Stepping into the role of a successor trustee entails a substantial commitment of your time, effort and at times - emotional effort. Tasked with the fiduciary responsibility of administering a trust, a trustee must be conversant with state laws, accounting practices, investment strategies, real estate management, and more.

In fulfilling this crucial duty for the deceased, it's essential to understand that the successor trustee's responsibilities don't equate to pro bono work. In fact, the law allows for trustee compensation.

So, what does a successor trustee's compensation look like? The answer to this is multi-faceted.

In our guide, we break down the compensation details as per the California code, while also discussing factors that may influence a deviation from these guidelines. Discover the nuances of trustee compensation in California and gain a better understanding of your entitlements as a successor trustee.

Trustee compensation, while normally outlined within the provisions of the trust - there may be some instances where the trust instrument does not explicitly specify the compensation fee or rate. In this case local laws usually step in to determine what is appropriate.

California legislation states that trustees should receive "reasonable" payment - an ambiguous term which can vary depending on numerous circumstances (California Probate Code §15681.).

What constitutes "reasonable" is not specifically defined in the law, making it dependent on the circumstances of each case. This flexibility allows for a case-by-case approach to trustee compensation tailored to the unique factors of each trust.

The nature of the trust and the amount of work required by the trustee are crucial factors in this determination. It's important for all parties involved to agree on these aspects before finalizing the compensation.

Assessing the Trust Size

The size of the trust is a crucial factor. This includes the complexity of the trust, the number of beneficiaries involved, the number of assets that need to be managed, and the total amount of money the trustee will be responsible for managing.

Determining the Compensation Method

While it's possible to establish an hourly rate for trustee compensation, this isn't typically the standard practice. More commonly, a percentage of the trust's value is used to determine a fair compensation for a personal trustee.

Using Executor Compensation as a Reference

While there are no strict rules for trustee compensation, guidelines for executor compensation can serve as a useful reference point. The term "reasonable compensation" is often used in this context.

This refers to the average fee for executors in most cases. For instance, if the average executor fee is 3 percent, it wouldn't be "reasonable" to expect a trustee to be compensated 10 percent of the estate value each year.

In some cases, trustees may believe that they deserve higher compensation. This often happens when the trust structure becomes more complex, and a trustee must spend more time managing a trust.

In this case, a trustee must send at least 60 days advance written notice to each beneficiary (California Probate Code §15686.) Trustees are also entitled to compensation for expenditures associated with trust administration (California Probate Code §15684.).

As for extraordinary services, judges can sometimes award additional compensation if the executor has performed duties beyond those normally expected. These could include:

Managing a business: If the deceased owned a business, the executor may need to manage or even sell it, which would go beyond typical executor duties.

Dealing with complicated tax issues: An estate with complex tax matters could require additional work from the executor.

Managing real estate: If the deceased owned multiple properties or properties in other states, the executor may have additional responsibilities.

According to California Courts Rule 7.776., while determining the compensation of trustees, a court considers the income of the trust estate, the effectiveness of trustee administration, any unusual skills or proficiency of a trustee, the amount of trustee's risk and responsibility, time trustee spends to perform their duties, and many other factors.

If the trust document stipulates an unreasonably low or high amount, the court may allow a larger or smaller compensation, respectively. Specifically, a court may change trustee compensation if the duties of trustees are significantly different from those contemplated when the trust was created, when compensation is unreasonably high or low according to the terms of the trust, and in extraordinary circumstances calling for equitable relief (California Probate Code §15684.)

Trustee fees in California are as varied as the trustees themselves, often influenced by the nature of the trustee's role - professional or non-professional. Understanding this distinction and the costs associated with each can provide clarity when selecting the right trustee for your trust.

Professional trustees, who bring their legal and financial expertise to the table, tend to have higher fees. Which involves an annual charge of about 1.5% to 2.5% of the trust's total assets. This percentage can increase when the trustee performs extraordinary services, like executing complex investment strategies or handling intricate trust matters.

In contrast, non-professional trustees, who are often family members or trusted acquaintances of the trustor, usually operate with lower fees. They typically charge around 0.5% to 1% of the trust assets' value annually. On an hourly basis, their fees usually range from $30 to $75. While this is the norm, it's not uncommon for non-professional trustees to waive their compensation entirely, though it's important to remember they're under no legal obligation to do so.

Trustee compensation doesn't have to be confusing

Navigating the complex waters of trustee fees in California can feel like a daunting journey. But you don't have to go it alone. Our team of experienced estate and trust professionals are here to provide personalized guidance tailored to your unique situation.

In our free consultation, we'll take the time to understand your specific circumstances and provide recommendations that align with your trust administration goals. We firmly believe that every trust voyage is unique, and we're committed to providing solutions that are as individual as you are.

Reach out today to book your free consultation. It's a step towards informed trust management, with guidance that's tailored specifically for you.

Is the trustee fee taxable income?

Trustee fees are generally treated as taxable income to the trustee in the year received.

However, legitimate expense reimbursement is not taxed. Therefore, a trustee should keep a detailed record of all trust-related expenses, including travel and any expenditures made in relation to administration of the trust. These expenses should be carefully documented with supporting invoices and checks.

The trustee should also create a trust administration account, typically under a Taxpayer Identification Number obtained specifically for the trust, to receive deposits and pay expenses. This helps avoid commingling trust expenses with personal expenses, which can lead to complications later on and may result in a fee reduction.

When filing the trustee fee - generally, trustee fees are reported as income on the trustee's personal income tax return (Form 1040). If the trust generates income, the trustee may also need to file a separate tax return for the trust using IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts. It's always a good idea to consult with a tax professional to ensure compliance with all tax laws and regulations.

What expenses can be covered by the trust?

Legal fees: These are fees related to legal services needed for the administration of the trust, such as the preparation of tax returns, defense of the trust in case of legal disputes, or advice on trust management.

Accounting fees: Trusts often require professional accounting services, for tasks such as preparing financial statements or filing tax returns. The costs of these services can be paid by the trust.

Tax obligations: Trusts typically have to pay taxes on income and other gains. The trust can pay these taxes directly.

Investment management fees: If the trust assets are invested, the trust can pay for the costs of managing these investments.

Property expenses: If the trust owns real property, it can pay for expenses related to this property, such as maintenance, insurance, and property taxes.

Distribution expenses: When the trust makes distributions to beneficiaries, there may be associated costs, such as bank fees or costs of transferring property.

Remember, these are just general categories and the specific expenses that a trust can pay for may depend on the terms of the trust agreement, the type of trust, and the applicable laws.

It’s always recommended to consult with a professional advisor when dealing with trust administration to ensure that all actions are in accordance with the law and the terms of the trust.