One of the most common additions to the average estate plan is a trust. One reason for this is that trusts can help achieve a multitude of estate planning goals from staggering an inheritance to your children over a period of time to planning for Medicaid eligibility. One thing that all trusts have in common is the need to a appoint a Trustee to administer the trust. If you are unfamiliar with trusts, you may be curious about Trustee compensation. To help you better understand how a trust works, the Overland Park trust lawyers at Parman & Easterday discuss the issue of Trustee compensation.
What Is a Trust?
A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries, also named by the Settlor. The overall job of a Trustee is to protect and invest trust assets and to administer the trust according to the terms found in the trust agreement, the document that creates the trust. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates during the lifetime of the Settlor once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because a testamentary trust is activated by a provision in the Settlor’s Will, and a Will can always be revoked up to the time of the Testator’s death, a testamentary trust is also revocable up to that point. Note: assets in a testamentary trust have to go through probate.
The Role of Trustee
Most Settlors designate themselves as Trustees so they can manage their own assets during their lifetime. The focus of this blog is on the Successor Trustee, the person the Settlor selects to manage trust assets if they are unwilling or unable to do so. Be clear, when you designate someone to serve as your Successor Trustee, you are giving them a job…a serious responsibility…one that includes meeting the fiduciary standard to all beneficiaries.
So, we know the Settlor owns the property and creates the trust. We know a Trustee administers the trust. This requires the Trustee to manage the trust assets and follow the terms created by the Settlor in the trust agreement. Some of the specific duties and responsibilities of a Trustee include:
- Managing and protecting trust assets
- Abiding by the trust terms unless they are impossible, illegal, or unconscionable
- Investing trust funds using the “Prudent Investor Standard”
- Monitoring trust investments
- Communicating with trust beneficiaries
- Resolving conflicts among beneficiaries
- Making discretionary decisions
- Distributing trust funds to beneficiaries
- Approving or denying distributions if given discretionary authority
- Keeping trust records and an accounting of receipts and disbursements
- Preparing and paying trust tax returns
How Is a Trustee Compensated?
It is difficult to overstate the importance of a Trustee to the success, or failure, of a trust. While there are a number of laws governing the administration of a trust, the reality is that the Trustee has a significant amount of autonomy and responsibility. Given the importance of the Trustee, and the time a Trustee must dedicate to his/her duties and responsibilities, it is only fair that the Trustee be compensated. The rate at which a Trustee is compensated, however, can vary tremendously. Sometimes, the Trustee himself/herself actually determines how much compensation to receive.
The first place to look when determining Trustee compensation, however, is the trust agreement itself. The Settlor may include terms that specifically address the Trustee’s compensation or that make it clear the Trustee has the authority to determine the Trustee’s fee. If the Trustee is a professional, such as a CPA or attorney, the trust agreement may authorize payment at the Trustee’s normal professional hourly rate. If the Trustee is a corporate trustee, compensation will be pursuant to a published fee schedule which is typically based on a percentage of the trust assets. Sometimes the trust agreement is silent on the issue of compensation. In that case, the Trustee must be paid a “reasonable fee.”
Keep in mind that regardless of the rate of compensation, or how the Trustee compensation is determined, the Trustee’s fee is considered a yearly trust expense. As such, that compensation is paid out of the trust assets. Like all other aspects of the administration of the trust, the Trustee should keep detailed records illustrating the time spent administering the trust so that his/her fee can be justified, if necessary.
Contact Overland Park Trust Lawyers,
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about Trustee compensation or trusts in general, contact the experienced Overland Park trust lawyers at Parman & Easterday by calling 405-843-6100 to schedule your appointment today.