Understanding Trustee Compensation: What is "Reasonable"?

The trust documents from our estate planning partners (they draft your documents) state that an individual trustee is entitled to "reasonable compensation." Here's a quick look at defining "reasonable compensation.

To begin, it's important to understand that any amount the trustee distributes as compensation is subject to the approval of the beneficiary(s).When serving as a trustee, individuals are entitled to "reasonable compensation" for their efforts, as outlined in trust documents. However, determining what’s reasonable can be tricky. Setting a fixed amount in advance is often unwise, as it may either be too low to motivate a trustee or too high, sparking disputes with beneficiaries. Typically, corporate or professional trustees charge 1-1.5% of trust assets annually (often on a sliding scale for larger trusts), while non-professional trustees charging similar rates may be deemed unreasonable. Many trustees track their time and apply a modest hourly rate, far below the $100-$150/hour professionals might charge. If a trustee has specialized skills, like a CPA, they can charge separate rates for professional services and general trustee duties. Financial advisors should avoid serving as trustees to prevent conflicts of interest, as they’re already compensated for managing assets. Trustees may also propose a flat fee at the end of trust administration, and out-of-pocket expenses are always reimbursed separately. Remember, beneficiaries can question compensation without triggering penalties, ensuring fairness and transparency.