This blog post views a trustee’s fee from the beneficiary’s perspective. Under California law, a trustee generally can set his or her own fee and collect it without prior disclosure to the beneficiaries. What can a beneficiary, who sees a hand reaching too greedily in the trust cookie jar, do in response?
We discussed best practices for a trustee when claiming a fee in a prior post and now consider how a beneficiary can monitor, evaluate and object to a trustee’s fee.
Read the Trust Document and Local Court Rules
Most trust instruments simply state that the trustee is entitled to a “reasonable” fee, which is the default under California Probate Code section 15681. Some trusts provide a specific rate or formula for setting the trustee’s compensation and the trustee under section 15680 is entitled to be paid accordingly. Also, some local Superior Court rules provide guidance as to trustee fee rates.
In the absence of such guidance, consider the “reasonableness” of the fee by applying the factors listed in California Rule of Court 7.776.
Ask Early About the Fee
If you are concerned that the trustee may charge a hefty fee, ask early on in trust administration. The beneficiary may inquire as to what fee has been paid and how it was calculated, and seek timekeeping records that support the fee amount.
California Probate Code section 16061 requires a trustee to provide information to the beneficiary relating to the administration of a trust if relevant to the beneficiary’s interest. If the trustee’s fee will decrease the beneficiary’s share, the beneficiary generally will be entitled to information as to the payment or even the accrual of the fee. If the trustee is uncooperative, the beneficiary can bring a petition for instructions under California Probate Code section 17200 and the probate court may compel the trustee to provide information and documents.
Study Any Trust Accounting for Fee Disclosures
Trustees are generally required to provide accountings annually and at the termination of the trust. Under California Probate Code section 16063, an accounting must include information as to the trustee’s compensation.
The trustee may petition to settle the accounting under section 17200(b)(5). If this occurs, a beneficiary who has concerns about the fee will have to come forward and state any objection. Otherwise, if the court grants the petition, the beneficiary will be unable to dispute the fee amount.
If the trustee circulates an accounting that discloses payment of a fee, but does not petition for court approval, the beneficiary will have three years from receipt of the accounting in which to challenge the fee amount. This three year statute of limitations is set forth in California Probate Code section 16460.
Assess the Cost-Benefit of Disputing the Fee
Under California law, trust litigation generally occurs in the county of the principal place of trust administration. A beneficiary thus may dispute a fee by filing a verified petition in the probate department of the Superior Court where the trustee is administering the trust. For example, Probate Code section 17200(b)(9) allows the court to review the reasonableness of the trustee’s compensation. Such a petition requires a $435 filing fee on top of any fee charged by the attorney representing the beneficiary.
A petition challenging a trustee’s fee should be drafted carefully and with ample factual detail. The judge will assume that the trustee is entitled to a fee and expect the beneficiary to show that the fee was excessive under the circumstances. The focus should be on the trustee’s actual performance, not the beneficiary’s feelings towards the trustee.
At the initial hearing, either the beneficiary or the trustee may request an evidentiary hearing with witness testimony, which generally will be scheduled for a later date. All in all, a beneficiary might spend many thousands of dollars contesting a trustee’s fee.
The trustee will charge the trust with his or her legal expenses associated with defending the fee. Such legal expenses, if reasonable, are allowable if the trustee prevails in defending the fee, but may be disallowed if the trustee’s fee is reduced.
Keep the Bigger Picture in Mind
Consider a situation where there are five sibling beneficiaries of a trust and one of them is serving as trustee. If the sibling/trustee charges a fee of $20,000 to complete the administration of the trust, each sibling will bear $4,000 of that fee. Even if the $20,000 seems high for the amount of work done, each beneficiary should consider whether the cost of challenging the fee will approach or exceed the cost of accepting the fee.
One or more of the non-trustee siblings may join together in disputing the fee, thus spreading the cost among them. It’s also possible that if one sibling undertakes the fee challenge, he or she (if successful) may be able to spread the cost to the other beneficiaries under the common fund doctrine, but such cost spreading requires court approval.
Usually, when beneficiaries question a trustee’s fee, they also have concerns about the trustee’s conduct as trustee, such as whether the trustee timely sold assets for fair value. Contesting the fee may become more economically viable if there are other issues in play. The trustee, especially if he or she is a family member, may discount or even waive his or her fee in the interest of putting trust administration to rest.