How Much Is Too Much? Trustee Compensation and an Analysis of California Rules of Court, Rule 7.776

JurisdictionCalifornia,United States
AuthorBy Joshua S. Yager, Esq.* and Peter S. Myers, Esq.**
Publication year2021
CitationVol. 27 No. 1
HOW MUCH IS TOO MUCH? TRUSTEE COMPENSATION AND AN ANALYSIS OF CALIFORNIA RULES OF COURT, RULE 7.776

By Joshua S. Yager, Esq.* and Peter S. Myers, Esq.**

MCLE Article

I. THE VIGNETTE

When reading a trust document for the first time, a new trustee discovers that the trustee's compensation shall be "a reasonable amount under the circumstances." The trustee calls the CPA who prepared the income tax returns for the prior trustee and asks, "What is a reasonable amount to be compensated as trustee?" The CPA responds, "$120 per hour. That's what your time is worth, and that's what the prior trustee was paid." Unsatisfied with that answer the trustee calls the attorney who drafted the trust and asks, "What is a reasonable amount to be compensated as trustee?" The attorney says, "A fixed annual amount based on the time spent administering the trust and the size of the trust." Unsatisfied with that answer, the trustee calls the bank that holds the trust assets and asks a banker the same question. The banker responds, "One percent of the value of the trust assets is the custom in the community."

II. THE PROBLEM

For many individuals, particularly family members of the settlor who come to occupy the office of trustee, the work is unfamiliar, tedious and difficult. A trustee is often thrust into the trustee role after losing a close friend or relative. The new trustee may have no experience serving as trustee and may work full-time or have other commitments—in other words, it's not a job the trustee applied for. What's more, serving as trustee exposes the trustee to personal risk and liability, which can be daunting. It would be unreasonable for the trustee to accept the weight of these responsibilities and risks without being fairly compensated. But what amount of compensation is appropriate?

A prudent trustee should always begin the compensation inquiry with the trust instrument. What instructions were provided by the settlor? Probate Code section 15680 provides, "if the trust instrument provides for the trustee's compensation, the trustee is entitled to be compensated in accordance with the trust instrument."1 Unfortunately, few trust documents provide any specific guidance on how to calculate the trustee's compensation. In the authors' experience, it is rare for the trust instrument to specifically set forth the level of compensation the trustee is to receive. Most often, a trust will permit "reasonable" compensation.

Absent specific guidance from the trust instrument, the trustee should turn to statutory guidance. Probate Code section 15681 directs, "If the trust instrument does not specify the trustee's compensation, the trustee is entitled to reasonable compensation under the circumstances." Frequently, this language does not assist the trustee, because it repeats the language in the trust.

Confounded, the trustee may wonder who defines "reasonable compensation under the circumstances?" What is reasonable to the trustee may be unreasonable to the disgruntled beneficiary and the beneficiary's legal counsel. The trustee can ask the trustee's professional advisors for their input. However, as noted, the professional advisors will generally rely upon their experience, which is necessarily anecdotal, or on published fee schedules that may not be applicable to the circumstances of the trust.

Ultimately, the Probate Court with jurisdiction over the trust determines the trustee's proper compensation, and the trustee may seek guidance from the court in advance by filing a petition for instructions.2 However, that process can be time consuming, costly, and unpredictable.

The vast majority of trustees therefore often find themselves with the power to determine their own compensation, but with little guidance from the trust instrument, governing statutes, their professional advisors, or a court. This article explores this problem and, through a review of California Rules of Court, rule 7.776, suggests methods of fee calculation that may be applied in unsupervised trust administrations. It also provides a reference for counsel and courts in supervised cases.3

III. THE THREE LEGS OF THE STOOL

A good trustee compensation analysis is built on three principles: (1) the trustee's duty of loyalty, (2) the trustee's duty to incur only reasonable expenses, and (3) the trustee's duty to pay only a reasonable level of compensation.

A. Loyalty

The trustee's primary duty is the duty of loyalty. This duty requires the trustee to administer the trust solely in the interest of the beneficiaries. On its face, the trustee's power to determine reasonable compensation for the trustee is a conflict of interest, and this power is of great concern to some beneficiaries. However, even though the trustee's power to set the trustee's compensation is a conflict, the necessity of permitting the trustee to take a fee requires us to live with the conflict. The analysis is nuanced, but the Probate Code sides with entitling the trustee to compensation determined without the intervention of a third party. A trustee does not breach the trustee's duties by taking a fee that is authorized by law. A trustee breaches the trustee's duties when the trustee takes a fee that is too large and, therefore, is not authorized by law. A breach of duty arises when the trustee's fee reaches the point that the trustee is dealing "with trust property for the trustee's own profit or for any purpose unconnected with the trust," or the trustee "take[s] part in any transaction in which the trustee has an interest adverse to the beneficiary." The line is a fine one, but the trustee's fee becomes a breach of duty when it has not been earned. At that point, it becomes a taking by the trustee for the trustee's own profit, unconnected with the trust administration.

[Page 21]

The unusual position occupied by the determination and payment of the trustee's fee in the conflict of interest analysis is illustrated by Probate Code section 16004(c). Under this subdivision, "a transaction between the trustee and a beneficiary which occurs during the existence of the trust . . . is presumed to be a violation of the trustee's fiduciary duties." However, if the trustee and the beneficiary agree to the trustee's compensation, this presumption does not apply.4 The agreed-upon compensation can still be a violation of the trustee's duties, but—unlike other trustee-beneficiary transactions—it is not presumed to be a violation of the trustee's duties. The gray area between authorized trustee compensation and unauthorized trustee profit is analyzed using the factors discussed in this article.

B. Reasonable Expenses

The trustee's duty to incur only reasonable expenses also informs the trustee's compensation decision.5 California Probate Code section 16050 directs, "[i]n investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, overall investment strategy, purposes, and other circumstances of the trust." This duty applies to both the fees paid to investment advisors and other professionals, but also to the payment of the trustee's fee. Incurring unreasonably high expenses, including the trustee's compensation, is imprudent.6

C. Reasonable Compensation

As noted, there is no bright-line rule for determining what amount is reasonable to compensate a trustee; "reasonable compensation depend[s] largely upon the circumstances of each particular case."7 California Rules of Court, rule 7.776, sets forth the following eight nonexclusive factors that should be considered when determining reasonable trustee compensation:

  1. The gross income of the trust estate;
  2. The success or failure of the trustee's administration;
  3. Any unusual skill, expertise, or experience brought to the trustee's work;
  4. The fidelity or disloyalty shown by the trustee;
  5. The amount of risk and responsibility assumed by the trustee;
  6. The time spent in the performance of the trustee's duties;
  7. The custom in the community where the court is located regarding compensation authorized by settlors, compensation allowed by the court, or charges of corporate trustees for trusts of similar size and complexity; and
  8. Whether the work performed was routine, or required more than ordinary skill or judgment.8

Some of these factors—for example the trustee's skill and experience and the custom in the community—can be considered when budgeting for trustee compensation in advance of an administration. Gross income can be budgeted in advance, but can only be determined after the fact. Time to be spent and the nature of the work as routine or not can be budgeted or anticipated, but must be evaluated as the administration continues. Many other factors can only be considered while a trust is being administered or, sometimes, upon completion of an administration. In all events, the trustee has an ongoing duty to monitor the reasonableness of the trustee's compensation.9

This article discusses the factors listed in rule 7.776 in order, even though they can become relevant in determining trustee compensation at different points in time.

IV. THE FACTORS UNDER RULE 7.776
A. The Gross Income of the Trust Estate

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The first factor a trustee should consider when evaluating trustee compensation is the "gross income of the trust estate."10 Trustee fees necessarily reduce the income and principal available to fulfill the trust purposes. A trust with modest income and large trustee fees may prevent the trustee from fulfilling their central duty to administer the trust consistent with its identified purposes.

Although the language of rule 7.776 only references the gross income of the trust, the fee analysis should not be constrained to this component of total return. Trust income was identified as a factor in the 1950s, before the "total return" framework of the Third Restatement of Trust was developed.11 In this pre-Third Restatement world, the income of the trust was of primary focus. In fact, the fee charged by many corporate trust...

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