Trustee compensation: proceed with caution.

• Author: Bakale, Anthony S.

The issue of trustee compensation comes up more often than most people would suspect. Although disputes about compensation do not flood the courts, when they do occur they are often hotly contested and unpleasant for all involved. The purpose of this item is to illuminate the issues that can lead to litigation on trustee compensation.

It is a rare trust document that says anything more specific about compensation than to note that the trustee is entitled to "reasonable compensation." This is a question of state, nor federal, law. The Uniform Trust Code (UTC), a model law adopted in 20 states (albeit with slight differences), provides:

1. If the terms of a trust do not specify the trustee's compensation, a trustee is entitled to compensation that is reasonable under the circumstances.

2. If the terms of a trust specify the trustee's compensation, the trustee is entitled to be compensated as specified, but the court may allow for more or less compensation if:

1. The duties of the trustee are substantially different from those contemplated when the trust was created; or

2. The compensation specified by the terms of the trust would be unreasonably high or low (UTC [section]708).

States that have not yet adopted the UTC follow common law, which provides for reasonable compensation under the circumstances. (See, e.g., Hartford Nat'l Bank & Trust Co. v. Donohue, 402 A.2d 1195 (Conn. Super. Ct. 1979); Alexander v. Harris Trust & Sail Bank, 401 N.E.2d 1168 (Ill. App. Ct. 1980).) The UTC basically codifies common law that applies in the absence of the UTC or a specific state statute (see Restatement (Third) of Trusts [section]38 comment c(1) (2003)). The Restatement of Trusts is a well-recognized treatise that provides insight and commentary about all matters relating to trusts and is followed by much of the judiciary, unless in direct conflict with state law.

The obvious and immediate conflict of interest that exists with respect to trustee compensation is that the trustee, the person who may unilaterally take a fee from the trust's assets, is also the person who decides what is reasonable. That dynamic is reason enough for beneficiaries and their advisers to keep a vigilant eye on the compensation component of the trust relationship.

Reasonable Compensation Defined (Perhaps)

It is well settled that factors to be considered when evaluating the reasonableness of a trustee fee include but are not limited to:

* The value and character of the trust property and the risk and responsibility of administering the property;

* The time spent and the quality and character of the services provided by the trustee;

* The character and cost of services provided by others;

* The trustee's skill and experience; and

* The results obtained (UTC [section]708 and comment).

Each case will be different, and a court has almost unfettered discretion to award whatever trustee fee it deems appropriate under the circumstances. As the reader can discern, it is a fuzzy test at best, and one that becomes even fuzzier if the trustee does not take a fee annually in accordance with the rules of fiduciary accounting (which require that half the fee be taken from principal and half from interest).

Depending on the size of the trust and the fee claim, experts will likely be asked to testify about a fee claim. An expert opinion usually addresses not only the factors identified above but also fees charged by corporate trustees and professional money managers. For...