Trustee fees are common flash points in the administration of family trusts. Trustees may put in hundreds of hours cleaning out and selling the family home, dealing with accountants, lawyers, and realtors, and otherwise working to distribute assets out to the beneficiaries. A diligent trustee provides a valuable service and should be compensated for his or her time.
From the beneficiary’s perspective, however, it may come as a surprise that Junior has obtained a handsome trustee fee by writing a check to himself. The beneficiary may feel that Junior should act as a volunteer and/or may believe that Junior has acted improperly in trust administration such that he deserves no fee.
The governing statute is simple. Where a trust instrument does not contain a contrary provision (and few do), a trustee is entitled to “reasonable compensation under the circumstances” under California Probate Code section 15681. But, what does “reasonable compensation” mean?
Factors to Consider
Rule 7.776 of the California Rules of Court lists eight non-exclusive factors that a court may consider in approving a trustee’s compensation. These include:
- Gross income of the trust. Where the trust property is simple, such as a bank account at the Bank of Stockton, the family home in Elk Grove, and an automobile, it is unlikely the trust estate would generate income justifying higher trustee compensation. If a trustee takes a substantial fee for “managing” non-income generating property then you might want to consider speaking with an attorney.
- Success or failure of administration. If the trustee is removed from office or if trust administration languishes much longer than necessary, then compensation should not be as high as if the trustee was able to wrap up administration in a timely and cost-effective manner.
- Trustee’s unusual skill, expertise, or experience. This factor is most relevant where the trustee is an attorney, accountant, real estate agent, or holds some other professional license or qualification that enables savings in trust administration.
- Fidelity or disloyalty of the trustee. Has the trustee acted appropriately and put the best interests of the beneficiaries ahead of his/her own best interests? If not, then a substantial fee might not be justified.
- Risk and responsibility assumed by the trustee. A trustee who ends up running the family business in Roseville during trust administration is in line for higher compensation, depending of course on the extent of the effort.
- Time spent performing trustee’s duties. Has the trustee kept detailed time records of his or her work? Is the hourly rate fair? An architect who bills clients at $150 per hour cannot charge that rate for administering the family trust, assuming he was not using his specialized professional skills.
- Custom in the community. This factor varies from court-to-court around California. A court in San Francisco is likely accustomed to higher trustee fees than a court in Butte County. Sometimes there is guidance in the “local rules” that each court adopts. For example, Solano County Superior Court Local Rule 7.51 provides that a trustee fee that does not exceed 1% of the estate is presumptively reasonable. Sacramento County Superior Court Local Rule 4.84(A) anticipates that a trustee will have maintained time records categorized by services performed in order to justify a trustee fee. One reference book on California trusts says that corporate trustees charge from 1% to 1.3% on the first $1 million, from 0.7% to 1.25% on each $1 million thereafter, and that trustee fees for a non-professional family trustee should likely be 1% or less absent other factors. (1 Calif. Trust Admin. (Cont.Ed.Bar 2d ed. 2015) § 9.7, pp. 9-9 and 9-10).)
- Whether the work performed was routine. Was the trustee’s work straightforward or did it require special skill and judgment? Trusts vary widely in terms of the scope of work that must be done to complete administration. If Mom and Dad left a bank account, with no real estate or other assets to handle, the trustee’s fee should be smaller.
Does It Pass the Smell Test?
Practically speaking, whether a trustee’s compensation is reasonable depends upon whether it has a reasonable factual basis. In probate administration, the judge must pre-approve any fees to be paid to the executor or administrator, and fees for ordinary services are set by a formula based on the value of the assets in the estate. No such pre-approval is required for a trustee’s fee. Instead, it falls to the beneficiaries to keep the trustee “honest.” Trustee fees are subject to court review and adjustment if a beneficiary objects. A beneficiary is entitled to know how much the trustee has taken as a fee and how the trustee calculated the fee. A trustee’s refusal to disclose this information may signal that the beneficiary should talk to an attorney.
A Taxing Concern
The trustee may have relatively little upside to claiming a fee. Trustee fees are taxable as ordinary income to the trustee while inheritance that the trustee receives as a beneficiary is generally income-tax free. By waiving a trustee fee, a trustee can keep more resources in the trust and avoid paying unnecessary taxes.
For example, consider a trust with $1 million in assets where Son and Daughter are the equal beneficiaries after Mom’s death and Daughter is the trustee. Daughter could waive her fee and evenly split the $1 million with Son with no income tax consequences. They each get $500,000.
If Daughter takes a 1% trustee fee ($10,000), she will receive more gross cash from the trust than her brother ($505,000 versus $495,000), but she will also have to pay any federal and California income tax that may be due on the fee.
The amount of tax, if any, will vary depending on Daughter’s overall situation. If she is in the upper income tax brackets, taxes on her $10,000 fee could be $5,000 or more, leaving Daughter with a net of $500,000, Son with $495,000, and the tax authorities with $5,000. Had Daughter waived a fee, she would have received essentially the same amount of net proceeds from the trust, the family as a whole would have saved significantly on taxes, and she might have been able to avoid conflict with her brother.
Income tax issues are complex and the trustee should talk to his or her accountant about potential tax consequences before taking a trustee’s fee.
Trustee fees can be a difficult aspect of trust administration for both trustees and beneficiaries. Trustees should keep detailed records of the time they spend, with a description of the tasks performed each day, so that they can provide factual support for any fees they eventually decide to claim. Beneficiaries who think a fee is excessive, and who do not receive a satisfactory explanation from the trustee, should consult with an attorney about whether to challenge the amount of the fee.