How are trustee fees calculated? Trustees play a critical role in trust administration. In California, trustee fees can vary based on the type of trustee appointed and the terms of the trust. Importantly, under California Probate Code § 15681, trustees are entitled to “reasonable compensation under the circumstances” for their services. However, these fees are not always calculated on an hourly basis.
As a beneficiary, it’s essential to understand how California trustee fees are determined. This knowledge not only helps you gauge administration costs but also serves as protection against potential overcharging by the trustee.
At Gokal Law Group, we have assisted numerous beneficiaries in defending their inheritance from trustees who impose excessive fees. Here’s what you need to know about how trustee fees are calculated.
What is the Purpose of Trustee Fees?
The purpose of trustee fees is to enable a trustee to put in the time and effort needed to properly administer a trust. Trust administration can be highly time consuming, requires significant effort and emotional energy. If done correctly, and it is only fair a trustee receives reasonable compensation, if the trust and California law allows.
How are trustee fees calculated? All fees must be reasonable, based on the experience of the trustee, the level of work required, and the value of the trust. As you would pay any other professional for their services, trustees deserve fair compensation for their work. Several responsibilities justify trustee fees:
- Asset management
- Distributing assets
- Tax compliance
- Record-keeping
- Legal and administrative tasks
- Maintaining trust property
- Keeping the trust profitable
- Investing on behalf of the trust
When determining trustee fees, the court considers several variables, such as the complexity of the trust, the trustee’s income, the effectiveness of trustee administration, any unusual and noteworthy skills or proficiency of the trustee, the risk and responsibility involved, and more.
Related Article: Do Trustees Get Paid in California?
What is the California Trustee Fee Schedule?
While trustees may be entitled to payment for their efforts, they cannot charge an excessive amount. Overcharging could constitute a breach of fiduciary duty, and because of this, the California trustee fee schedule exists.
The California trustee fee schedule provides guidelines to calculate how much a trustee should receive. It is a reference for trustees to adhere to when paying themselves with trust funds and a way for beneficiaries to understand what is and isn’t reasonable compensation.
However, the schedule does not give fixed or standardized fee rates for trustees because they can vary widely depending on several factors, such as:
- The complexity of the trust
- The amount of time spent dedicated to maintaining the trust
- The cost of living and level of competition among trustees in that area
- Any trustee compensation outlined in the trust document
Ultimately, the trust document is one of the most essential variables in answering the question, How are trustee fees calculated? This instrument can outline specific fee structures in either an hourly rate or a percentage so there is little ambiguity. But this is not always the case.
If the trust document does not explicitly state a compensation fee or rate, local laws typically determine what is appropriate. As mentioned above, the California Probate Code states trustees should receive “reasonable” payment.
But what’s “reasonable” is subjective and different for each trust.
“Calculating trustee compensation can be complicated as it varies from trust to trust, and from trustee to trustee. At times, the court may intervene and override trust terms regarding compensation. If a trust document outlines an unreasonably low or high amount, the court may order an increase or decrease in compensation. This change is usually the result of the trustee duties being significantly different from what the grantor expected when creating the trust.”
– Anum Arshad, Associate, Gokal Law Group
Related Article: California Fiduciary Fee Schedule: How Much Will You Pay?
How Are California Trustee Fees Calculated? Professional vs. Non-Professional vs. Corporate Trustees
It is essential to recognize that different types of trustees (e.g. private professional fiduciary versus a family member) will have a different answer to the question, How are California trustee fees calculated? The general categories of trustees significantly influence how trustee compensation is determined.
How Are Trustee Fees Calculated for Private Trustees?
Trustee fees for private trustees, who are typically family members or close friends appointed by the trust creator, are usually calculated as follows:
- Hourly rate: The most common method for private trustees is to charge an hourly rate. This rate typically ranges from $25 to $35 per hour, reflecting the time spent managing the trust’s affairs.
- Pro bono service: Many private trustees, especially when managing a trust for their own family, choose to perform their duties without compensation. This is particularly common when the trustee is a close relative or friend of the trust creator.
- Nominal fee: In some cases, a private trustee might accept a small, symbolic fee to acknowledge their responsibilities while not significantly impacting the trust’s assets.
It’s important to note that private trustees rarely use percentage-based fee structures, which are more common among professional or corporate trustees. The focus for private trustees is often on fair compensation for their time and effort, rather than generating income from the position.
Factors that might influence a private trustee’s decision on fees include:
- The complexity of the trust and required tasks
- The time commitment involved
- Their relationship to the trust creator and beneficiaries
- The financial situation of the trust and its beneficiaries
Regardless of the fee arrangement, private trustees still have a fiduciary duty to manage the trust responsibly and in the best interests of the beneficiaries. Any fees charged should be reasonable and justifiable given the trustee’s responsibilities and the trust’s circumstances.
Related Article: Case Study: How to Use a Probate Calculator in California
How Are Trustee Fees Calculated for Professional Trustees?
Professional trustees, or private professional fiduciaries, calculate their fees as either a percentage of the trust assets or on an hourly basis. The most common method for professional trustees is to charge an hourly rate. Typically, these rates start at $100 per hour and can go higher, depending on the trustee’s experience, expertise, and the complexity of the trust.
Some professional trustees will base their fees on a percentage of trust assets. This usually happens when a professional trustee is handling larger trusts. This method is more commonly used by corporate trustees but is also an option for individual professional trustees. The percentage typically ranges from 0.5% to 2% of the trust’s value annually, often with a sliding scale that decreases the percentage as the trust value increases.
How Are Trustee Fees Calculated for Corporate Trustees?
Unlike an individual who carries out trust administration, corporate trustees are banks or investment firms hired by beneficiaries to administer their trust.
For the most part, corporate trustees are compensated through a percentage of the trust’s assets, typically between 0.5% to 2% per year. In other words, if a trust has $2 million in assets, a corporate trustee would receive annual fees between $20,000 and $40,000.
Professional trustees are generally preferred over private trustees (like family members) for several reasons. First, they make a career out of managing trusts and have specialized knowledge and experience. Second, there’s less risk of self-dealing, as they’re not personally connected to the trust or its beneficiaries. Third, they’re typically held to higher standards of accountability and often carry professional liability insurance.
It’s important to note that regardless of the fee structure, professional trustees have a fiduciary duty to act in the best interests of the trust and its beneficiaries. Their fees should be reasonable and commensurate with the services provided and the responsibilities undertaken.
When engaging a professional trustee, it’s advisable to discuss fee structures upfront and ensure that the chosen method aligns with the trust’s needs and the expectations of the trust creator and beneficiaries.
How Are Trustees Paid?
When a trustee is paid, they’re most commonly paid with assets out of the trust unless it’s a private trustee with an hourly rate. If their compensation is trust assets, they’re paid out on a quarterly basis, though the trust could instruct otherwise.
Oftentimes, trustees are paid twice per year. On top of these fees, trustees are also entitled to reimbursement for any trust-related expenses they pay for out of pocket.
These can include travel expenses, insurance premiums, storage fees, and taxes, though the trustee is required to maintain accurate records of such expenses, such as receipts, if they seek reimbursement.
Trustees should also keep a record of how much time and energy they’re applying to the task of administering and managing the trust and the associated fees. If they have not consulted an attorney to determine the fees they’ll charge, this could be a red flag.
When Do Trustees Deserve an Increase in Compensation?
In some situations, trustees may believe that they deserve higher compensation than the trust allows. This usually happens when the trust structure is more complex, requiring more time to manage. However, in these situations, a trustee must inform beneficiaries.
A trustee must send a written notice to beneficiaries 60 days in advance (per California Probate Code § 15686) informing them they will charge an increase in compensation. Trustees also have a right to receive compensation for expenditures associated with trust administration (per California Probate Code § 15684.)
Because of this, Judges can also sometimes award additional compensation if they feel they performed duties beyond those normally expected. Such duties include:
- Managing a business
- Navigating complicated tax issues
- Managing real estate
Are Your Trustee’s Fees Too High?
If you feel that your trustee is charging high fees for their administrative services, it could be time to contact an Orange County trust attorney.
Charging exorbitant fees could constitute self-dealing or another breach of fiduciary duty. It could also be a sign of foul play when creating the trust, like the trustee using undue influence to manipulate the trust creator into raising the fees for their benefit, which could warrant litigation to invalidate the trust and more.
Under California Probate Code 17200, beneficiaries may submit petitions to probate court to review and contest how reasonable their trustee’s fees are. By contesting fees, the court could reduce their fees, eliminate payment altogether, or even make them pay damages.
Related Article: When Do You Need a Trust Litigation Attorney in Orange County?
Is a Trustee Overcharging? We Know How Trustee Fees Are Calculated and Can Hold Them Accountable.
Gokal Law Group is your go-to law firm to navigate trust litigation and estate administration. We flaunt a track record of successful verdicts and settlements, especially when confronted with highly combative estate disputes involving litigation.
Each of our attorneys has a specific practice area for which they are tried, tested, and battle-ready. All have years of experience that have given them knowledge, skills, and vision to fight and win. Learn more about Gokal Law Group, and reach out to our offices for assistance in enforcing or invalidating changes to trusts.
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