One of the first issues you must examine when closing a Trust Administraiton is how much the trustee should take in compensation. Often the trustee will ask you for counsel in this area. The trustee assumes a great deal of responsibility and liability and thus should be justly compensated for his or her work. At the same time, it is important that the trustee not take a fee that is too high or that will raise questions from the beneficiaries on whether or not the fee was justified. As a result, counseling the trustee on the proper fee is critical.
In determining a proper fee, you first should examine the trust itself. California Probate Code Section 15680 states that “if the trust instrument provides for the trustee’s compensation, the trustee is entitled to be compensated in accordance with the instrument.” If the trust sets a fee that you and the trustee feel is reasonable, that might be the end of the discussion. However, keep in mind that Section 15680 does allow a procedure for the court to adjust the fee higher or lower given factors such as whether the trustee’s duties were different than contemplated or whether the set fee is unreasonably high or low. If the set fee does not seem appropriate given the circumstances, you might consider taking a lower fee (if the set fee appears too high) or petitioning the court for a higher fee (if the set fee appears too low).
While there are trusts that set a specific fee for trust compenstaion, more commonly trusts state that the trustee is entitled to “reasonable compensation.” In fact, California Probate Code Section 15681 states that “If the trust instrument does not specify the trustee’s compensation, the trustee is entitled to reasonable compensation under the circumstances.”
The difficulty is that “reasonable compensation” is not a defined term. If the trust refers to “reasonable compensation” or is silent on the issue of trustee compensation, it becomes a judgment call as far as how much the trustee should take as a fee. The trustee will likely have no idea how to determine “reasonable compensation” and will rely upon you for the answer. Fortunately, there is some guidance.
In general when California courts determine “reasonable compensation,” they look at specific factors in accordance with California Rules of Court Section 7.776 which are:
• The gross income of the trust;
• The success or failure of the trustee’s administration, as measured, e.g., by the growth in value of the investments;
• Any unusual skill, expertise, or experience that the trustee has brought to the position, e.g., investment management expertise;
• The “fidelity” or “disloyalty” shown by the trustee,
• The amount of risk and responsibility assumed by the trustee, as measured, e.g., by negotiation of oil leases or management of a large office building;
• The time that the trustee spent performing trust duties;
• The custom in the community, including the compensation allowed to trustees by settlors or courts and the fees charged by corporate trustees; and
• Whether the work was routine or required more than ordinary skill and judgment.
Another source for determining an appropriate trustee fee is the fee schedules for corporate trustees in the local community. Corporate trustee fees on the first $1 million of market value of trust assets tend to range from 1.0 to 1.3 percent and fees on the second $1 million tend to range from 0.70 to 1.25 percent per year. In practice, most non-professional Trustees use corporate trustee fee schedules as an upper limit on their own fees. These fee schedules are not legal standards but they may suggest benchmarks for what constitutes “reasonable compensation.”
A key aspect of determining an appropriate fee is to decide whether trustee compensation should be calculated upon a percentage of the estate or upon an hourly basis. Although most corporate trustee fees are calculated upon a percentage, your local court might have a practice of allowing a specified hourly rate. Furthermore, some private professional fiduciaries in your community might determine their compensation based upon a specified hourly rate and that can give you guidance as to what an appropriate hourly fee is for your trustee.
Often the best practice is to “test” your proposed fee under both methods. Once you have figured out an appropriate percentage and an appropriate hourly rate using the process described above, calculate the trustee fee under both methods. If they are close, the trustee is likely justified in taking either fee. If they are far apart, try to determine whether one fee appears more “reasonable’ under the circumstances than the other fee. You might ultimately decide to “split the difference.”
However you arrive at the trustee’s fee, the key is to make sure that you can demonstrate thoughtfulness and a reasoned approach to calculating a fee. Be prepared to defend or explain how the fee was calculated to the beneficiaries or to a court. In the end, as long as you can make a good faith argument in support of the trustee’s chosen fee, it is more likely that the beneficiaries or a court will agree that the trustee’s fee is “reasonable.”
Keep in mind the fact that trustee compensation is taxable income to the trustee. This factor might play in to how much the trustee decides that he or she wants to take as compensation. If the trustee is also a significant beneficiary of the estate, it might be advantageous to take a smaller trustee fee as the receipt of the inheritance is not considered income to the beneficiary.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.