We recently received a question about whether irrevocable dynasty trust made sense for a family, with the goal of using it to invest in direct deals, venture funds, and SPVs over a very long time horizon. What had kept him from acting on it was a long-held assumption that the cost of running these trusts, the setup, the trustee, the ongoing administration, would be high enough to outweigh the benefit. He wanted to pressure test that assumption. So do I, so let’s get into it.
The Real Cost Isn’t Where You Think It Is
The first thing worth knowing is that setup costs, legal fees, and tax filing generally aren’t the expense that matters here. Those are largely one-time or minor recurring costs. The real cost center is trustee administration. In a directed trust structure, which is what I’d expect in this scenario, you remain the investment advisor for the trust, handling the SPVs, venture funds, and direct deals yourself, while a separate trustee handles administration and distributions. That separation matters because it keeps the trust’s irrevocable status intact, but your attorney needs to structure it carefully to avoid problems.
What Administration Fees Actually Look Like
For a purely administrative arrangement, where the trustee isn’t managing investments, you’re generally looking at 10 to 30 basis points. On a $10 million trust, that’s roughly $30,000 a year, which adds up but is manageable. If the trustee is also handling investments, the fee structure starts to resemble a traditional AUM advisory relationship, often landing around 50 to 70 basis points once you clear certain asset thresholds. In some cases, particularly with a lot of illiquid holdings, K-1s, valuation complexity, and layered distributions, total trust management costs can climb as high as 1.5% to 2%. The complexity of what’s actually held in the trust drives most of that variation.
Weighing the Fee Drag Against the Illiquidity Premium
Once you know the real cost bucket, the next step is weighing it against the benefit you’re actually pursuing. Illiquid, direct-deal style investments typically carry an illiquidity premium of a couple hundred basis points a year, often two to three percent over more liquid alternatives. Against a 10 to 30 basis point administrative drag in a directed trust structure, that math tends to work in your favor, assuming the portfolio is diversified enough and sized appropriately to absorb the illiquidity. It’s a relatively low fee drag sitting on top of what should be a higher-returning, higher-risk portfolio.
This Isn’t Really About Your Kids
Here’s the detail worth sitting with. If the goal is truly a dynasty trust, and you’re using generation-skipping exemptions to fund it, the benefit isn’t primarily flowing to your children. It’s flowing to your grandchildren and great-grandchildren. The kind of investments described here, multi-decade holds in venture funds and SPVs, aren’t built around a five to seven year liquidity timeline no matter what the fund materials say. I’ve watched funds that promised liquidity in five years stretch to twenty or thirty. If this is genuinely a multi-generational vehicle, that long horizon is a feature, not a flaw, but it only makes sense if the trust is actually structured with generation-skipping provisions elected. Skipping that step is one of the most common mistakes I see in this space.
The Question That Matters More Than the Fee Schedule
The number that deserves more attention than the basis point math is what happens after you’re no longer the one managing the investments. If your children have no interest in running the trust’s investment strategy, you need to pressure test whether the structure can absorb a successor manager charging one percent, or one and a half, instead of the 10 to 30 basis points you were effectively contributing as the family’s own investment advisor. That fee could easily triple. A dynasty trust built around your own hands-on management looks very different, and costs very differently, once someone else has to take the wheel. Build the plan around that eventuality, not just around today’s numbers.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on dynasty trusts and generational investing, listen to the full podcast episode here.