June 28, 2010

Reasonable Compensation for a Trustee

In a previous post I discussed the compensation rate for a trustee in which the trust did not specify how much the trustee would be compensated. In such a situation, the trustee would be entitled to "reasonable compensation under the circumstances." Prob C § 15681. As mentioned, a rule of thumb used by some estate planning attorneys is to annually compensate the trustee 1% based off of the trust's total value. For example, if the trust estate was worth $500,000, the trustee would be entitled to $5,000 as compensation.

Alternatively, if the compensation rate might be a bit higher than the trust beneficiaries like, 4 or 5% for instance. The trustee can petition the competent probate court for approval of their trustee fee. Prob C § 17200(b)(9). This ensures that the trustee's compensation is not grounds for the trustee's removal and surcharge (see monetary penalty) for breach of trust.

If the trustee decides to file a petition to approve their compensation rate, the probate court may consider the following factors in determining reasonable compensation (see Cal Rules of Ct 7.776): 

1. The gross income of the trust. 

Gross income is the total amount of revenue that the trust generates before taxes are imposed. For example, if the trust's only asset was a piece of rental property and collected $5,000 in rent a month. The gross income of the trust would be $60,000. The fact that gross income is the measure, and not net income, is worth mentioning. Net income is the amount of revenue generated after expenses have been accounted for, namely taxes, fees, permits, licenses, etc. In the example here, if net income was the measure, the revenue figure would be much lower because property taxes, maintenance costs and other expenses would be incorporated into the accounting equation. Consequently, this revenue reduction would in turn lessen the amount of compensation the trustee could claim since the trust estate was less profitable.   

2. The success or failure of the trustee's administration. 

For example, the trustee decided to invest in Google during its initial public offering. Good decision. Conversely, the trustee decided to invest entirely in Enron stock. Bad decision. 

3. Any unusual skill, expertise, or experience that the trustee has brought to the position. 

For example, the trust owns a large collection of Persian rugs. The trustee is a collector of Persian rugs and is keenly aware of the different types of Persian rugs. Hence, the trustee can accurately appraise the value of a Persian rug in case one is ever sold. 

4. The "fidelity" or "disloyalty" shown by the trustee. 

For example, the trust owns a beautiful beach home along an exclusive part of the coastline. The only other nearby tenant is a dining hall. Instead of renting the dining hall for dinner parties for his family and friends, the trustee hosts all the dinner parties at the beach home. This would be an example of "self-dealing", an act of infidelity. 

5. The amount of risk and responsibility assumed by the trustee. 

For example, the trust owns a large office building. The trustee is entrusted with leasing office space to hundreds of individual tenants who each have particular demands and concerns. 

6. The time that the trustee spent performing trust duties. 

For example, the sole trust asset is a block of Southern Company stock, a blue chip energy company whose stock has been historically stable. Clearly, the trustee would not be overly-worked in managing this trust.

Disclaimer: I own 1200 shares of its stock and am acutely aware of its molasses-like stock movements over the years. 

7. The custom in the community, including the compensation allowed to trustees by settlors or courts and the fees charged by corporate trustees. 

8. Whether the work was routine or required more than ordinary skill and judgment. 

For example, the trust owned numerous pieces of antique jewelry, furniture and paintings. Since a common person is ill-equipped to distinguish between authentic and fake in those fields, the trustee would either need to self-educate themselves on the topic or enlist the services of antiques expert in making a decision to sell the items.