Asking someone to be a trustee of your trust shows you have a lot of faith in that person’s capabilities and ethics.
But how much is their time worth?
Serving as a trustee can be a big responsibility, and can also be quite time consuming. And while family members and friends often serve as trustees without expecting any financial payment, there are many cases in which compensation is either warranted or required.
So what exactly does a trustee do?
A trustee’s duties can include a wide variety of tasks such as:
- Protecting and distributing assets
- Managing investments
- Safeguarding any income
- Overseeing business interests and operations
- Managing liquidity needs
- Defending and pursuing legal claims
In addition, they may be called upon to handle certain interpersonal tasks, including resolving beneficiary disputes, updating and informing beneficiaries, and determining division of assets. There is also a fair amount of administration that falls to the trustee such as keeping detailed records, managing taxes, paying expenses, and interfacing with relevant professionals.
How many of these tasks and responsibilities apply, and how involved they become depends on the complexity of the trust and the estate. But it’s easy to see how even a subset of these obligations can wind up taking time to manage properly.
How do you calculate fair compensation for your trustee?
While some trusts do spell out a trustee compensation plan in detail, many fail to provide any specifics. If the trust itself doesn’t provide any guidance, most state laws simply require that trustee compensation be “reasonable”—which is not always easy to determine.
There are several factors to consider when determining trustee compensation:
- The amount of time needed to administer the trust
- The complexity of the trust
- How many beneficiaries are involved
- What type of assets need to be managed
Looking at what professional trustees charge can give you a helpful benchmark. Most such professionals charge an annual fee of between 1 and 2 percent of the assets in the trust. So, for example, the annual fee for a trust holding $1 million could be between $10,000 and $20,000. This rule-of-thumb rate can vary based on a sort of sliding scale. Often, professionals charge a higher percentage of smaller trusts, and a lower percentage of larger trusts.
It’s also important recognize the services provided by a professional trustee and a non-professional trustee (like a family member or friend). If a non-professional trustee is taking on all the tasks of a professional, paying professional rates may be appropriate.
However, if a non-professional is outsourcing various functions to others and/or acting as a co-trustee partnered with a professional trustee, you may want to revisit the compensation structure. In such cases, a typical fee for the non-professional might be a quarter of standard professional fees, or .25 percent. (Financial professionals often refer to this as “25 basis points.”)
Finally, if taking a percentage of the trust assets would deplete the trust, non-professional trustees may instead charge an hourly rate for time spent. And—regardless of which compensation amount you choose—trustees are always entitled to reimbursement for any expenses incurred. This might include travel, storage, insurance, or taxes.
What if there are issues with the compensation?
If the trust’s beneficiaries are unhappy with the trustee fees, they can challenge them in court. And, conversely, if a trustee feels they are entitled to additional compensation, they can appeal to the court to receive higher payment.
Choosing a trustee and determining the appropriate compensation are important parts of responsible estate planning.
While your executor’s responsibilities are limited to handling the execution of your Will, your trustee’s responsibilities may extend years or even generations into the future, affecting all your beneficiaries in small and large ways. Choose the right person for the job, and then compensate them fairly for their work.
- The first step in the process is often deciding whether you should choose a family member or professional to be your trustee.
- From there, you can assess the complexity of the responsibility, and determine a fair compensation.
- Take your time deciding what’s best for your situation and circumstances and understand that you have people that can help you through the process.
If you need help deciding who to choose for your trustee or would like to consider us to serve as trustee, feel free to contact us for further guidance.
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