How much does an executor of a will get paid? How much does a Trustee get paid? What is reasonable compensation for a Trustee? Can I get paid as a Trustee? Are there California rules about paying Trustees? How much do Trustees get paid in California?
By James L. Cunningham Jr., Esq.
If you’ve been named a successor Trustee, you might be wondering if you’re entitled to compensation for your time and effort. You’re in the right place, as we’re going to dive deep into this topic in this blog. You may also want to watch the webinar on this page.
Trustee compensation, which is taxable income, is payment for the hard work and time a Trustee pours into their duties managing a “trust estate.” Understanding Trustee compensation is like knowing the rules of the game—it helps maintain a level of professionalism and confidence, which makes managing a trust a smoother ride in most cases!
As a Trustee (or Successor Trustee), your general role is to manage and distribute the assets in a trust after someone has passed away. You need to communicate regularly with the Beneficiaries, who are the people set to inherit these assets, and in this state, you need to comply with the terms of the trust and the California Probate Code. If there are any disputes about the trust or your actions, the Court can step in to resolve the issues and ensure everything is handled correctly.
Here at CunninghamLegal, we provide access to professional Trust Administration in California. Please schedule a call to learn more.
When is it usually a bad idea to take a fee for being the Trustee?
Sometimes, the rules of the trust itself say you can’t take a fee—usually in the case of a family member serving as Trustee.
What if you’re the only Beneficiary who’s going to get money from the trust? In this case, taking a fee may not make much sense. It’s pretty much like taking money out of your right pocket and putting it into your left, and then having to pay taxes on it!
Now, keep in mind that a trust’s income isn’t just cash. It can also include other things, like profits from selling a house. This is called “distributable net income.” If you take your fee when the trust has a lot of this kind of income, it could bump you into a higher tax bracket, meaning you’d pay more taxes.
So timing really is crucial.
If you do take a fee, you have to think about when to take your fee. Trusts have their own “tax years,” and the income they make can be taxed at higher rates. So, if you time it right and take your fee at the right moment, you could end up saving yourself some money. Consult with a tax professional and create a plan in order to avoid incurring a higher rate when filing taxes.
Trustees of Living Trusts can receive compensation in the form of a percentage of the trust estate (for example, 1% of estate value) or what’s termed as “reasonable compensation.” This holds true even if you’re a Beneficiary or a professional Trustee. However, what does the 1% refer to? What qualifies as “reasonable”? These are questions that may not have straightforward answers, but we aim to shed light on them in this blog.
To fully grasp how Trustee fees are calculated, we first need to develop an understanding of how a Trust operates.
How does a trust work?
You can think of a trust as a bucket filled with assets, with the handle held by the Trustee. When the original Trustee can no longer hold the bucket, the successor Trustee takes over, ensuring the assets within the trust are managed and distributed according to the terms of the trust. It’s a vital role, requiring great responsibility, some expertise, and commitment.
What is 1% compensation for a Trustee?
When a Trustee is entitled to “1% compensation,” it usually refers to 1% of the trust assets under management. The job of a Trustee includes many tasks, including collection of the assets, payment of expenses and liabilities, and distribution to the people who inherit. It can also mean going to probate.
But what about a situation where the person who created the trust isn’t dead, but cannot serve as Trustee? Take for example, a Mom who has a stroke. Daughter takes over as Trustee. If the trust provides for “1% compensation to the Trustee (Daughter),” does that mean 1% per year? 1% for the entire time that Daughter might serve as Trustee?
After Mom dies, Daughter holds the inheritance for her Brother, who is disabled. Is Daughter entitled to 1% per year for that trust or 1% for the entire time that Daughter is serving?
Paying a percentage often is not a fair way to pay a Trustee. That’s why many trusts are written to pay the Trustee “reasonable compensation.”
What is reasonable Trustee compensation? Who or what determines Trustee fees in California?
In California, Trustees are entitled to what’s called ‘reasonable compensation’, according to California Probate Code section 15681. However, defining what is ‘reasonable’ is where things get interesting. The term ‘reasonable’ is not a one-dimensional, fixed concept. ‘Reasonable’ compensation is influenced by a variety of factors, including ‘reasonable’ for the work that’s been done.
Here is a list of ways that California Trustee fees can be determined:
- Trust Document: Often, the trust document spells out how much the Trustee should get paid.
- Trustee: If the trust document doesn’t say anything about compensation, then the Trustee decides on a fair fee. They’ll think about how much work they’ve done and what people usually charge for this kind of job. It’s always a good idea for the Trustee to keep detailed records and to communicate with the beneficiaries about the fees to maintain transparency and avoid any potential disputes.
- Court: If there’s a disagreement about the fee, the Court can be petitioned to decide a fair fee.
- Professionals: The Trustee might ask an accountant, attorney, or another professional to help determine the fee.
- The County local rules: California County local rules can influence Trustee fees by providing guidelines on what is considered ‘reasonable’ compensation, often based on a percentage of the trust’s current value.
How do California County local rules impact Trustee fees?
If the Trustee fees are not mentioned in the trust, then local rules apply. Each California County can have its own unique rules and standards, written and unwritten, when it comes to family Trustee compensation and Trustee compensation in general. This can impact typical Trustee fees. The local rules provide guidance on what is considered ‘reasonable’ Trustee compensation in that county.
Forty-three counties in California don’t have specific local, written rules for Trustee compensation, but often have unwritten rules. These counties leave it up to the Trustee (and the attorney) to determine what constitutes ‘reasonable’ compensation.
For example, if you’re a Trustee in Marin County, California, and you’re not a business, local rules direct you should get paid no more than 0.8% of the total value of the trust each year. This percentage is based on the value of the trust’s assets at a certain point in the past, not their current value.
In Monterey County, California, the local rules indicate a Trustee usually gets paid 0.75% of the current value of the trust’s assets each year. But if the Court is continuously overseeing the trust, the Trustee needs to get the Court’s okay on their fee.
In essence, local rules give a framework for determining Trustee fees, but there’s often room for some flexibility. Understanding these local rules is key to navigating the complex world of Trustee compensation.
When are Trustees paid?
Trustee fees are typically paid either during the initial distribution—or if the Trust Administration is complex, periodically throughout the duration of the Trustee’s service (usually annually). The specific timing can vary based on the terms of the trust document and the nature of the work performed by the Trustee.
How does the Court determine Trustee fees?
California Probate courts use eight factors to consider when determining or approving Trustee fees, which are as listed and discussed in more detail below:
- Gross income of the trust estate
- Success or failure of the Trustee’s administration
- Skill, expertise, or experience brought to the Trustee’s work
- Disloyalty shown by the Trustee
- Amount of risk and responsibility assumed by the Trustee
- Time spent in the performance of the Trustee’s duties
- The custom in the community where the court is located
- Whether the work performed was routine or required more than ordinary skill or judgment
Let’s take a closer look at these factors:
1. Does Trust estate value impact Trustee fees?
The size of trust estates can widely vary, meaning a percentage Trustee fee can be nominal to significant. If the trust estate is small in value and requires significant amount of Trustee time, the fees could be larger than 1% if tracking hourly time. If the trust estate is quite large but the Trustee hasn’t been required to exert much time, it might be wise to take hourly compensation instead of a percentage. In any case, the best practice is to inform the Beneficiaries of the Trustee fee early on to provide ample time for them to approve or question it.
2. Does it matter if the Trustee is successful in a Trust Administration?
The success or failure of a Trustee’s administration can have a direct impact on compensation. A Trustee who successfully manages the trust, adheres to its terms, and maintains effective communication with Beneficiaries may command higher compensation, rewarding their diligence and competence. Conversely, if the administration is deemed unsuccessful due to poor management or breach of fiduciary duty, the Trustee’s compensation may be negatively affected.
A failed trust administration is typically determined by a court of law. It might involve mismanagement of the trust’s assets, violation of the Trustee’s duties, lack of communication or transparency with beneficiaries, or unresolved or poorly handled disputes. If the trust’s assets decrease in value due to the Trustee’s actions, or if the Beneficiaries are unhappy with the Trustee’s performance, these could be factors of failed administration.
3. What if the Trustee has some kind of unique skill?
The experience and expertise of the Trustee may also be considered in calculating Trustee compensation. For example, if the Trustee is a Certified Public Accountant (CPA), they have special skills in handling finances and taxes. These skills are very helpful in managing a trust. Because they bring these extra skills to the table, a CPA acting as a Trustee might get paid more for their work. This may apply to family members acting as Trustees or professional Trustees.
4. A Trustee has a duty of loyalty
Disloyalty of a Trustee is generally determined by a court of law. If a beneficiary or another interested party believes that a Trustee has acted disloyally or breached their fiduciary duties, they can bring a legal action against the Trustee.
If a Trustee acts in ways that are not in the best interest of the trust or its beneficiaries, their compensation may be reduced or even denied, serving as a consequence for their actions.
Examples of disloyalty could include situations where the Trustee uses the trust’s assets for their own personal benefit, makes decisions that benefit themselves at the expense of the beneficiaries, or fails to act impartially when managing the trust.
You can read more about the pitfalls and liabilities of Trustees in this blog.
5. Are Trustees compensated based on risk?
If a Trustee assumes a significant amount of risk, such as making substantial investment decisions or managing a complex business asset, this could warrant higher compensation.
6. Should Trustees track working hours?
The hours clocked in performing Trustee duties are a significant factor in the fee calculation. The more time invested, the higher the pay. Tracking time as a Trustee is absolutely essential.
7. Which county’s local rules apply to Trustee Compensation?
The county of the “principal place of trust administration” is where the “day to day activities take place” or the residence of the Trustee determine which county’s rules apply. In our example above, if Mom lives in Los Angeles County and Daughter lives in Marin County, Marin County rules apply when it comes to Daughter’s fees.
This contrasts with Probate. If Daughter files a probate action on Mom’s estate, it will be in the county of the Mom’s residence, or Los Angeles County. Los Angeles County’s rules will apply to the probate case.
8. Does the complexity of the Trust Administration matter in compensation?
Imagine a Trustee’s job as a chef. If the Trustee is simply following a basic recipe—think boiling eggs or toasting bread—their pay might be more like a short-order cook’s wages. But if they’re whipping up a five-course gourmet meal from scratch, using some serious culinary skills (for complex properties, businesses, and trusts), their compensation could look more like that of a celebrity chef. In short, the more skill and judgment the Trustee’s work requires, the higher the fee.
Trustee fees are a complex subject
In essence, determining ‘reasonable’ Trustee compensation is a complex process. It’s a carefully calibrated mix of multiple factors that together define what constitutes a fair evaluation for the Trustee’s services. It’s not one-size-fits-all, and is tailored to the unique circumstances of each individual trust and Trustee. CunninghamLegal can help you navigate this process. Our team has provided guidance on Trustee compensation to clients in a wide variety of situations. We are ready to help you determine the best approach for your Trust management needs.
What we do at CunninghamLegal
The experienced team of estate planning lawyers and staff at CunninghamLegal help people plan for some of the most critical times in their lives; then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for Trust Administration, Probate, Estate Planning, and much more. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.
We look forward to working with you!
Best, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection and transfer of multi-generational wealth.
