Crucial Facts You Should Know About Trustee Fees in California
A trustee must dedicate time and effort to managing the trust, making distributions of its assets in accordance with the terms of the trust and paying all necessary administration expenses and other debts on time, among other things.
This article discusses the fundamental aspects of trustee compensation in California, including how to collect it, what it entails, and which factors could play a role in determining its amount.
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When a family member dies leaving behind a trust, the person whom they nominated as successor trustee will generally take over trust management. This role involves a wide array of trustee responsibilities, including gathering the trust’s assets, paying the trust’s debts and making trust fund distributions to trust beneficiaries, among other things.
Considering that a trust can be active for years after the trust creator’s death, the successor trustee can expect to dedicate many hours to managing the trust. For all this work, how much does a trustee get paid?
Explore the most critical aspects of trustee fees in California, from how to position yourself to take them to the differences in professional vs. non-professional trustee fees, to why trustee fees aren’t guaranteed, in this article by Keystone Law Group.
What Are Trustee Fees?
The duties of a trustee can vary greatly from trust to trust, and in some cases, their duties can be highly complex and time-consuming. For this reason, trustees generally have a right to be compensated for the time they spend overseeing a trust.
When a trust instrument does not specify how the trustee should be compensated, California Probate Code section 15681, which allows for “reasonable compensation under the circumstances” — may provide direction. Because what is “reasonable” is subjective and the circumstances of each trust are different, it is best for trustees to work with a trust administration lawyer when deciding how much to take in trustee fees to reduce the likelihood of their trustee fees being challenged in court.
Who Is Affected by Trustee Fees?
First and foremost, the trustee benefits from taking a trustee fee, as it compensates them for the time they have spent managing a trust. Managing a trust can be similar to a full-time job, so it is valid for the trustee to request reasonable trustee fees for their work.
It’s important to remember there is no one-size-fits-all formula in the California Probate Code for calculating trustee fees, like there is for calculating probate fees. Trustee fees generally are determined by such factors as the experience of the trustee, and the size and complexity of the trust, among other things.
Since the trustee fee comes out of the actual trust fund, it necessarily affects the inheritances of beneficiaries (as the payment of trustee fees leaves fewer assets to distribute to them).
There are times when beneficiaries may choose to dispute trustee fees, especially if the trustee’s compensation is excessive or if it comes to light that the trustee had been engaged in trustee misconduct. California Probate Code section 17200 states that a beneficiary may petition the court to determine whether a trustee fee is reasonable.
Why Are Trustees Paid?
Trusts can be extremely simple and straightforward, or highly personalized and complex. With such variance in trusts, it’s easy why there is not an established formula for calculating trustee fees. Trustee fees generally are commensurate with how little or how much work was required by the trustee to administer the trust.
When the role of a trustee becomes demanding, it makes sense that a trustee would hire an attorney to help them take a reasonable fee for their efforts.
Are Trustee Fees Guaranteed?
While California law states that trustees are entitled to take a reasonable fee, beneficiaries can just as well object to their fees if they have good reason to do so, such as proof that the trustee had been engaged in fiduciary misconduct to misappropriate or misuse trust assets.
If a beneficiary elects to submit a petition to the court to determine the reasonableness of a trustee fee, a number of factors will be considered, which we go over in the subsections below.
Does the Trust Instrument Specify Trustee Compensation?
Ideally, the trustee compensation hourly rate and/or trustee compensation percentage would be written into the trust. When such information is included, there is little ambiguity surrounding the amount of the trustee’s compensation, unless the services the trustee provided were extraordinary in any way, which could entitle the trustee to seek additional trust management fees.
If there are no instructions within the trust instrument for trustee compensation, it does not mean the trustee is not entitled to collect fees for their work. In fact, they may even be entitled to reasonably compensate themselves without obtaining prior approval from the court or beneficiaries.
6 Factors the Probate Court May Consider
After a beneficiary files a petition with the court for it to assess whether a trustee fee is reasonable, there are many factors the court will take into account when making its decision. These include the trustee’s workload, the total value of the trust, and any skills that make the trustee particularly valuable and worthy of a fee.
What Are the Circumstances Surrounding the Trust?
The court will consider all circumstances related to the trust when determining whether a fee is warranted. For example, did the trustee have to go above and beyond the standard duties of a trustee when administering the trust (e.g., arranging the sale of real property or the dissolution of multiple businesses)? Did the trustee have to litigate on behalf of the trust or defend the trust in a trust dispute?
These circumstances can be major factors contributing to the probate court’s decision of whether a trustee fee is reasonable.
What Were the Trustee's Responsibilities?
Managing a trust can be a simple or highly complex job, depending on the tasks required. The court will examine how much time and effort the trustee had to dedicate to administering the trust, and whether the fees they are seeking align with the amount of work they put in.
Suppose that Trust A calls for the trustee to make a one-time lump sum distribution to the beneficiaries, whereas Trust B of roughly the same value calls for the trustee to make distributions to beneficiaries twice a year for the next 20 years. Because Trust B would require more time and effort to administer, it would make sense for the trustee of that trust to seek more compensation than the trustee of Trust A.
The complexity of the assets within the trust also play a significant role in determining whether larger trustee fees are warranted. For example, trusts that contain only modest liquid assets require substantially less work to administer than trusts that contain multiple parcels of commercial properties or businesses that need to be actively managed by the successor trustee.
What Was the Trustee’s Degree of Risk?
Make no mistake about it: The trustee is assuming a degree of risk if they agree to serve. For example, if they fail to carry out any of their obligations as trustee or make any errors that result in trust assets being harmed, they could be held personally liable. The level of risk a trustee is assuming by serving should ultimately play into how much they get paid.
What Is the Value of the Trust?
Another important factor in deciding a trustee’s compensation is whether the trust is large enough to support the fee requested by the trustee. Since the fee comes out of the trust fund, the court will generally not allow the trustee to collect steep trustee fees if the total value of the trust is low.
It is usually safe to assume that the more a trust is worth, the more complex it will be to administer, and the more a trustee can reasonably charge.
How Are the Trust’s Investments Performing?
In trusts where a trustee is responsible for trying to make trust assets productive, the court will take the success or failure of their investments of trust assets into account when determining whether or not trustee fees are reasonable.
While the nature of investments is that they are not always guaranteed to turn a profit, the trustee has a fiduciary duty to act prudently when investing trust assets. In other words, they should steer clear of highly speculative or risky investments.
If a trustee were to make an ill-advised investment that ultimately reduces the value of the trust, they not only could be denied trustee compensation by the court if a beneficiary were to file a petition to determine whether their trustee fee is reasonable, but they could also be sued for mismanaging/misappropriating trust funds.
Does the Trustee Have Any Noteworthy Skills or Experience?
The experience and applicable skills of the trustee are important factors when determining reasonable trust fund trustee fees. For example, a trustee with trust accounting or legal experience generally can justify charging a higher trustee fee than a non-professional trustee, who often lacks these skills and will have to hire professionals to help them administer the trust.
What Is Reasonable Compensation for a Trustee in California?
In the event that the trust doesn’t offer instructions for trustee compensation, how much does a trustee get paid in California?
Although the six factors mentioned above can play a role, the main factor that can help determine whether or not trustee compensation is reasonable is whether the the trustee is a professional or non-professional.
Professional vs. Non-Professional Trustee Fees
Successor trustee fees in California can vary based on whether or not the trustee is a professional. This is because non-professional trustees generally have to solicit the help of third-party professionals, such as CPAs and trust administration attorneys, to fulfill the various obligations of their role.
If a trustee is a professional, they generally can charge their standard hourly rates (which, in our experience, usually fall between $100 and $175 per hour). Alternatively, they could charge a fee equivalent to 1% to 1.5% of the value of the trust assets per year. Additionally, if the trustee is making investments or performing other extraordinary tasks (as opposed to merely managing and distributing trust assets), they may qualify to charge even higher trustee fees.
Non-professional trustee fees, on the other hand, generally fall between 0.5% to 1% of the value of trust assets per year. The trustee could also seek hourly compensation (which, in our experience, typically falls between $30 and $75 per hour). It is not uncommon for non-professional trustees, especially those who are family members of the decedent, to waive their right to trustee compensation, though there is nothing in the law that requires them to do so.
Is Trustee Compensation Taxed?
Being a trustee is like any other job, in that earning compensation means that you pay taxes on it. Although trustee fees can be deducted as an expense on the trust’s tax returns, the trustee will still have to pay taxes on the income they earn if they opt to collect trustee fees.
How Are Trustee Fees Requested in California?
If instructions for trustee compensation are provided in the trust, California Probate Code section 15680 states that these instructions should be followed.
In situations where the trustee fee isn’t specified or mentioned at all, the trustee can charge the fees they believe to be reasonable; however, they should be careful to be conservative, as beneficiaries do have the right to challenge trustee fees if they believe they are unreasonable, which could open the door to the court either reducing or altogether denying the requested trustee fees.
Consult With an Attorney First
Since so many details are involved with the preparation and positioning of trustee fees, it’s always recommended to hire an attorney to help with the process. An attorney can help you not only with interpreting the trust instrument to determine whether specifics for trustee compensation are provided, but also with completing your trustee responsibilities, such as gathering and valuing trust assets, paying creditors, making distributions to beneficiaries, and selling trust property — all of which can contribute to the amount you ultimately seek in trustee fees.
A knowledgeable probate attorney will be able to answer any questions you may have surrounding trustee compensation. They can help you determine what a reasonable compensation would be after analyzing the type of work you’ve put in, and how much time and energy you’ve dedicated to it.
Keeping a Logbook
When seeking trustee fees, it’s important to have proof to demonstrate the nature of the tasks you’ve had to compete as part of your duties, and how much time and energy you’ve applied to the role. By keeping a logbook that details each task you performed on behalf of the trust, how much time you spent on it, and the results you achieved, you’ll be far more likely to be taken seriously when it’s time to take trustee fees for your work.
It is preferable to log your work as you go, as opposed to logging it all at the end, to ensure your records are accurate and unlikely to be disputed. Without thorough records, it will be as if you did not complete any work at all, so if you hope to get paid, staying organized is of extreme importance.
Taking Trustee Fees at Regular Intervals
There is no requirement for trustees to wait until administration is complete to collect trustee compensation, nor do their trustee fees have to be pre-approved by the court. In fact, collecting trustee compensation at regular intervals generally is the better option for a number of reasons.
For one, doing so could motivate the trustee to keep thorough records of their work. Second, it could lessen the likelihood of beneficiaries disputing the trustee’s compensation (a large lump sum payment is more likely to be challenged than small payments made annually). Third, it could potentially reduce the taxable income of the trust and income tax of the trustee.
Discussing Trustee Fees With Beneficiaries
Unless the trust instrument requires it, trustees are generally not required to seek approval from the beneficiaries when compensating themselves — though this doesn’t mean they shouldn’t do it. Discussing trustee compensation with beneficiaries prior to taking it can save trustees a lot of trouble in the long run by precluding trustee fee disputes.
When having such discussions with beneficiaries, trustees should have their work logs on hand to justify why the compensation they are seeking is reasonable. If an agreement cannot be reached using this approach, then the only option may be to resolve the dispute via the court.
Trustees should remember that transparency is key. Beneficiaries are likely to eventually find out about the fees trustees are taking when they review trust accountings; therefore, there is no reason for trustees to operate in the dark.