When you create a living trust to hold assets during your lifetime and/or pass assets on at your death, you must name a trustee to manage those assets. You might name yourself as trustee, although some situations may require that it be another individual or organization, for example, with an irrevocable trust that is created for long term care purposes. In addition to naming a trustee, there is the issue of trustee fees, especially when the trustee is a non-family member or is a corporate fiduciary. Trustees assume responsibilities when managing assets and administering the trust, and the fees compensate them for their time, and with respect to professionals, their expertise in finances or legal issues.
Yahoo Finance’s recent article entitled “Trustee Fees: What Are They and Who Pays?” explains that trustee fees are a payment for services rendered. A trustee can be an individual or an organization, like a bank, wealth management company or other financial institution. Trustees will do various duties, depending on the instructions in the trust document. However, their primary job is to make certain that the assets held in a trust are managed according to the trust grantor’s (creator’s) wishes for the trust’s beneficiaries.
The trust creator will usually set out the terms of payment for a trustee in the trust document. Let’s look at some different ways to structure trustee fees. One fee structure is to pay the trustee a set percentage of the assets in the trust each year. This is typically used with larger trusts with significant assets that continually appreciate or generate ongoing income. With a smaller trust, a different fee structure might be used. Instead of a percentage, you might pay the trustee a flat dollar amount each year. If they don’t have as many duties, they could be paid an hourly rate.
When drafting a trust document with the help of an experienced estate planning attorney, the grantor can set the terms of payment, including capping how much can be paid in trustee fees, as well as who can serve as a trustee, e.g., corporate trustee or an independent lawyer, accountant or financial advisor.
If a trust doesn’t mention trustee fees in the trust document, state law can determine the fee. Typically, fees can either be charged as a percentage of assets or as a percentage of transactions associated with money moving in or out of the trust.
There are no set rules for calculating the amount trustees can charge for their time. However, there are some common guidelines. In many instances, a trustee will charge a minimum of 1% when dealing with larger trusts with significant assets. Smaller trusts frequently use a flat fee model. Trustee fees are paid out of the trust’s assets. Fees are typically paid quarterly.
Trustees are also entitled to reimbursement for any expenses, such as travel expenses, storage fees, taxes, insurance, or other expenses they incur related to the management of the trust. These expenses are reimbursable, regardless of whether the trust document specifies any guidelines for reimbursement.
The trustee fees are tax deductible to the trust, and the fees are considered taxable income for the trustee. If you’re uncertain what to pay (or what to charge if you’re acting as a trustee), speak with an estate planning attorney.
Reference: Yahoo Finance (Aug. 14, 2020) “Trustee Fees: What Are They and Who Pays?”