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TRUSTEE FEES: HOW
ARE THEY SET?
INTRODUCTION:
With the increased
use of the Intervivos Trust as the standard “middle class” estate plan,
a typical question that arises is how the Trustees are paid. The reader
should first read our two articles on
Wills and Trusts and the
Irrevocable Living Trust before reading further.
Trusts are,
essentially, contracts between the Trustor and the Trustee for the
benefit of the beneficiaries and they may be subject to court
supervision or not, depending on the terms of the trust. It is important
for the person considering a trust to realize that one retains a great
deal of control over the terms of most trusts…so long as public policy
is not violated, one can impose almost any condition on the Trust and
Trustees, including setting what fees should be paid. Indeed, one can
provide that no fees should be paid to Trustees.
Realistically,
however, the duties of a Trustee and the
fiduciary duty
that a Trustee faces makes most people reluctant to accept those
obligations without some compensation. Since Trusts can last decades and
thus require successor Trustees, even if a friend or relative agrees to
serve without fees, one must take into account the fact that later
Trustees may insist upon compensation before serving. And if one wants
an institutional Trustee, such as a bank, the fees are not only set but
are often higher than noninstitutional trustees.
COURT SUPERVISED
FEES.
Some Trusts provide
for Court supervision in their terms or become subject to Court
supervision due to legal action or events befalling beneficiaries or
Trustees. In such cases, the statutory fees set by the Court normally
apply.
As an example,
assume the Trust is domiciled in Oakland or Hayward, California. This
is in Alameda County.
According to the
Alameda County Superior Court Local Rules, ordinarily, trustees' fees
shall not be paid until there has been an order of court fixing the same
and settlement of an account. Where the Will or trust document is silent
and the trustee and/or the trustee's attorney have elected not to
support a fee application with a declaration with itemized detail of
work and hours, the Court ordinarily will award the trustee an amount
equal to one percent (1%) of the value of the trust assets annually
and the trustee's attorney an amount equal to approximately one-third
(1/3) of the trustee's fee. (Local Rules of the Superior Court of
California, County of Alameda 12.16.4.2 )
Trusts subject to
court supervision are usually subject to a schedule of appropriate fees
set by the local court and while most courts have quite similar
schedules, each local court should be consulted for its latest schedule
of fees.
Assuming that the
Trustee claims that he or she provided services that are extraordinary
in nature (e.g. bringing or defending litigation; particularly difficult
work buying or selling assets or running a business) the Trustee may
apply for extraordinary fees from the Court and normally provides
detailed time records and description of services in a petition to the
Court which normally has a full hearing to consider the matter.
Most Trustee fees
are computed and paid annually and this is what the Courts normally
require. Again, the terms of the Trust may impose different criteria
and timing of such fees. Absent extraordinary circumstances, the Court
will follow the terms of the Trust.
Some counties no longer follow a set percentage award of fees, but examine the time records of the trustee to determine reasonable compensation, using the percentage method only as one factor in determining reasonable fees. In such counties, it is vital to keep good time records if you are a trustee. It is important to get updates on local rules to determine the current method used by the court.
CASE LAW REGARDING
TRUSTEE FEES:
Most Trusts being
created now are not subject to Court supervision and provide for
“reasonable fees”
There are no
restrictions governing the compensation taken by the Trustee of a
non-supervised trust other than that it must be reasonable. If there is
friction between the Trustee and the beneficiaries, it may be wise for
the Trustee to seek an order fixing compensation, or at least explain
the basis for compensation, at the outset of the trust, rather than wait
until the beneficiaries ask for court review.
Case law has
established the following criteria for determining reasonable
compensation:
-
the gross income
of the trust
-
the success or
failure of the trustee’s administration, as measured by the growth
in the value of investments
-
any unusual
skill or experience the trustee has brought to the position
-
the “fidelity”
or “disloyalty” shown by the trustee
-
the degree of
risk and responsibility assumed by the trustee
-
the time the
trustee devotes to performing trust duties
-
the custom in
the community, including the compensation allowed to trustees by
Trustors or courts typically in that community
-
the character of
the work done in administering the trust
-
and, any
estimate the trustee has given concerning the value of his or her
own services
(Estate of
McLaughlin (1954) 43 C2d 462, Estate of Gump (1982) 128 CA3d
11, Estate of Nazaro (1971) 15 CA3d 218)
Keep in mind that
the Trustee has a fiduciary duty to the Trust and its beneficiaries and
that includes dealing fairly with all of them. Charging of appropriate
fees is but one area of “fairness” that said duty requires.
The “one percent
rule” is a fairly typical one and most often used.
At section 14.110,
page 206, "Compensation Guidelines for Management of the Estate,"
a San Francisco Superior Court document at
http://sfgov.org/site/uploadedfiles/courts/rule_14.pdf
it reads,
"Ordinarily, annual fees for guardians, conservators and trustee shall
not exceed the
following: One percent (1%) of the fair market value of assets at the
end of the accounting period."
Again, extraordinary
services allow extraordinary fees and may be sought both in supervised
and unsupervised Trusts.
CONCLUSION:
Typically, in a
revocable intervivos trust for most couples, the surviving spouse first
assumes the role of Trustee and typically does not take any fees for the
very good reason that such fees are taxable as income and the money is
his or her own in any event. It is when the successor Trustee assumes
the role that such fees often become important to consider.
But whether at the
inception or later, one often gets what one pays for and paying good
money for a good Trustee can be the best economic decision a Trustor can
make. |
