What is a reasonable trustee’s fee in California for a family member who acts as trustee? We see a high degree of conflict over this issue even when the amount of the claimed fee is small compared to value of the trust estate. Our blog analytics show that our post of a few years ago on the fee issue continues to draw a high number of hits. If you found this post in a Google search, you are probably grappling with a fee dispute in your family’s trust.
California Probate Code section 15681 generally permits a “reasonable” fee, but the term is hazy in practice. Most California Superior Courts do not have fee guidelines in their local rules. While California Rule of Court 7.776 lists factors a court may consider in reviewing trustee compensation, the trustee and the beneficiaries are likely to apply those factors differently. Accordingly, fee disputes are common in California trust litigation.
Here we’ll discuss best practices for a trustee with respect to claiming a fee. Let’s use the common situation where Mom and Dad have picked one of their several children to act as successor trustee when they die or become incapacitated. When Larry becomes the trustee, siblings Moe and Curley may be resentful and thus disinclined to go along with any fee.
Seek Clarity in the Trust Instrument as to the Fee Amount
If you may be (or already have been) nominated to serve as successor trustee in your parents’ trust, consider asking them to work with their estate planner specify how the fee will be calculated, especially if you think substantial work will be needed and that the other beneficiaries may be hostile to a fee.
The creators of a trust (known variously as settlors, grantors or trustors) can avoid or reduce conflict by specifying a formula for trustee compensation within the trust instrument. Under California Probate Code section 15680, a trustee is entitled to be compensated as set forth in the instrument. For example, the instrument might state that the trustee shall receive a management fee of one percent of the value of the trust assets per year, with pro ration for partial years. Then, if the value of the assets is clear, the fee will be easy to calculate.
Alternatively, the creators might set an hourly rate (perhaps indexed for inflation) that the trustee may charge.
Even general language regarding the intent to pay a fee might help avoid a fight. For example, Mom and Dad might write: “Given that we hold real estate and various other assets, we acknowledge that our successor trustee will have to devote many hours to administering this trust. Our trustee should receive a fee for his or her services in accord with the hourly rate that a private professional fiduciary would charge.” Professional fiduciaries, licensed by California’s Professional Fiduciaries Bureau, charge in the neighborhood of $100 to $150 per hour. Such language will leave the trustee in a better position to claim a substantial fee than generic language authorizing a “reasonable fee.”
Prepare to Justify a Fee as Reasonable
If you have never had a job where you bill for your time by the hour, you now are entering that terrain. A trustee should start a time log upon beginning to serve as trustee, detailing the date each task was performed, the number of hours per task (broken into fractional increments), and a brief description of the nature of the task. (Remember that more complex tasks generally warrant a higher fee.) Such a log might be kept in an electronic file or a spiral notebook.
Calls made by mobile phone are relatively easy to track given that smart phones will show when and how long you had calls on trust business. Emails and texts also provide clues, as might the billing invoices of an attorney hired to advise you as trustee.
Reconstructing time records long after the fact can be quite difficult and the trustee often will lose hours in the process. Hours estimates may not be accepted unless they are conservative.
Take a Fee at Regular Intervals
California trustees generally can receive fees over the course of trust administration without court preapproval, rather than waiting until they are closing out the trust.
Spreading the fee out, as by charging a fee at the end of each calendar year, has several advantages: (1) it may encourage trustee diligence in keeping a time log; (2) the fee might be an administrative expense against income, thus reducing income tax; (3) the trustee may pay less income tax because the fee will be spread across multiple tax years rather than bunched in a single year; and (4) the fee, when spread across multiple years, may be more palatable to the beneficiaries, as opposed to a lump sum at the end of administration.
Since trustees often account annually to the beneficiaries, the fee often is disclosed in the context of an accounting.
Keep Track of Unreimbursed Expenses
While a fee generally is treated as taxable income to the trustee in the year received, legitimate expense reimbursement is not taxed. Hence, a trustee should keep a mileage log with respect to trust-related travel, including tolls paid. Expenditures to prepare Mom and Dad’s house for sale also should be carefully documented, with supporting invoices and canceled checks.
Early on, the trustee should create a trust administration account, typically under a Taxpayer Identification Number obtained specifically for the trust, to receive deposits and pay expenses. Commingling trust expenses with personal expenses leads to a messy tangle to sort out later and may result in a fee reduction.
Do Good Work and Get an Attorney on Board Early
A diligent trustee, who acts prudently and in the interests of all beneficiaries, deserves a fee for successfully administering the trust. On the other hand, a trustee may have difficulty justifying any fee, or may end up with a reduced fee, if he or she has unreasonably delayed wrapping up the trust or has engaged in self-dealing. California Probate Code section 16420 permits a court to reduce or deny trustee compensation where a trustee has threatened to or actually committed a breach of trust.
It is a good idea to hire a lawyer familiar with trust administration early in your tenure as trustee. The lawyer may, but need not, be the one who drafted the trust instrument. The lawyer will guide you in completing trust administration and help you avoid breaches of fiduciary duty.
The California Probate Code and the trust instrument generally permit trustees to hire attorneys and other professionals, and to pay them from trust assets. Yet all such expenses are subject to review and possible objection by the beneficiaries, so trustees should review invoices and be ready to justify them.
Experienced trust administration attorneys typically are well situated to suggest accountants, appraisers, real estate brokers, and other professionals to assist with administration.
Be Well Positioned to Claim a Fee, Even if You Ultimately Decide to Waive It
Some family member trustees eventually choose to waive a fee, given that fees (unlike trust distributions) are subject to income tax. Trustees may feel that their beneficial shares of the trust provide sufficient remuneration and/or that their fee should not come at the expense of other beneficiaries.
Yet trustees should approach administration as a serious endeavor such that they are deserving of a fee if they decide to charge one. For a variety of reasons, the job may prove more time consuming than the trustee originally anticipated. At the same time, a trustee may agree to waive or reduce a fee in order to assuage a disgruntled beneficiary and thus avoid or quickly extinguish litigation that might otherwise be expensive.
In an upcoming post, we’ll look at trustee’s fee issues from the beneficiary’s perspective.