Asking someone to serve as your fiduciary (trustee of your trust or personal representative or executor under your last will and testament) is not something you should take lightly. Serving as a fiduciary is a heavy responsibility that requires significant time and effort. As an estate planning attorney in Austin, I can help you work through the momentous choice of trustee assignment and successor trustee compensation. Suppose you plan to nominate a family member or friend to serve in one or both roles. In that case, you will need to consider whether you should authorize them to receive compensation from the trust or estate for their services to the trust beneficiaries or heirs of the estate.
What is the customary amount of compensation for these types of services? Most state laws have addressed the question of whether you have not specified in a will or a trust whether or how much the fiduciary should receive in compensation for their services. States that have adopted some form of the Uniform Trust Code allow the fiduciary to receive payment of a fee that is "reasonable under the circumstances." [1] Some states have other approaches to fiduciary compensation, including a graduated fee scale based on the property's value the trustee manages.[2] However, the current trend among the states is the "reasonableness" standard. In 2016, the American College of Trusts and Estates published a comprehensive comparison of the various state rules, including a list of the states that allow a trustee's fee to be calculated based on a percentage of the assets under management.[3] [4]
Following the trend, in Texas, § 114.061 of the Property Code provides that a "trustee is entitled to reasonable compensation from the trust for acting as trustee."
[1] Unif. Trust Code § 708 (Unif. L. Comm'n 2010), available at https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=3d7d5428-dfc6-ac33-0a32-d5b65463c6e3&forceDialog=0.
[2] For example, see Georgia (O.C.G.A. § 53-12-210), Maryland (Md. Code § 14.5-708), or New York (S.C.P.A. § 2309).
[3] Fee Statutes by State, The American College of Trust and Estate Counsel (Feb. 2016), https://www.actec.org/assets/1/6/Fee_Statutes_by_State_February_2016.pdf.
[4] See Unif. Trust Code § 708 (Unif. L. Comm'n 2010), available at https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=3d7d5428-dfc6-ac33-0a32-d5b65463c6e3&forceDialog=0.
"Reasonable under the circumstances" can be hard to pin down when it comes time to write the check to pay the fiduciary. To provide some guidance on the "reasonableness" standard, the Uniform Law Commission and case law have offered, in one form or another, the following factors to assist the courts (and the parties in court cases) in determining what makes a fee "reasonable." These are not the only factors to be considered, but they are some of the factors frequently cited by courts when determining the reasonableness of a fiduciary's compensation.
When a court evaluates the reasonableness of fiduciary fees, it first considers the customary fees charged by professional or corporate trustee companies in the local area. The result may be an hourly rate or a percentage of the property's value under management, paid annually. In either case, if you are trying to determine a reasonable fee to compensate your trustee, ask some professional trustees in your area about their typical fee structure. Then ask whether it would make sense in your case to provide the same level of compensation to the fiduciary handling your trust or estate.
The skills or expertise your trustee can bring to the table is another crucial factor. An attorney or a certified public accountant (C.P.A.) will have much more knowledge and experience when acting as a trustee than a professional musician will. Thus, a reasonable fee for a trustee who is a C.P.A. may be a much higher hourly rate because of the skill, efficiency, and professionalism that they use in doing their job. On the other hand, because a professional musician is more likely to be unfamiliar with such subjects, they may need to spend much more time than a C.P.A. to get the accounting and tax preparation done, thereby justifying a lower hourly rate.
Similarly, it would be unreasonable for a trustee who is an attorney to bill their typical rate of $350 per hour to clean out or mow the lawn of a home owned by the trust. In such a case, reason would dictate that the trustee hire someone at $25 per hour, or the standard rate for similar work in the geographical location, to perform the landscaping work for the trust and charge the trust $350 per hour for the job only an attorney could do.
Some fiduciary roles require significant investments of time. Therefore, to justify a reasonable fee, the fiduciary must keep careful records of the amount of time they spend carrying out their duties. Suppose a price seems particularly large, especially when compared to the amount of property in the estate or trust. In that case, the fiduciary must show a court or the beneficiaries and heirs of the trust and estate that the time spent on those fiduciary duties was necessary for properly administering the estate and trust.
Some forms of property can be much more complicated to deal with than others. For example, a savings account containing $800,000 can be much simpler to deal with than five rental properties in a depressed area of town where renters have done significant damage to the property. Thus, a reasonable fee for managing those properties or preparing them for sale could be significantly more than the fee for distributing outright one savings account in equal shares to the beneficiaries. Similarly, the tax preparation and investment decisions required from the fiduciary of an estate or trust worth $800,000 will be much different from the same types of decisions for an estate or trust worth $18 million.
Some trust and estate administrations can be very straightforward and easily managed. For example, if a widow leaves all her property and cash to her only child, outright and free of continuing trusts, the degree of difficulty of such an administration would be meager. On the other hand, if the deceased had been married multiple times and left a surviving spouse as well as children and grandchildren, some of whom may be suffering from addiction, creditor issues, or a messy divorce and who were prone to challenge every action by the fiduciary, the fiduciary's duties could be exponentially more difficult. As a result, a reasonable fee for the latter example could be substantially higher than the fee for the former.
Different types of responsibilities may require different levels of compensation. For instance, managing property held in trust for the benefit of a mentally disabled individual, so the beneficiary remains eligible for public benefits takes a much different level and type of responsibility than making scheduled outright distributions to a beneficiary or distributions under a more straightforward distribution standard, such as for health or education expenses.
The protection and management of certain types of estate and trust property can also carry varying levels of risk. Suppose a trust holds certain types of business property associated with high risks or volatile value fluctuations. In that case, the trustee may personally be at much greater risk concerning being responsible for that property's proper care and management. As a result, a higher fiduciary fee may be appropriate in such a case.
Other factors may be involved in analyzing whether a trustee's or personal representative's fee is reasonable under the circumstances. However, the characteristics described above should give you some sense of the types of things that you should consider. The bottom line is that the reasonableness of these fees is very fact-specific. Suppose a trustee or personal representative wants compensation for their services. In that case, they should keep careful and detailed records of the types of services provided for the management of the trust and the time spent, and the expenses incurred on the trust's behalf. Even if a trustee or personal representative is not asked to provide that information to justify their fee, doing so anyway is crucial if, down the road, that fee is ever challenged as being unreasonable.
Whether you choose a corporate or professional fiduciary or a family member or friend to act as trustee or personal representative, discuss trustee compensation issues with your estate planning attorney. Contact me today to talk about this matter further. This conversation will ensure that you understand how to handle this critical element of your estate planning and that it conforms to your ideas about what is reasonable and what is not.
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