Crucial Facts You Should Know About Trustee Fees in California
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When a family member passes and leaves behind a trust fund, the person whom they nominated as the successor trustee will generally take over the management of their trust. This role involves a wide array of responsibilities, including gathering the trust’s assets, paying the trust’s debts, and ultimately, distributing the remaining assets of the trust to the appropriate 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 some of 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 from Keystone Law Group.
What Are Trustee Fees?
The role of a trustee ranges greatly, and in some cases, their duties can be complex and time-consuming. For this reason, trustees generally have a right to be compensated for the time they spend overseeing the trust.
When the trust instrument does not specify how the trustee is to be compensated, the law refers to California Probate Code section 15681, which allows for “reasonable compensation under the circumstances.” Because what is “reasonable” is subjective and the circumstances of each trust are different, it is best to work with a lawyer when deciding on trustee fees to prevent the possibility of your trustee fees being challenged in court.
Determining whether, when and in what amount to pay trustee fees is a nuanced process and justifies hiring a probate attorney. A legal professional can help you navigate the many rules associated with taking a reasonable trustee fee that the court will uphold.
Who Is Affected by Trustee Fees?
The trustee, their attorney, and other people involved in the trust’s administration can potentially influence a trustee fee.
First and foremost, the trustee benefits from taking a trustee fee, as it compensates them for the time they spent managing a trust. Managing a trust can be similar to a full-time job, so it is reasonable for the trustee to at least be paid standard trustee fees for their work. It’s important to remember that there is no one standard trustee fee provided by the law; rather, these fees 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 trust beneficiaries (as the payment of trustee fees leaves less money available for distribution to beneficiaries). There are times when beneficiaries may choose to dispute the fee, especially if the trustee’s compensation is excessive or if the trustee breached their duties. 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 the trusts themselves, it’s easy to see how serving as a trustee could take very little time and effort, or can be a major task that demands significant skills and effort. Trustee fees generally align 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 and attempt to take a 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 was engaged in fiduciary misconduct by mismanaging the trust, misusing its assets or breaching their duties. If a beneficiary chooses to submit a petition for 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?
In the simplest cases, the trustee compensation hourly rate and/or trustee compensation percentage is 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 that 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. Trust beneficiaries can challenge trustee fees by asking the probate court to assess whether the amount being requested is reasonable.
6 Factors the Probate Court May Consider
After a beneficiary files a petition for the court to assess whether a trustee fee is justified, there are many factors it will take into account when making its decision. These include the trustee’s workload, the total amount 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 specific circumstances can be major factors as the probate court decides if a fee is reasonable.
What Were the Trustee's Responsibilities?
Managing a trust can be simple or highly complex, depending on the tasks required. The court will examine how much time and effort the trustee dedicated 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 large 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: serving as a trustee involves responsibilities that could land the trustee in legal trouble if they are not upheld, so the trustee is assuming a degree of risk when they choose to take on the responsibility of handling the trust. This should ultimately play into how much they get paid.
There are a lot of ways that a person’s life may be affected by taking on the risk of serving as a trustee. This can include new conflicts with family members and detailed tasks that must be performed within a given timeframe. The court will consider these risks when determining whether a trustee’s compensation is appropriate. The more liabilities a trustee incurs as a result of their role, the more compensation they are likely to receive.
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 will charge.
How Are the Trust’s Investments Performing?
In trusts where a trustee is responsible for using trust funds to make investments and earn income, the court will take the success or failure of these investments 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 as a reasonably prudent person when investing trust assets and not engage in highly speculative or risky investments; otherwise, they could be sued for mismanaging trust assets and altogether be denied the requested trustee compensation.
Does the Trustee Have Any Noteworthy Skills or Experience?
The experience and applicable skills of the trustee are crucial factors when determining reasonable trust fund trustee fees. For example, a trustee with 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 factors mentioned above play a role in determining a reasonable compensation for the trustee, the main factor that can help reach the specific amount of a trustee’s compensation is whether the person appointed is a professional or non-professional trustee.
Professional vs. Non-Professional Trustee Fees
Successor trustee fees in California can vary based on whether or not the person appointed is a professional. This is because non-professional trustees generally have to solicit the help of professionals, such as CPAs and trust administration attorneys to fulfill their trustee responsibilities.
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, it is customary for some trustees to 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. Alternatively, the trustee may request compensation on an hourly basis (which, in our experience, usually is 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 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 other responsibilities, such as gathering and valuing trust assets, which can contribute to the amount you eventually seek in trustee fees.
A knowledgeable probate attorney will be able to answer any questions you may have surrounding trustee compensation and determine what a reasonable compensation would be after analyzing the amount and type of work you put in.
Keeping a Logbook
It’s important to have evidence showing the work you have and will put in as a trustee when seeking trustee fees. By simply 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 charge a fee for your work.
It is crucial 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 compensation, nor do their 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, including potentially reducing the taxable income of the trust, potentially reducing the income tax of the trustee, motivating the trustee to keep thorough records of their work, and making the trustee’s compensation less likely to be disputed by the beneficiaries (i.e., a large lump sum payment is more likely to be challenged than small payments made annually).
Discussing Trustee Fees With Beneficiaries
Unless the trust instrument requires it, trustees are generally not required to seek approval from beneficiaries when compensating themselves — though this doesn’t mean that 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 reducing the likelihood of 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 in this way, then the only option may be to resolve the dispute via the court.