Successor Trustee Compensation
Asking someone to serve as your fiduciary (trustee of your trust or personal representative or executor under your last will and testament) is not something that you should take lightly. Serving as a fiduciary is a heavy responsibility that requires significant time and effort. If you plan to nominate a family member or friend to serve in one or both of these roles, you will need to consider whether you should authorize them to be compensated from the trust or estate for the services they provide to the trust beneficiaries or heirs of the estate.
What is the customary amount of compensation for these types of services? If you have not specified in a will or a trust whether, or how much, the fiduciary should be compensated for their services, most state laws have addressed the question. A majority of the states that have adopted some form of the Uniform Trust Code allow the fiduciary to be paid a fee that is “reasonable under the circumstances.” (Unif. Trust Code § 708 (Unif. L. Comm’n 2010), available at https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=3d7d5428-dfc6-ac33-0a32-d5b65463c6e3&forceDialog=0). Some states have other approaches to fiduciary compensation, including a graduated fee scale based on the value of the property being managed (For example, see Georgia, O.C.G.A. § 53-12-210, Maryland, Md. Code § 14.5-708, or New York, S.C.P.A. § 2309). In 2016, the American College of Trusts and Estates published a comprehensive comparison of the different state rules, including a list of the states that allow a trustee’s fee to be calculated based on a percentage of the assets under management (Fee Statutes by State, The American College of Trust and Estate Counsel (Feb. 2016), https://www.actec.org/assets/1/6/Fee_Statutes_by_State_February_2016.pdf). The current trend among the different states, however, is the “reasonableness” standard (See Unif. Trust Code § 708, Unif. L. Comm’n 2010, available at https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=3d7d5428-dfc6-ac33-0a32-d5b65463c6e3&forceDialog=0).
What Is a Reasonable Fee?
“Reasonable under the circumstances” can be hard to pin down when it comes time to actually write the check to pay the fiduciary. To provide some guidance on the “reasonableness” standard, the Uniform Law Commission, and case law have offered, in one form or another, the following factors to assist the courts (and the parties in court cases) in determining what makes a fee “reasonable.” These are not the only factors to be considered, but they are some of the factors frequently cited by courts when determining the reasonableness of a fiduciary’s compensation.
When a court is being asked to evaluate the reasonableness of fiduciary fees, it first considers the customary fees charged by professional or corporate trustee companies in the local area. The result may be an hourly rate or it may be a percentage of the value of the property under management, paid annually. In either case, if you are trying to determine a reasonable fee to pay your trustee, ask some professional trustees in your area what their customary fee structure is and whether it would make sense in your case to provide the same level of compensation to the fiduciary handling your trust or estate.
Trustee’s Skill and Expertise
The skills or expertise your trustee can bring to the table is another important factor. Simply put, an attorney or a certified public accountant (CPA) will bring much more knowledge and experience when acting as a trustee than a professional musician will. Thus, a reasonable fee for a trustee who is a CPA may be a much higher hourly rate because of the skill, efficiency, and professionalism that they use in doing their job. On the other hand, because a professional musician is more likely to be unfamiliar with such subjects, they may need to spend much more time than a CPA will to get the accounting and tax preparation done, thereby justifying a lower hourly rate.
Similarly, it would be unreasonable for a trustee who is an attorney to bill their typical rate of $350 per hour to clean out or mow the lawn of a home owned by the trust. In such a case, reason would dictate that the trustee hire someone at $25 per hour, or the standard rate for similar work in the same geographical location, to perform the landscaping work for the trust and charge the trust $350 per hour for the work only an attorney could do.
Time Devoted to the Trustee’s Duties
Some fiduciary roles require significant investments of time. Therefore, to justify a reasonable fee, the fiduciary must keep careful records of the amount of time they spend carrying out their duties. If a fee seems particularly large, especially when compared to the amount of property in the estate or trust, the fiduciary must be prepared to show a court or the beneficiaries and heirs of the trust and estate that the time spent on those fiduciary duties was necessary for the proper administering the estate and trust.
Amount and Character of Trust Property
Some forms of property can be much more complicated to deal with than others. For example, a savings account containing $800,000 can be much simpler to deal with than five rental properties in a depressed area of town where renters have done significant damage to the property. Thus, a reasonable fee for managing those properties or preparing them for sale could be significantly larger than the fee for distributing outright one savings account in equal shares to the beneficiaries. Similarly, the tax preparation and investment decisions required from the fiduciary of an estate or trust worth $800,000 will be much different from the same types of decisions for an estate or trust worth $18 million.
Degree of Difficulty
Some trust and estate administrations can be very straightforward and easily managed. For example, if a widow leaves all her property and cash to her only child, outright and free of continuing trusts, the degree of difficulty of such an administration would be very low. On the other hand, if the deceased had been married multiple times and left a surviving spouse as well as children and grandchildren, some of whom may be suffering from addiction, creditor issues, or a messy divorce and who were prone to challenge every action by the fiduciary, the fiduciary’s duties could be exponentially more difficult. As a result, a reasonable fee for the latter example could be substantially higher than the fee for the former.
Level and Type of Responsibility
Different types of responsibilities may require different levels of compensation. For instance, managing property held in trust for the benefit of a mentally disabled individual so the beneficiary remains eligible for public benefits takes a much different level and type of responsibility than making scheduled outright distributions to a beneficiary or distributions under a more straightforward distribution standard, such as for health or education expenses.
The protection and management of certain types of estate and trust property can also carry varying levels of risk. If a trust holds certain types of business property associated with high risks or volatile value fluctuations, the trustee may personally be at much greater risk with regard to being responsible for the proper care and management of that property. As a result, a higher fiduciary fee may be appropriate in such a case.
There may be other factors involved in an analysis of whether a trustee’s or personal representative’s fee is reasonable under the circumstances. However, the factors described above should give you some sense of the types of things that you should consider. The bottom line is that the reasonableness of these types of fees is very fact specific. If a trustee or personal representative wants to be paid for their services, they should keep careful and detailed records of the types of services provided for the management of the trust in addition to the time spent and the expenses incurred on the trust’s behalf. Even if a trustee or personal representative is not asked to provide that information to justify their fee, doing so anyway is crucial if, down the road, that fee is ever challenged as being unreasonable.
Whether you choose a corporate or professional fiduciary or a family member or friend to act as trustee or personal representative, discuss with your estate planning attorney the issues surrounding trustee compensation to ensure that you understand how to handle this important element of your estate planning and that it conforms to your ideas about what is reasonable and what is not.