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. 

Small Estate Affidavit

My relative recently passed away, do I need to go through probate?

Fortunately, California has a simplified probate procedure when the value of the decedent's personal property estate does not exceed, subject to certain exceptions, $100,000. This process is commonly referred to as "small estate affidavit" or "small estate declaration." Collection via small estate affidavit allows a person to receive an inheritance by presenting an affidavit or declaration to the holder of the decedent's personal property, a bank for example. It is one of the three methods for collecting small estates without a formal probate proceeding. The other two pertain to obtaining real property and are infrequently used.

AUTHOR'S UPDATE: The valuation threshold has changed. The bill discussed in this subsequent post became law in 2012. 
 
Small estate affidavit may be used be either the beneficiaries named in a will or a trust, or the decedent's intestate heirs if the decedent had no will. Prob C § 13100; Prob C §§ 6401 - 6402. For example, if you were named in your late relative's will as a beneficiary and their estate was quite modest, then you could take advantage of the small estate affidavit process.

In order to qualify, (1) the gross fair market value of the decedent's personal and real property assets in California must be less than $100,000, subject to exclusions found in Prob C § 13050, and (2) 40 days have elapsed since the decedent's passing. Prob C § 13100. 

The exclusions found in Prob C § 13050 include real property held in joint tenancy, multiple party bank accounts, payable on death bank accounts, assets held in a revocable trust, life insurance contracts, etc. Thus, if the decedent owned a home in joint tenancy,  took out a substantial life insurance policy which named a beneficiary or left their favorite cousin as the pay on death beneficiary of their bank account, none of these assets would count towards the $100,000 limitation.

The 40 day waiting period provides the beneficiaries the opportunity to collect the decedent's bills: television, Internet, phone, credit card, utilities, etc., since the billing cycle is often 30 days. This is particularly important because the beneficiary of the decedent's estate is liable for the decedent's outstanding debts, but only up to the value of the transferred property. Prob C §§ 13109, 13112. For instance, if Danny Decedent left Bobby Beneficiary with a $50,000 inheritance and $90,000 in credit card debt, Bobby would not be liable for the unpaid balance of $40,000.

The required contents of the affidavit are found in Prob C §§ 13110-13116. 

Below is an explanation of the the small estate affidavit process: 

(1) The beneficiary needs to provide evidence that the decedent actually owned the property the beneficiary is inheriting. Prob C § 13102(a). 

For example, if the decedent had a Wells Fargo savings account, the beneficiary could provide the bank with a recent bank statement of the decedent. 

(2) The beneficiary needs to provide a certified copy of the decedent's death certificate. Prob C § 13101(d). 

The fee for a certified death certificate is nominal. For example, in Santa Clara County, the fee is $12. 

(3) The beneficiary needs to provide proof of identity. Prob C § 13104. 

This can most easily be accomplished if the beneficiary has the declaration notarized by a notary public.  

(4) If the decedent owned real property in California, an inventory and appraisal by a referee of that real property. Prob C § 13103. 

For example, the decedent owned open space in Willits, that was not valued over $100,000. 

(5) If the decedent's probate is pending and the decedent's personal representative has consented to payment, transfer or delivery of the property to the declarant or affiant, a copy of the consent and of the personal representative's letters, attached to the affidavit or declaration Prob C § 13101(e).  

Unlike attorney fees for a formal probate proceeding, attorney fees for summary procedures are not set by statute but rather by private agreement between the client and attorney.  

Trust Administration - Taxes, Uniform Prudent Investor Act & Accounting

It is not uncommon for a trust to endure for many years after the original drafter(s), the settlor(s), have passed away. This can be classified as long-term trust administration. 

For example, husband and wife draft a trust with the survivor inheriting everything. Then upon the surviving spouse’s death, the remainder of the trust estate distributes to the children in equal shares outright and free of trust, provided the children are at least 25 years old. Even though at first glance it does not appear that long-term trust administration is likely, there is the distinct possibility that it may arise. For the sake of argument, let us assume that husband and wife pass away in an auto accident, leaving Son, age 18 and Daughter, age 20. Son’s trust would require 7 years of administration while Daughter’s trust would require 5 years of administration. The following are common hurdles that would be encountered in the long-term trust administration of Son and Daughter’s trust.

1. Tax Returns

First, the trustee should file Form 56 with the IRS to notify it that a fiduciary relationship exists between the trustee and the trust. IRC §§6903, 7701(a)(6); Treas Reg §301.6903-1. Second, the trustee would need to acquire a federal identification number for the trust in order to properly file tax returns. Third, the trustee would need to annually file federal and state tax returns depending on the trust’s circumstances. In particular, a trust must file a tax return in California if either the net taxable income is over $100 or the gross income exceeds $10,000, regardless of the net taxable income. Rev & T C §18505(e)-(f); FTB Form 541. A federal return must be filed if the trust has any taxable income or gross income of $600 or more, regardless of the amount of taxable income. IRC §6012(a)(4); IRS Form 1041.

2. Investments of Trust Assets - Uniform Prudent Investor Act (UPIA)

The trustee needs to be mindful of the Uniform Prudent Investor Act (UPIA) which governs investment and management of trust assets. Probate Code §§16045-16054. The UPIA is the default rule as the trust can specify a different method in evaluating a trustee’s investment decisions. Prob C §16046(b). However, most trusts do not expand or restrict the UPIA standards. Here are some important sections from the UPIA.

First and foremost, the duty of care requires that “a trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution. Prob C §16047(a). Although, “a trustee's investment and management decisions respecting individual assets and courses of action must be evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust." Prob C §16047(b). Therefore, the fact that the trustee made 10 good and 1 bad investment choices that resulted in a positive outcome for the trust does not violate UPIA.

Furthermore, “the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.” Prob C §16048. Hence, the trustee could probably not invest all trust assets in volatile stocks like British Petroleum or Goldman Sachs.

Additionally, a trustee may delegate investment and management functions, if prudent under the circumstances, to an agent of the trustee. Prob C §16052(a). Thus, a trustee could appoint a certified financial planner to assist the trustee in making investment decisions.

Moreover, “the trustee must, within a reasonable time of accepting the trusteeship or receiving the assets, review the assets and make and implement decisions concerning the retention and disposition of assets so as to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust.” Consequently, the trustee would need to perform an inventory of the trust and determine the future goals and needs of the trust in order to achieve the trust’s stated goals.

3. Accounting

The trustee is generally required to provide at least an annual accounting to beneficiaries for trusts created on or after June 30, 1987. See Prob C §16062. An accounting is also required when there is a change of trustee and when the trust terminates. Prob C §16062(a). The accounting must contain the information specified in Prob C §16063, which is too long to cite here (trust me). However, a beneficiary may waive in writing the right to an accounting from the trustee. See Prob C §16064(c).

Petition to Remove a Trustee

One of the most common problems with trust administration is the selection of a competent successor trustee who will manage the affairs of the trust after the original trust drafter(s), the settlor(s), have passed on. 

For example, husband and wife will typically select a child or close relative to serve as the trustee because of his or her familiarity with the trust beneficiaries, commonly the settlor’s children, and to conserve trust funds since professional trustee fees can be quite high. However, often the selection of a family member successor trustee ultimately proves imprudent. For instance, I have received a number of phone calls from beneficiaries asking that the trustee, almost always a family member, be removed.  There are two methods in which a trustee can be removed.

1. A trustee may be removed in accordance with the terms of a trust instrument. Prob C §15642.

For example, the trust instrument may grant a third-party the power to remove a successor trustee for cause or no cause.  Consequently, the third-party could remove a successor trustee for misappropriating trust funds, namely spending money on a Ferrari for their own personal use or an exotic vacation to Tahiti for their own benefit.

2. The trustee may be removed by a settlor, co-trustee or beneficiary via a probate petition under Prob C §17200. Prob C §15642(a). 

The common grounds for which a court petition would be ordered by the court include: breach of trust, insolvency of the trustee or other unfitness to administer the trust, hostility among cotrustees that impairs administration, the trustee's failure to act or declining to act, excessive compensation, substantial inability to manage the trust's resources or properly execute the duties of the office due to lack of mental capacity, substantial inability to resist fraud or undue influence or other good cause. Prob C §15642(b).

Now before you run off to the county probate court to file a petition to remove your despised Uncle Melvin, the successor trustee of your parent’s trust of which you are a beneficiary, please remember that all papers submitted to a California state court must be in conformity with Cal Rules of Ct 2.100-2.119 along with the local rules for each county superior court. In addition to proper formatting, the bigger dilemma is whether an unrepresented litigant can appropriately draft the petition (see practicing law) so that the court can grant the relief the petitioner is seeking if merited. For these two reasons, most petitioners hire an attorney to file and draft a petition if a significant amount of money is involved.