Is a Trustee Entitled to Compensation?
Yes, trustees are entitled to compensation. After all, they perform important services with a high degree of responsibility and potential liability. Nevertheless, when family members serve as trustees they usually do not charge a fee.
Professional trustees, whether banks, trust companies or attorneys, usually charge a percentage of the funds in trust as their annual fee. This is usually in the range of 0.8 % to 1.5%, often with the percentage fee being higher for smaller trusts and lower for larger trusts. Often, trustees also charge a minimum fee, which can effectively increase the percentage rate. For instance, if the minimum fee is $5,000 a year and the trust holds $200,000 in assets, then the effect rate will be 2.5% per year. Over time, this could erode the trust principal.
When considering trustees, it’s important to ask what other costs might be involved. The biggest potential cost is often fees for investment management. Depending on the trustee, this might be included in trustee fee or other additional charge. When a bank or trust company is serving as trustee, it’s likely that there’s no additional investment fee. On the other hand, an independent trustee, such as an attorney, may not have the necessary investment background and may hire outside investment advisors at a cost to the trust, pushing up the full trust administration expenses.
This is also true of family member trustees who may not charge a fee themselves, but very well may want outside investment management. They might also call on more legal and accounting assistance at some cost to the trust. In some instances, family members do ask to be paid or a trust grantor sometimes feels it’s only fair that they receive some compensation. In such cases, we typically see either a smaller percentage fee, often 0.25% to 0.5% depending on the size of the trust, or a flat amount, perhaps $5,000 a year, again depending on the size of the trust.
If you are a family member receiving compensation for serving as trustee, remember that you are earning this fee and must report it as taxable income.