Trustee Compensation – What is Reasonable?
Serving as trustee of a trust can be a daunting task. You are likely dealing with the loss of a family member or close friend. At the same time, in addition to your usual work and commitments, you’re expected to take on a new job, for which you have little to no experience. Even when dealing with a well-drafted and fully funded trust, marshaling and distributing the assets of a trust is time consuming work.
While an experienced trusts and estates attorney will help guide you through your responsibilities, there’s no question that you will have to dedicate a significant amount of time to fulfill those duties. The trustee is expected to put the interests of the trust beneficiaries above all else, but is not expected to do this work for free. Determining how a trustee will be compensated for their time is a critical part of any trust administration and is perhaps one of the biggest points of contention if not handled properly.
What Compensation is a Trustee Owed?
The terms of the trust document control when it comes to determining compensation for a trustee. However, most trusts are not very illustrative on this question, for good reason.
It is usually unwise to set a rate or fee cap for a trustee. It is nearly impossible to predict what will actually be involved in the administration and what an appropriate fee for said tasks would be at the time of service. What is considered a “reasonable” hourly rate now may be far too low when the Trustee is called upon to serve 15 years down the road. Setting a rate or cap on fees may deter an otherwise competent trustee from serving if those rates are not commensurate with what the individual would otherwise be able to earn. Thus, most trusts will simply state that a trustee is entitled to “reasonable compensation.” This permits for flexibility and an appropriate determination of compensation proportionate with the work performed. If the trust is silent on the issue of trustee compensation, California Probate Code section 15681 similarly provides that “the trustee is entitled to reasonable compensation under the circumstances.”
A strategy that lends itself to maximum flexibility is naturally subject to vast interpretation. So, how do we determine what is “reasonable”? An experienced trusts and estates attorney can help guide you through this decision.
How to Determine “Reasonable Compensation”
Most California Superior Courts do not have fee guidelines in their local rules defining what is “reasonable” in terms of trustee compensation. This is currently true of both Los Angeles and Ventura Counties. Napa, Santa Cruz, and Solano Counties, on the other hand, all agree that a fee of 1% of the market value of trust assets is considered reasonable.
The California probate code similarly does not define “reasonable.” While California Rule of Court 7.776 lists factors a court may consider in reviewing trustee compensation (see below), the trustee and the beneficiaries are likely to apply those factors differently. Accordingly, fee disputes are commonly the subject of California trust litigation. However, most disputes can be avoided with proper guidance, communication, and documentation.
California Rule of Court 7.776 lists the following factors a court may consider in reviewing trustee compensation:
“Rule 7.776. – Compensation of Trustees. In determining or approving compensation of a trustee, the court may consider, among other factors, the following:
(1) The gross income of the trust estate;
(2) The success or failure of the trustee’s administration;
(3) Any unusual skill, expertise, or experience brought to the trustee’s work;
(4) The fidelity or disloyalty shown by the trustee;
(5) The amount of risk and responsibility assumed by the trustee;
(6) The time spent in the performance of the trustee’s duties;
(7) 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
(8) Whether the work performed was routine or required more than ordinary skill or judgment.”
Trustees should always be prepared to justify their fee as “reasonable,” and should always keep the above factors in mind. This involves keeping detailed time records, even if the trustee decides to take a percentage of the trust assets as a fee instead of charging an hourly rate. While keeping time records, it’s helpful to consider how a particular entry fits into one of the above categories.
It is also important to consider the type of work a trustee is performing at any given time. For example, a trustee may choose to charge a lower rate for tasks that are routine and do not require extraordinary skill, with a higher rate charged for tasks that require a specialized skill set (such as running a business). Again, we can look to the California Rules of Court for examples of what may be considered “extraordinary.” California Rule of Court 7.703(a) provides that services such as the selling or leasing real property or carrying on the decedent’s business if necessary to preserve the estate would be considered “extraordinary.”
While serving as trustee is a monumental undertaking, it is one that should come as a great honor. Being named as trustee means the settlor of the trust sees you as the person in their life with exceptional integrity, judgment, and skill. With the right legal representation and continuous reflection on your duties, you can carry out this role smoothly and effectively.