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 the circumstances.”
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 accordingly.
Given that 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 litigation.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at [email protected] or by phone at 707-263-3235.
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