Successor Trustee Fees

In the typical estate plan it is common for a child to become the successor trustee of his or her parent's trust provided they are over the age of 18 and of sufficient competency. 

One of the biggest dilemmas facing the successor trustee is their compensation rate because even though the Probate Code states that a trust document may specify the compensation rate, such a clause is often omitted. Prob C § 15681. In which case, "the trustee is entitled to reasonable compensation under the circumstances." Prob C § 15681.

So you are the successor trustee of your parent's trust and have just read through the trust and found that the trust document states that the trustee is entitled to reasonable compensation. Knowing that the word "reasonable compensation under the circumstances" is an elastic phrase which lawyers love to litigate over, you begin to wonder what could constitute reasonable compensation? Would $50 an hour be considered reasonable given that the trust owns a home and a few bank accounts? Given the difficulty in ascertaining "reasonable compensation under the circumstances", a simple formula used by some is to compensate the trustee 1% per annum based off of the value of the entire trust estate.

For example, if the trust estate is worth $100,000 at the close of the year, the trustee would be entitled to $1,000 as compensation. Although, the trustee is not required to accept a fee, but if he or she does so, the fee must be reported as taxable income.

Trust Petition

Although a revocable trust is not necessarily a public record, the probate department of the superior court has the ability to intervene in the internal affairs of trusts. Prob C §17000(a).

Consequently Probate Code §17200(b) allows a trustee or beneficiary to petition the probate department of the superior court to resolve the following matters:

1. Determining questions of construction of a trust instrument;
2. Determining the existence or nonexistence of any immunity, power, privilege, duty, or right;
3. Determining the validity of a trust provision;
4. Ascertaining beneficiaries and determining to whom property shall pass on termination of the trust, to the extent not specified in the instrument;
5. Settling accounts and passing on the trustee's acts, including the exercise of discretionary powers;
6. Instructing the trustee;

7. Compelling the trustee to submit a report or account to the beneficiary under specified circumstances;

8. Granting powers to the trustee;

9. Fixing or allowing payment of the trustee's compensation or reviewing its reasonableness;

10. Appointing or removing a trustee;

11. Accepting the resignation of a trustee;

12. Compelling redress of a breach of the trust;
13. Modifying or terminating the trust;
14. Combining or dividing trusts;
15. Amending the trust to qualify a decedent's estate for the federal estate tax charitable deduction;
16. Transferring a trust or trust property between jurisdictions;
17. Transferring a supervised testamentary trust between counties;
18. Removing a testamentary trust from court supervision;
19. Excusing compliance with the governing instrument of an organization under Prob C §16105;
20. Determining the trust's liability for a deceased settlor's debts (but this does not confer standing to bring an action under Prob C §17200 on a person whose only claim to trust assets is as a creditor);
21. Determining petitions under Prob C §15687 (rules regarding dual compensation to attorney, who also acts as trustee, for legal services rendered to the trust) and reviewing the reasonableness of compensation for legal services under that section; and
22. Appointing a practice administrator for a deceased or disabled member of the State Bar under Prob C §9764 or §2468.

Trust Administration

In the typical estate plan for married couples, a couple will draft a living trust in which the surviving spouse inherits everything of the deceased spouse. Thereafter, upon the surviving spouse's death, the successor trustee will administer the trust in accordance with the terms of the trust. Most commonly, the surviving spouse's estate will be distributed to his or her children or grandchildren. This process is quite similar to probate in that an inventory of assets is taken, debts and taxes are paid and the remaining assets are distributed.

Instead of focusing on the entire trust administration process, I will touch upon some major issues that are addressed in most, if not all, trust administration cases.

1. Notice

The successor trustee must send a notification to current beneficiaries and heirs at law when a revocable trust or any portion of it becomes irrevocable because of the death of one or more of the settlors or because of a contingency as specified in Prob C §16061.(a)(1) or when there is a change of trustee of an irrevocable trust.

2. Lodging of the Will 

The custodian of the decedent's original will must (1) lodge the original will with the clerk of the county where the decedent resided at the time of death and (2) mail a copy of the will to the named executor within 30 days of learning of the death. Prob C §8200.

3. Updating Title

If the trust held real property, an affidavit of death of trustee would need to be recorded with the County Recorder’s Office so the successor trustee can acquire title to the property. Also, a Preliminary Change of Ownership Report (PCOR) must be filed within 150 days of death. Rev & T C §480(b).

4. Debts

The trustee would also need to ascertain the trust's creditors and pay off any outstanding debts. This might include credit card bills, mortgage payments and various utility bills. This can be done through the collection of the trust’s mail over a period of time.

5. Taxes

In terms of income taxes, IRS Form 56 (Notice Concerning Fiduciary Relationship) must be prepared and filed to notify the taxing authorities that the trust is now irrevocable and has become a separate taxable entity. Also, a separate taxpayer identification number, an EIN, would need to be obtained for the trust.

6. Appraisals

Formal written appraisals would need to be obtained for real property, personal property, intangible personal property and business interest in order to obtain a basis for those assets in terms of capital gains. In particular, the tax basis of those aforementioned assets is pegged to the fair market value of it on the decedent’s date of death. IRC §1014

7. Retirement Benefits

The trustee would need to prepare and mail letters to employers, plan administrators, and IRA sponsors concerning retirement benefits since retirement benefits are often intentionally excluded from being included in a trust.

Again, these are not all the steps that are taken in the trust administration process. Rather, these are the steps that are very common to most, if not all, trust administration cases.