WHY DID THE TRUSTEE PAY ALL THAT MONEY TO HIMSELF?
WHAT ARE TRUSTEE FEES?
A trust is typically established by a document known as a declaration of trust will which is a document with instructions for how the trust assets are to be handled. The declaration of trust also identifies the trust creators, known as trustors, the beneficiaries who will be receiving money and benefits out of the trust and the trustee. The trustee is the person or institution responsible for administering the trust, writing the checks, paying the bills, etc. The trustees fees are what is paid to the trustee for doing the work of administering the trust.
THE LAW DOES NOT SPECIFY WHAT TO PAY TRUSTEES
To have a valid Trust, California law only requires a proper manifestation of the Trustor’s intention to create a trust, trust property, a valid trust purpose, and a beneficiary. The law does not have any detailed requirements about trustee fees or what trustees fees are to be paid. If trustees fees are not mentioned in the declaration of trust, then the law allows for “reasonable” trustees fees.
FAILURE TO SPECIFY WHAT TRUSTEES FEES ARE TO BE PAID LEADS TO DISAGREEMENTS
Most declarations of trust do not have any rules or schedules as to what the trustee is to be paid or guidlines for trustee fees. Most declarations of trust simply provide for payment of “reasonable trustees fees” which simply sows the seeds for disagreement. I once had a trust case where the trust consisted of a few bank accounts and a very modest house in Long Beach which was ultimately sold for $200,000. The trustees insisted that they be paid $40,000 for trustees fees since they supervised some cleanup and fix up of the house before was sold. I represented a beneficiary and we took the position that $40,000 was absurd and that we would have to file a lawsuit with the probate court to have the judge decide. Ultimately, the case was settled on an agreed trustees fee of $14,000.
TRUSTEES FEE PROVISIONS ARE NOT USUALLY SERIOUSLY CONSIDERED WHEN FORMING A TRUST BECAUSE IT SEEMS SO FAR AWAY
In the typical married couple living trust, the trustors who are the originators of the trust don’t take any trustees fees because it’s their own assets they are managing which they were doing anyway before the trust was created. People often disregard one of the fundamental purposes of the trust which is to have an orderly transition of the estate upon the demise of the creators. It is hard to have an orderly transition if the trustee and the beneficiaries disagree about what is a reasonable trustee fee.
TRUSTEES FEES WILL BE CLAUSES THAT CAN BE INCLUDED IN A TRUST
Here are the choices that should be discussed when the declaration of trust is created:
- It can state that the trustee is to be paid a “reasonable compensation” but that simply creates a possibility of future disputes. Disputes can be avoided with a reasonable compensation clause if all of the trust beneficiaries are the successor trustees who will serve following the demise of the Trustors. Thus if the trust provides that the Trustors’ only two adult children who are also the only trust beneficiaries are both successor trustees then they will each be paid the same trustee compensation. Often, in this instance, the adult children will waive any trustee compensation because the compensation will most likely be taxable income to them. If they don’t take compensation than the amount of assets that they receive as a tax-free distribution as beneficiaries will be higher.
- The declaration of trust can also state that no trustee compensation will be allowed. This type of provision is often used when it is anticipated that the trustee will be a family member or a beneficiary and if there is not too much work involved in administering the trust.
- Another method of determining compensation would be according to a formula. Most formulas are based upon income, and/or a percentage of the value of the assets and or a combination of income and asset value. The formula can be whatever the trust creators choose to write and are no legal limitations.
- The trustee can also be paid a fixed amount. This type of clause is most often used in family situations to encourage a family member to take some fee since there is work involved, to avoid disputes amongst family members about the fee and to show the trust creator’s intent that some fee be paid.
- If a professional trust company is the trustee, they sometimes specify that the trustee is to be paid according to its published fee schedules. Those fee schedules tend to be a percentage of the assets and range from 1% per annum upward. When establishing a trust with a professional trust company, the legal department of the trust company should be consulted to determine what they want to have written into the trust for trustees fees. Such consultation will ensure that the trust company will most likely accept the assignment as successor trustee when the time comes.
ORDINARY TRUSTEES FEES VERSUS EXTRAORDINARY FEES
There is another twist in trustees fees that usually do not occur to people forming trusts because they have not been involved in litigation over trustees fees. The way the court system and the law looks at this is that the trustees fees as specified in the trust declaration compensate the trustee for “ordinary duties”. If the trustee feels that more than ordinary duties have been performed, the trustee can ask for “extraordinary fees”. It is possible to write in the declaration of trust that no extraordinary fees will be allowed but if that is not done, the door is open for the trustee to claim more money for what the trustee considers as “extraordinary fees” The services included in basic ordinary duties cover services pertaining to custody of assets, investment management, collection and distribution of income, and reporting to the beneficiaries. Anything other than these types of fees would be considered work justifying extraordinary fees. Examples might be the handling of litigation, handling of transactions involving purchases and sale of real estate and our businesses. There has been a lot of litigation over the years concerning what fees are reasonable for ordinary fees and extraordinary fees. Each situation would need to be looked at by the attorneys for the trustee and attorneys for the beneficiaries to see what each side can agree on. If there is no agreement, one side of the other can file a court petition to let the court determine what the fees should be.
MODIFICATION OF TRUSTEE FEE PROVISIONS ON APPLICATION TO THE COURT
Even the most tightly drawn trustees fee provisions in a declaration of trust can be challenged. California law has built into it that a trustee may apply to a court to fix or allow a greater or lesser compensation than that provided for in the trust document. The law says that the court can increase or decrease the trustees fees in any of the following circumstances:
- If the trustee duties are substantially different then contemplated when the trust was created;
- If the compensation in the instrument is inequitable, or unreasonably low or high; or
- If there are extraordinary circumstances calling for equitable relief i.e. Trustees fees are unfair.
CALL (949) 229-7034 to speak with Lawyer David L. Crockett
Some plan and specification about trustees fees in the declaration of trust is better than no plan at all. Court litigation over trustees fees can take over a year and can cost the trust and the persons disputing the fees tens of thousands of dollars in legal fees.
Conveniently located in Newport Beach
near the John Wayne Airport
We are located near the Orange County California John Wayne Airport. My office is catty-corner from Fletcher-Jones Motorcars; —right behind the rear entrance of Newport Lexus on Dove Street. Here is a picture of my office building and a Google Map to get your bearings.