As a beneficiary of a trust, you might be highly concerned that the trustee is stealing money. After all, he or she is taking money from the trust, often for what seems like little to no work. This is particularly concerning when the trustee is also a beneficiary of the trust.
Knowing how much to pay a trustee is a difficult question for any trust beneficiary. Are the trustee fees proposed in a trust agreement fair? Is another beneficiary getting more than they should for acting as a trustee? What is a fair rate for successor trustee’s fees? How do you know if you’re getting good value for trustee pay?
So, how much is too much? At what point does trustee pay become thievery?
There are no easy answers to these questions because the duties each trustee must perform can vary. Some situations demand that the trustee make difficult decisions on behalf of the beneficiaries. Other trusts need only infrequent decisions from a trustee, which aren’t challenging to make. A one-size-fits-all rule won’t work to set trustee pay.
This guide will help you sort through the delicate and (at times) complicated issue of trustee fees in a simple and straight forward way.
There is no one set answer to how much a trustee of a trust should be paid. Instead, there are many factors to consider. For example:
1. Does the Trust Allow Compensation to the Trustee?
2. What Kind of Trustee Does the Trust Appoint?
3. What is the Skill of the Trustee?
4. What is the Value of the Entire Estate?
5. Does the Trustee Delegate His or Her Work?
6. What Are the Trustee’s Duties?
All of that said, courts will generally accept annual trustee fees between 1% and 2% of the gross value of the trust assets.
For example, if you have a trust with a gross value of $500,000, then you can expect to pay the trustee between $5,000 and $10,000 per year. This is a general rule of thumb. There are times when more or less compensation is reasonable or required (discussed more in-depth below).
So if the trustee of your trust is charging more than 1% and 2% if the gross value of the trust estate per year, then here are your options:
- Request the trustee to return the excess fund to the trust.
- File a petition with the court to remove the trustee, and seek an order compelling the trustee to return the excess funds.
- If the trustee has taken well above the standard rates, you may consider a complaint for breach of trust, fraud, or conversion (or all three).
What Does the Trust Say?
Your first step in deciding whether trustee compensation is reasonable or justified is the terms of the trust itself. What does the trust say?
Both the Uniform Trust Code and the California Probate Code specify that the terms of the trust itself control (1) whether the trustee has a right to compensation; and (2) how much compensation the trustee can receive.
If the trust says that the trustee CANNOT receive compensation, then the trustee is NOT entitled to any kind of fee or compensation for his or her work.
If the trust allows the trustee to receive compensation, then there are four ways the trust can do this:
1. The trust can specify a particular formula for calculating the fee. For example, the trust might say that the trustee gets 2% of the gross value of the estate plus 10% of trust income.
2. The trust can use generic terms like saying that the trustee is to be paid a “reasonable fee.”
3. The trust can say that the trustee is to be paid based on published fee schedules like this one from Fidelity:
|Value of Trust Assets
|First $2 Million
|0.45% (up to $9,000)
|Next $3 Million
|0.26% (up to $7,800)
|Next $5 Million
|0.19% (up to $9,500)
|Over $10 Million
|Minimum Annual Fee
4. The trust can say that the trustee is to be paid a fixed amount. For example, it might say $2,000 per year or $50 per hour.
Whatever the trust says, courts are generally going to follow it.[i] But, a court may adjust the fee up or down depending on the circumstances.
What If the Trust Does Not Say Anything About Compensation?
If the trust says nothing about trustee compensation, then the trustee is entitled to a “reasonable” fee.[ii]
Whether a fee is reasonable depends on many factors.
Here is what courts in California look at when deciding whether a trustee fee is reasonable:
- The gross income of the trust estate;
- The success or failure of the trustee’s administration;
- Any unusual skill, expertise, or experience brought to the trustee’s work;
- The fidelity or disloyalty shown by the trustee;
- The amount of risk and responsibility assumed by the trustee;
- The time spent in the performance of the trustee’s duties;
- The custom in the community where the court is located regarding compensation authorized by settlors, compensation allowed by the court, or charges of corporate trustees for trusts of similar size and complexity; and
- Whether the work performed was routine, or required more than ordinary skill or judgment.
What Would Cause a Court to Reduce a Trustee Fee?
Based on the factors above, there are several reasons a court may reduce the trustee’s fees.
First, if the total compensation paid to the trustee is not justified by the total value of the trust, the court can reduce the fee.
Second, if the trustee cased a loss of trust assets, then his or her fee can be reduced by the amount of the loss. For example, if the trustee caused a loss in value of an investment of $10,000, his or her trustee fee can be reduced $10,000.
Third, if the trustee had special skills, a high trustee fee may be justified. For example, if the trustee is an attorney, the attorney-trustee may be able to receive higher compensation than a non-attorney trustee. Additionally, if the trustee has to hire a professional to help him or her with his or her duties, then the fee can be reduced by the amount paid to the hired professionals.
Fourth, if the trustee assumes a lot of risk by acting as a trustee, then he or she can justify a more substantial fee.
Fifth, if the trustee spends more time managing the trust, then he or she can justify a higher fee. Alternatively, if the trustees spend little time managing the trust assets, then a lower fee is required.
Sixth, if a particular fee is customary in your jurisdiction, then that will usually be the fee that controls. For example, if in the area you live, trustees are always paid $5,000 per year, then this may be reasonable even if the value of the estate is relatively low.
Finally, if the work performed was ordinary or routine, then a higher fee cannot be justified.
Unless a trust prohibits trustee fees, the terms of trustee compensation in a trust or as applied by probate courts throughout the country, only apply to ordinary services of a trustee. If a trustee is required to perform services which are not usual to the administration of a trust, then the trustee can also receive “extraordinary” fees.
What Kind of Trustee Does the Trust Appoint?
There are two basic types of trustees, either a professional trust management team or a private individual(s). Many times the private individual is either a close friend or family member of the grantor (trust creator). Trusts often choose one beneficiary, or a group of beneficiaries, to act as successor trustee.
Trusts often change trustees under set circumstances (fox example, when the creator passes). Many times the successor trustees are private individuals who follow a professional trust manager. This can cause problems when the successor trustee hires other professionals to do the trustee’s work.
Fees For Professional Trust Management Firms
In one way, there are no set fees for professional trustees. But all professional trustees have set fees. For example, you can see the professional trustee fees for Fidelity above. In general, courts will accept annual fees between 1% and 2% of trust assets as reasonable. Unfortunately, the answer isn’t as easy as this rule-of-thumb makes it seem.
As discussed more in-depth below, any trust will require a large amount of work regardless of the trust’s size. Since most professional trustees offer a flat percentage fee based on the amount of assets managed, smaller trusts will demand more work relative to their fees.
For this reason, trust management companies will often charge higher rates for smaller estates. The cost often declines as the size of the estate increases. For example, typical trustee fees can be 2% for estates below $500,000, 1% for estates below $1 million, .85% for estates between $1-$3 million, and even as low as .5% for very large estates.
Of course, you can’t just look at the percentage to know if trustee pay is reasonable. The devil is in the details. Exactly what does the trust company do for their fee? Which services will they delegate to a third party? Are those expenses charged to the trust or do they come out of the flat percentage management fee?
Fees Paid to Private Individuals
Individual trustees are still entitled to a reasonable trustee fee, just like professional trustees. But, an individual private trustee, like a family member or beneficiary of the trust still needs to function competently and carry out the basic duties of a trustee (see below).
To help him or her, the private, individual trustee can hire other professionals to help. For example, it is common to hire an attorney to help with the legal documents and required notices. But, in these circumstances, the trustee’s fee should be reduced by the amount they pay to other professionals.
Multiple Successor Trustees
Sometimes a trustee names more than one person to be the successor trustee. These “co-trustees” are still entitled to receive compensation; however, they can only receive compensation if (1) the trust allows them to receive compensation; and (2) they actually do work.
For example, if a trust appoints two persons to act a co-trustees, and one person does 90% of the work, and the other does 10% of the work. Then the fees need to be split in proportion to the work they did (90/10). Both co-trustees are NOT entitled to double the trustee fees.
Duties of a Trustee
Some beneficiaries question why trustees should get paid in the first place. The short answer is that administering a trust can involve a considerable amount of time and effort from a trustee. We wrote a great article on the Duties of a Trustee, and this section lists some of the typical duties trustees must fulfill. If you want more detail, read our article called “15 Essential Duties of a Trustee Explained.”
1. Must Administer the Trust According to Its Terms.
While this sounds simple, this duty can require both prudence and good judgment to execute well. The problem here is when a situation comes up, and the terms of the trust offer little concrete guidance. If, for example, you have set up a spendthrift trust designed to protect a compromised beneficiary, what is “reasonable maintenance?” In what situations can the trustee spend from the trust’s principal to help a beneficiary manage an unforeseen life problem?
Trusts can be vague when difficult-to-foresee circumstances come up. Trust agreements can create all kinds of hard-to-define duties that are entirely unique to a particular situation. The range of trust terms are only loosely constrained by law, and may need a court to decide what is reasonable under the circumstances. Thus, a trustee may have to seek legal counsel, or even direction from a court, to perform their duties.
2. Fiduciary Duty
The law generally requires trustees to have a “fiduciary relationship” with trust beneficiaries. This term means that the trustee must act for the benefit of both the current and future beneficiaries of a trust. A fiduciary is not an “at-arms-length” business relationship. Fiduciaries can face both civil and criminal penalties for acting on their own behalf rather than the beneficiaries.
As a fiduciary, a trustee must take even greater care to manage trust assets in a prudent manner than most investment advisors. For example, a stock fund portfolio manager is not typically a fiduciary. In practice, this means that a portfolio manager can take risks that a fiduciary can’t.
3. Portfolio Management
While the fiduciary duty requires prudence, prudence doesn’t mean stagnation. If the trust purpose is to provide a long-term income stream for its beneficiaries, you can’t achieve this result with low-yield financial vehicles like government bonds. Inflation will eat away at the principal assets of the trust. Assets will have to be split between high-risk and low-risk investments. The exact mixture requires judgment and can be challenging to achieve.
Trusts can contain all kinds of different assets, including liquid financial assets like stocks or securities, oil and gas leases, real property, and even operating businesses. The more unique the assets you put into a trust, the more difficult they can be to manage in a prudent manner.
4. Distribution of Trust Assets
Typically, trustees are responsible for regularly distributing trust assets to the beneficiaries. The trustee must balance the present needs of the beneficiaries against future needs. In practice, this involves setting income payments large enough to maintain beneficiaries without spending so much that trust becomes too small to meet future obligations.
Trust distributions frequently become a sore point between trustees and beneficiaries. They can also create acrimony between beneficiaries.
Trustees must provide a regular and fair accounting of all matters related to the trust. This can include:
- an expense list for services provided to maintain the trust assets
- buying and selling actions
- expenses to meet trust obligations
- taxes paid on all trust assets
- legal fees
- cost basis tracking
- gain/loss reporting
The accounting requirements can be onerous for many estates.
6. Report and Pay Taxes
Depending on your trust structure, some trusts will have to pay taxes. The trustee is responsible for filing and paying any taxes due.
7. Delegate Trust Duties
The trustee doesn’t have to perform all the necessary duties to administer the trust. A trustee can use trust resources to hire third parties to perform many of the above tasks. The trustee, however, does have a fiduciary duty to ensure that the services provided by third parties are both necessary and purchased for a reasonable price.
As the above breakdown should make clear, being a trustee can be both time-consuming and difficult. Further, trustees can become liable for failing to meet their fiduciary duty. Any trustee fee must consider both the duties they will have to perform on behalf of the trust and the risks they bear as a fiduciary.
Reimbursement of Expenses
All trustees are entitled to be reimbursed for the expenses they pay out of pocket while administering the trust. This is a separate entitlement than trustee fees. A trustee is ALWAYS entitled to reimbursement for the costs of administration. So even if a trust does not allow trustee compensation, the trustee is still allowed reimbursement.
Trustees do a lot of work for a trust. Unless the trust says otherwise, a trustee is entitled to reasonable compensation. It does not matter if the trustee is also a beneficiary. As long as the trust does not expressly disallow compensation, then even a beneficiary-trustee can receive a fee for administering the trust.
Whether a trustee fee is reasonable or not depends on a lot of unique factors. But a general rule of thumb is, if a trustee fee is more than 2% of the gross value of the assets of the trust in any single year, then it may be an unreasonable fee.