appropriateness of a Trustee’s fees for administering a trust can sometimes
become a thorny area of disagreement between the trustee and the trust
beneficiaries. Fee disputes usually
arise when the trustee provides an accounting.
Let’s consider how California law treats trustee compensation.
When dealing with court supervised
trusts, California law distinguishes between “ordinary compensation” and
“extraordinary compensation”. So-called
“ordinary compensation” includes the normal trustee duties a trustee regularly
is expect to perform. Sometimes Trustees
will ask a court to grant “extraordinary compensation” when the trustee
performs additional services — such as handling litigation, running a
business, or managing commercial property.
A trustee’s fees is governed
foremost by what the Trust document says.
Trustees receive reasonable compensation under the circumstances of the
trust administration, unless the trustee is a corporate entity (like a bank) or
a government entity (such as the public guardian). This is what most trust documents say and is
also what California law provides. [Corporate
trustees and Public Guardians, however, have trustee fee schedules that
determine what they will charge for trustee services.] Let’s examine “reasonable compensation under
California case law provides
guidelines to evaluate whether trustee fees are reasonable under the
circumstances. The following are factors
used to evaluate the reasonableness of trustee fees: (1) Value of Trust assets under management;
(2) Success of Trustee in administering trust (usually measured in terms of
asset growth); (3) Faithfulness of Trustee in following the terms of the trust;
(4) Risks and Responsibilities Assumed by Trustee; (5) Time spent by Trustee in
administering the Trust; (6) Local Court Rules regarding trustee compensation;
and (7) Skill of trustee relevant to administering the trust. The quality of the trustee’s accounting and
documentation of trust administration services will be important evidence as to
how the factors apply.
Thus, a trustee who successfully
administers a large trust estate, faithfully follows the terms of the trust,
spends many hours performing trustee duties, and uses special expertise to
manage the trust assets is reasonably entitled large trustee fees. This will be reflected either by the trustee
charging a higher hourly rate or a higher percentage of the trust assets. Courts much prefer trustees to compute their
fees based on an hourly compensation.
Local court rules where the trustee resides should be followed.
When a trustee hires agents to help
with the management of trust assets — e.g., hiring a real estate management
company to collect trust rental income — then the expenses incurred will
naturally reduce reasonable trustee fees because the trustee has delegated out
his work. Also, if there are
co-trustees the fees are apportioned between them based on the value of their
services, unless the trust says otherwise.
If a trustee breaches his duty as
trustee – such as by engaging in impermissible acts of self dealing (such as by
using trust assets for the trustee’s own benefit) or by failing to administer
the trust according to its own terms –
the beneficiaries may bring a court proceeding to reduce the trustee fees
reasonable trustee fees depend on the facts and circumstances of each case,
there is room for negotiation over what is reasonable. Mediation, therefore, may be a cost effective
way to negotiate disputes over trustee fees.
Otherwise the issue of trustee fees may get resolved by costly trust