If a treasury bond is placed in a trust, and the trust charges a maintenance fee based on a percentage of assets, which asset is the fee based on? The value of the bond? The earned interest after taxes? The earned interest pre-tax? The bond value and the interest?
-Pete
Since the trustee is going to hold legal title to the bonds, it should be the value of the bond itself. The interest payments aren’t the value of the bond, they’re only the annual revenue generated by the bond, i.e., the compensation that you get for tying up the value of the bond in the form of this particular investment.
Depends entirely on the terms of the contract under which the Trustee is entitled to fees. But it’s usual for the trustee fee to be a percentage of the market value of the assets in the trust.
Let’s say the trustees job is to pay the tax on the interest accrued and distribute the remaining interest to a relative.
If it’s a 10 million dollar bond and the fee is 2% that’s 200K a year. If the bond is only making 4.75% that’s a pretty big chunk. Or am I missing something here? Is there a better way to do this?
The trustee’s job is to hold the asset, and to account for how they deal with it to the beneficiaries. If they stuff up and e.g. lose the asset completely their responsiblity is not limited to making up the missing interest payments; they are liable for the full value of the asset. Therefore a fee which is based on the value of the assets in the trust seems, in principle, the right approach.
You could argue that holding the assets and dealing with the interest payment received is a simple job and doesn’t merit a 2% fee of the asset value — fine; your contract with the trustee does not have to stipulate a 2% fee and you can bargain for something you feel is much more reasonable. 0.2%? 0.02%?