When creating an estate plan, it may be necessary to name a trustee to handle your assets. For example, if you’re establishing a revocable living trust to pass on wealth to your spouse or children, a trustee would be responsible for managing it. While you could name yourself as trustee, some situations may require that another individual or organization, such as a bank, fill the role. One thing you need to plan for are the trustee fees involved. Trustees assume certain responsibilities when managing assets and fees help to compensate them for their time and efforts. You also may benefit from the hands-on guidance of an expert financial advisor in choosing a trustee, planning your estate and exploring how trustee fees will affect your estate.
Trustee Fees Explained
In simple terms, trustee fees are essentially a payment for services rendered. A trustee can be an individual or an organization, such as a bank, wealth management company or other financial institution.
Trustees can perform various duties, depending on the terms outlined in the trust document. Their main job is to ensure that the assets held in a trust are managed according to the trust grantor’s wishes (meaning the person who created the trust) on behalf of the trust’s beneficiaries.
So, for example, that can include things like handling tax filings for the trust, distributing payments or assets from the trust to its beneficiaries or managing investments held in the trust. For those activities or anything else the trustee is obligated to do, they can be paid a fee.
Trustee Fee Structure
Typically, you’d specify the terms of payment for a trustee in the trust document itself when you’re creating it. With that in mind, there are different ways to structure trustee fees.
For example, you might pay the trustee a figure that represents a set percentage of the assets in the trust each year. This is typically done when you have a larger trust with significant assets that continually appreciate or generate ongoing income.
In the case of a smaller trust, a different fee structure might be used. For instance, instead of a percentage, you might pay the trustee a flat dollar amount each year. Or if they don’t have as many duties, they could be paid an hourly rate for their time.
When writing a trust document, the grantor can set the terms of payment, including putting a limit on how much can be paid out in trustee fees. They can also set different payment terms for any successor trustees named in the document as well.
When a grantor doesn’t mention trustee fees in the trust document, state laws can determine the fee. Typically, states use the same guidelines for executor fees when determining trustee fees. The fees can either be charged as a percentage of assets or as a percentage of transactions associated with money moving in or out of the trust. State laws can also specify how successor trustees can and should be paid.
Typical Trustee Fees
While there are no set rules for determining how much trustees can charge for their time, there are some commonly accepted baselines. For example, it’s not unusual for trustees to charge a minimum of 1% when dealing with larger trusts that have substantial assets. So for a trust with $5 million in assets, the fee would work out to $50,000 a year.
With smaller trusts that use a flat fee model, the numbers can look very different. For example, say you have a trust that has $200,000 in assets. Using the 1% rule as a guideline, your trustee would be able to collect $2,000 a year for their services. But if the trust doesn’t require much hands-on management, it might make more sense for you to offer them a flat fee of $1,000 instead.
If you’re choosing a person instead of an institution, like a trust company in a commercial bank, to serve as trustee, you may be able to negotiate a fee structure that works for both of you. With banks and other financial institutions that act as corporate trustees, you can ask them to explain their fees upfront so you know what you’ll pay before deciding to give them the trustee role.
And if you’re asked to serve as a trustee, consider what kind of commitment is expected of you and what your time is worth. If you’re not a licensed attorney then it likely wouldn’t be realistic to charge an hourly rate similar to what an attorney would but you don’t want to shortchange yourself either.
How Trustee Fees Are Paid
Trustee fees don’t come directly out of the grantor’s pocket. Instead, they’re paid out of the trust’s assets.
Depending on what you specify in the trust document, they can be paid once per year or biannually, though it’s more common for trustee fees to be paid quarterly.
It’s also important to note that trustees are entitled to reimbursement for any expenses they pay out of pocket. That includes things like travel expenses, storage fees, taxes, insurance or other expenses they incur related to the management of the trust.
Those expenses are reimbursable, regardless of whether the trust document specifies any guidelines for reimbursement. The trustee would, however, need to keep accurate records of their out of pocket expenses, including mileage, to be able to claim reimbursement.
How Trustee Fees Are Taxed
First, trustee fees are tax deductible to the trust. And second, trustee fees are considered taxable income for the trustee. Professional trustees also have to pay self-employment tax on the fees they receive.
If you’re creating a trust, it helps to know what is and isn’t deductible when managing taxes in your estate plan. And if you’re asked to be a trustee, you should consider how collecting fees as part of your taxable income may affect your tax liability when it’s time to file.
The Bottom Line
Trustee fees can be an overlooked part of the estate planning process, but you can’t afford to forget about them. When creating a trust, it’s important to estimate how much the trust will pay out in fees and how that affects the assets you’ll be able to pass on to future generations. If you’re unsure of what to pay (or what to charge if you’re acting as a trustee), talking to an estate planning attorney that specializes in trusts can help.
Tips for Investing
- Consider talking to a financial advisor about the implications of paying trustee fees. If you don’t have an advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help. It takes just a few minutes to get your recommendations and connect with a financial professional in your area. If you’re ready, get started now.
- If you’re considering a trust to protect investments or other assets, do your homework in comparing trust options. For example, some types of trusts are designed specifically for real estate investments, while others can be used to provide for special needs beneficiaries or shield assets from creditors.
Photo credit: ©iStock.com/SDI Productions, ©iStock.com/gustavofrazao, ©iStock.com/DNY59