With the increased use of the Intervivos Trust as the standard “middle class” estate plan, a typical question that arises is how the Trustees are paid. The reader should first read our two articles on Wills and Trusts and the Irrevocable Living Trust before reading further.
Trusts are, essentially, contracts between the Trustor and the Trustee for the benefit of the beneficiaries and they may be subject to court supervision or not, depending on the terms of the trust. It is important for the person considering a trust to realize that one retains a great deal of control over the terms of most trusts…so long as public policy is not violated, one can impose almost any condition on the Trust and Trustees, including setting what fees should be paid. Indeed, one can provide that no fees should be paid to Trustees.
Realistically, however, the duties of a Trustee and the fiduciary duty that a Trustee faces makes most people reluctant to accept those obligations without some compensation. Since Trusts can last decades and thus require successor Trustees, even if a friend or relative agrees to serve without fees, one must take into account the fact that later Trustees may insist upon compensation before serving. And if one wants an institutional Trustee, such as a bank, the fees are not only set but are often higher than noninstitutional trustees.
COURT SUPERVISED FEES.
Some Trusts provide for Court supervision in their terms or become subject to Court supervision due to legal action or events befalling beneficiaries or Trustees. In such cases, the statutory fees set by the Court normally apply.
As an example, assume the Trust is domiciled in Oakland or Hayward, California. This is in Alameda County.
According to the Alameda County Superior Court Local Rules, ordinarily, trustees' fees shall not be paid until there has been an order of court fixing the same and settlement of an account. Where the Will or trust document is silent and the trustee and/or the trustee's attorney have elected not to support a fee application with a declaration with itemized detail of work and hours, the Court ordinarily will award the trustee an amount equal to one percent (1%) of the value of the trust assets annually and the trustee's attorney an amount equal to approximately one-third (1/3) of the trustee's fee. (Local Rules of the Superior Court of California, County of Alameda 12.16.4.2 )
Trusts subject to court supervision are usually subject to a schedule of appropriate fees set by the local court and while most courts have quite similar schedules, each local court should be consulted for its latest schedule of fees.
Assuming that the Trustee claims that he or she provided services that are extraordinary in nature (e.g. bringing or defending litigation; particularly difficult work buying or selling assets or running a business) the Trustee may apply for extraordinary fees from the Court and normally provides detailed time records and description of services in a petition to the Court which normally has a full hearing to consider the matter.
Most Trustee fees are computed and paid annually and this is what the Courts normally require. Again, the terms of the Trust may impose different criteria and timing of such fees. Absent extraordinary circumstances, the Court will follow the terms of the Trust.
Some counties no longer follow a set percentage award of fees, but examine the time records of the trustee to determine reasonable compensation, using the percentage method only as one factor in determining reasonable fees. In such counties, it is vital to keep good time records if you are a trustee. It is important to get updates on local rules to determine the current method used by the court.
CASE LAW REGARDING TRUSTEE FEES:
Most Trusts being created now are not subject to Court supervision and provide for “reasonable fees”
There are no restrictions governing the compensation taken by the Trustee of a non-supervised trust other than that it must be reasonable. If there is friction between the Trustee and the beneficiaries, it may be wise for the Trustee to seek an order fixing compensation, or at least explain the basis for compensation, at the outset of the trust, rather than wait until the beneficiaries ask for court review.
Case law has established the following criteria for determining reasonable compensation:
-
the gross income of the trust
-
the success or failure of the trustee’s administration, as measured by the growth in the value of investments
-
any unusual skill or experience the trustee has brought to the position
-
the “fidelity” or “disloyalty” shown by the trustee
-
the degree of risk and responsibility assumed by the trustee
-
the time the trustee devotes to performing trust duties
-
the custom in the community, including the compensation allowed to trustees by Trustors or courts typically in that community
-
the character of the work done in administering the trust
-
and, any estimate the trustee has given concerning the value of his or her own services
(Estate of McLaughlin (1954) 43 C2d 462, Estate of Gump (1982) 128 CA3d 11, Estate of Nazaro (1971) 15 CA3d 218)
Keep in mind that the Trustee has a fiduciary duty to the Trust and its beneficiaries and that includes dealing fairly with all of them. Charging of appropriate fees is but one area of “fairness” that said duty requires.
The “one percent rule” is a fairly typical one and most often used.
At section 14.110, page 206, "Compensation Guidelines for Management of the Estate," a San Francisco Superior Court document at
http://sfgov.org/site/uploadedfiles/courts/rule_14.pdf
it reads, "Ordinarily, annual fees for guardians, conservators and trustee shall
not exceed the following: One percent (1%) of the fair market value of assets at the end of the accounting period."
Again, extraordinary services allow extraordinary fees and may be sought both in supervised and unsupervised Trusts.
CONCLUSION:
Typically, in a revocable intervivos trust for most couples, the surviving spouse first assumes the role of Trustee and typically does not take any fees for the very good reason that such fees are taxable as income and the money is his or her own in any event. It is when the successor Trustee assumes the role that such fees often become important to consider.
But whether at the inception or later, one often gets what one pays for and paying good money for a good Trustee can be the best economic decision a Trustor can make.