Like many people, you may be contemplating the addition of a trust to your estate plan. If you create a trust, one of the pivotal decisions you will need to make is deciding who to appoint as the Trustee. This individual or entity will manage the trust assets and ensure that the terms of the trust are followed. A common question that arises when creating a trust is whether a Trustee is compensated for administering a trust. To help you better understand how trust administration works, the Indianapolis attorneys at Frank & Kraft address whether a Trustee is compensated for administering a trust.
Trust Administration Basics
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 can be an individual or an entity, such as a bank, law firm, or trust company. 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. Usually, Trustee compensation is addressed in the trust agreement. If you are creating a trust agreement, it is important to include clear guidelines on compensation to avoid potential conflicts or misunderstandings down the line. 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 provides clarity and predictability for both the Trustee and the beneficiaries. Fees for a professional Trustee may be higher than those for individual Trustees due to the professional expertise and resources they bring to the table. 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 approach is often used when trust administration is particularly complex or time-consuming. 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. If the Trustee is a professional Trustee, a typical fee is between 1.0 and 1.5 percent of the value of the trust assets per year. They may also receive a small percentage of the trust income each year. If the Trustee is a non-professional, the fee tends to be lower (0.5-1.0 percent) because the trust will usually incur additional professional fees.
How to Set Trustee Compensation Schedules in a Trust
If you are creating a trust, you should take Trustee compensation into account when drafting the trust agreement. Several factors can influence Trustee compensation, such as the complexity of the trust. Trusts with diverse investments, real estate holdings, or business interests require more time and expertise to manage, often justifying higher compensation. Likewise, larger trusts generally involve more work and responsibility, leading to higher compensation and long-term trusts that last several years or even decades may require ongoing administration, impacting the overall compensation. State laws can also address “reasonable” compensation for a Trustee 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?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about Trustee compensation, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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