In our last post on how to pick a trustee for your trust, we very briefly mentioned that trustees are entitled to compensation for their work as trustee. Below, we have outlined how trustees are paid how their compensation is calculated.

Trustee Compensation Overview

Firstly, trustees of a trust are entitled to compensation for their services under the California Probate Code Section 15680. Under this section, "if the trust instrument provides for the trustee's compensation, the trustee is entitled to be compensated in accordance with the trust instrument." Going further, section 15681 holds, "If the trust instrument does not specify the trustee's compensation, the trustee is entitled to reasonable compensation under the circumstances.

Putting these two sections together we get the following concepts:

1.    As a blanket concept, trustees are entitled to reasonable compensation for their services.

2.    If the trustors, when creating the trust, wish to specify how trustee compensation is to be calculated or that the trustee is not entitled to compensation, then they have the power to do so.

3.    Trustees can always default to allow for reasonable compensation for trustees.

4.    Though not specifically referenced in the sections quoted above, just know that a probate court can always modify trustee compensation where they see cause to do so.

Keep in mind, there are other code sections in the probate code on trustee compensation such as the allowance for additional compensation where appropriate and equitable or a limiting of fees if they are unreasonably high. However, those sections address fact-specific situations. Thus, if you want to know more details on fact specific situations, then do not forget to subscribe to our newsletter here or our YouTube channel here to stay up to date for when the post deeper dives on trustee compensation. Otherwise, let's continue on into trustee compensation as it applies to the vast majority of cases.

How Trustee Compensation is Calculated

There generally two methods by which trustee compensation is calculated: hourly and percentage based. Beginning with hourly, if a trustee elects to charge an hourly rate, they usually look to what the market hourly rate for bookkeeping or accounting services are in the area and use that as a baseline. However, if you or someone you know ever operated as a trustee of a trust, then you or they know that being a trustee is much more than simply closing down bank accounts, collecting money and handing out checks and accounting ledgers. Even in relatively simple estates, 1 house, 2 bank accounts and 2 kids for example, closing down an estate is a lot of work. Trustees are contacting beneficiaries, selling or distributing personal property, selling real estate, going to banks, talking to creditors, and much more. It can become a full-time job and easy to rack up a lot of hours or simply lose track of them by the end. Due to this, we do not see trustees charging hourly very often. Almost never to be honest.

Instead, most trustees elect to simply receive a percentage-based compensation. This is usually a percentage of the assets under management (as in the real estate and money in the estate) and is often anywhere between 1-2% depending on how difficult the administration was. This method is also the easiest to calculate with one simple calculation, the easiest to evidence in an accounting, and the easiest to justify or show how the trustee arrived at that number in the first place. Remember, a trustee has to account to beneficiaries, so each beneficiary is entitled to know what the trustee compensation was and how it was determined.

Going further, most professional trustees or fiduciaries will use a percentage-based fee structure as well. Depending on the sophistication of the particular company or professional trustee, they may have a tiered system where the larger the estate, the lower the percentage charged in a manner similar to how our personal income taxes are structured. For example, 1% of the first $750,000, 0.5% of the next $750,000, and 0.25% of anything beyond $1.5 million. Under that example fee structure, a $500,000 estate would mean trustee compensation of $5,000, a $1.5 million estate would be $11,250, and a $2 million estate would be $12,500. Keep in mind, the more sophisticated the professional, the higher their fees typically are, and they may even have a mandatory minimum total asset value before they will accept the role as trustee. For example, I have come across a company that had a minimum requirement of a $1 million estate value before they would accept the role as trustee.

Other Points to Keep in Mind

To close this discussion, there are a couple small concepts to keep in mind as well. First, trustees are entitled to receive reimbursements for any out-of-pocket expenses they incur while working on behalf of the trust such as travel fees, shipping fees and even for payment of bills and expenses that were required before the trustee could gain access to trust funds.

Next, another form of trustee compensation is to simply take a flat fee. However, this is exceedingly rare since it becomes a determination between what the trustee thinks is fair and reasonable versus what one or all of the beneficiaries think is a fair a reasonable fee. At this point, the difference between the two figures will likely be based on emotions rather than facts. Using an hourly or percentage-based fee structure makes the manner by which the fees is calculated fairly clear and open.

Lastly, a trustee can always simply elect not to receive compensation for their services. Often times when a beneficiary is also a trustee, something that is legally allowed, they elect not to receive compensation since it would only slightly reduce their inheritance and mean taxable income to them, thus increasing their own personal tax liability.

Whether you are a trustee, picking a trustee for your trust or a beneficiary of a trust, always remember that a trustee has a lot of work to perform and are legally entitled to compensation for that work. The biggest fight we see in trust administrations is over trustee compensation, especially where there is a beneficiary who either did not know a trustee could be compensated or where they feel they are entitled to that money and that the trustee is just gouging the estate.

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