Is a trustee compensated for administering a trust?
Like most people, you might be considering adding a trust to the estate plan. One of the most important decisions you’ll need to make when creating a trust is who you want to be the Trustee. This person or entity will be responsible for managing the trust assets and ensuring that the trust terms are followed. When creating a new trust, a common question is whether the Trustee will be compensated for administering the trust. The Indianapolis attorneys at Frank&Kraft will explain how trust administration works.
Trust Administrative Basics
A legal relationship in which property is held for the benefit of a third party is called a trust. The person who creates the trust is called the “Settlor”, the “Trustor” and the “Grantor”. The Settlor transfers the property to the Trustee appointed by the Settlor. The Trustee may be an individual, or an entity such as a law firm, trust company, or bank. A trust can also be administered by two or more Trustees acting as Co-Trustees.
The overall job of a Trustee is to protect and manage trust assets and to administer the trust terms found in the trust agreement. The duties and responsibilities of a Trustee, however, are numerous and varied and include things such as:
- Communicating with beneficiaries about trust business
- Settling disputes among beneficiaries
- Keeping detailed trust records
- Preparing trust taxes every year
- Investing trust assets using the “prudent investor standard”
- Distributing trust assets according to the terms of the trust
- Understanding and abiding by trust terms
- Making discretionary decisions when given the authority to do so
Is a Trustee Compensated?
The short answer is that “yes” a Trustee is typically compensated for administering a trust. Trustee compensation will usually be addressed in the trust contract. It is important to include guidelines on compensation when creating a trust contract to avoid any misunderstandings or conflicts. Traditionally, Trustee are compensated using one of three compensation methods, including:
- Fixed Fees: Some trusts specify a fixed annual fee, or a fee based on the value of the trust assets. This method is predictable and provides clarity for both the Trustee as well as the beneficiaries. Professional Trustees may charge higher fees than individual Trustees because of their professional expertise and resources. Professional Trustees offer experience, objectivity, and the ability to handle complex financial and legal matters.
- Hourly Fees: A Trustee can also be compensated based on the number of hours they spend administering the trust. This method is used when trust administration is time-consuming or complex. Individual Trustees, often family members or close friends, may agree to waive their fees out of a sense of duty or familial obligation; however, it is generally advisable to compensate them for their time and effort since acting as a Trustee can be a complex and time-consuming task.
- Percentage of Assets: Another common method is to pay the Trustee a percentage of the trust’s assets on an annual basis. A professional Trustee will typically charge between 1.0 and 1.5% of the value of trust assets each year. The fee may be lower (0.5-1.0 percent) if the Trustee is not a professional. This is because the trust will usually incur additional professional fees. When creating a trust you should consider the compensation schedules for the Trustee when drafting the agreement. The complexity of the trust is one factor that can affect Trustee compensation. Trusts that have diverse investments, real-estate holdings, and business interests often require more expertise and time to manage. This can justify a higher compensation. In the same way, larger trusts require more work and responsibility and therefore higher compensation. Long-term trusts lasting several years or even a decade may also require ongoing administration which impacts compensation. State laws can also address a “reasonable compensation” for a Trustee in order to prevent excessive fees. Ultimately, the compensation arrangements you set in your trust agreement should reflect the time, effort, and expertise required to administer the trust while ensuring that the fees are reasonable and justifiable.
Do You Have Additional Questions about How a Trustee Is Compensated for Administering a Trust?
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