Trustee Compensation in California — what is reasonable?

How Much Should a Trustee of a Trust Be Paid?http://www.dreamstime.com/-image4662112

From the desk of San Diego Trust and Probate Attorney, Kristina R. Hess

With research and contribution by Klint LeBlang

Tom and Sue of La Jolla, California responsible parents and grandparents that they are, have recently updated their estate plan. *Tom and Sue are a fictitious couple.  Any resemblance to real people is purely coincidental.  As part of their plan, they have nominated a trusted friend to serve as successor Trustee should they no longer be able to serve.  Tom and Sue do not want their children to serve until after they have attained 40 years of age and they want an independent party to handle the administration and management of their trust until such time.  The question that they have and you may have, is how much should your Trustee be paid?

Most revocable living trusts will say that a “Trustee is entitled to reasonable compensation.”  The question then becomes what exactly is reasonable compensation in California?

Reasonable Compensation for a Trustee in California

A trustee in California (and subsequently San Diego) has a broad discretion to determine their compensation if it is not stated directly in the trust instrument.  Although the simple solution is to include a value in the trust, it is not easy as simply picking a number.  Certain banks and Trustee financial institutions often charge a percentage of assets under management (e.g. 1%).  But how do we compensate the friend, family member or non-corporate trustee?

A long line of commentary has developed through rules of court, the probate code, case law and general practice regarding this subject.  However, no simple solution has evolved.  Rather, various tests and factors provide us with guidance to pick the proper number.

How To Determine Reasonable Compensation If Not In The Trust Document

The compensation rate for a trustee in which the trust did not specify how much the trustee would be compensated is based on Cal. Prob. Code § 15681.  In such a situation, the trustee would be entitled to “reasonable compensation under the circumstances.” Cal. Prob. Code § 15681.

There is no exact value considered reasonable compensation, but rather, the probate court gives the following guidelines if a dispute arises:

1)                The gross income of the trust estate;

2)                The success or failure of the trustee’s administration;

3)                Any unusual skill, expertise, or experience brought to the trustee’s work;

4)                The fidelity or disloyalty shown by the trustee;

5)                The amount of risk and responsibility assumed by the trustee;

6)                The time spent in the performance of the trustee’s duties;

7)                The custom in the community where the court is located regarding compensation authorized by settlors, compensation allowed by the court, or charges of corporate trustees for trusts of similar size and complexity; and

8)                Whether the work performed was routine, or required more than ordinary skill or judgment. Cal Rules of Ct § 7.776.

California Case Law On Determining A Fair Value

One main case discussing this issue is In re McLaughlin’s Estate (1954) 43 Cal.2d 462, 467-68, which gives a general answer and factors to consider.  In this case, a beneficiary filed objections against the trustees based on the amount of their compensation.

The court stated, “The question of what is a reasonable compensation depends largely upon the circumstances of each particular case.  Other factors considered include:

1)                the success or failure of the administration of the trustee;

2)                any unusual skill or experience which the trustee in question may have brought to his work;

3)                the fidelity or disloyalty displayed by the trustee;

4)                the amount of risk and responsibility assumed;

5)                the time consumed in carrying out the trust;

6)                the custom in the community as to allowances to trustees by settlors or courts and as to charges exacted by trust companies and banks;

7)                the character of the work done in the course of administration, whether routine or involving skill and judgment; and

8)                any estimate which the trustee has given of the value of his own services.”

Reasonable Compensation Based On An Hourly Rate

Based on the CALCPA Accounting Site, http://www.calcpa.org/Content/23483.aspx, a CPA will generally charge less than their hourly rate for accounting purposes. Additionally, a judge will determine the trustee’s compensation based on an hourly rate.

Further, after researching various individuals and businesses in San Diego and throughout California who are in the profession of administering trust, conservatorship and guardianship estates, referred to as private professional fiduciaries, an average hourly rate will range between $80 to $140 per hour.

Conclusion

Therefore, the trustee has a wide amount of discretion in determining reasonable compensation depending on the facts of their case.  Generally, the trustee can name a reasonable price and avoid potential adverse consequences from the beneficiaries.  In putting together your estate plan, you may want to use the standard “reasonable compensation” or you may want to define the compensation in the trust agreement.  Tom and Sue decided to use the standard reasonable compensation in their Restated Trust, but they also chose to leave their successor Trustees with a letter of instruction to express their views and wishes on administering their estate which included a discussion of compensation.  After all, a trustee has an important job to do and it is best that he or she be compensated fairly.

Make sure your Trust is up to date and will work as you desire…

KR HESS LAW