Understanding Trustee Compensation: A Gray Area in Estate Planning
When it comes to managing a trust, many families turn to a trusted relative to act as a trustee. However, the responsibilities involved can often be more time-consuming and complex than initially anticipated. This raises an important question: should a family member be compensated for their work as a trustee? The answer is not straightforward, and the lack of clear guidelines can lead to disputes among beneficiaries.
Elder law attorney Harry Margolis explains that there is no set standard for compensating a family trustee. In his experience, most family members are not paid for their role, but this does not mean they shouldn’t be. The key factor is the amount of work involved. If the trustee is handling ongoing responsibilities, such as managing a farm or overseeing the sale of property, the workload may warrant compensation.
The Problem with After-the-Fact Compensation
One of the main issues arises when compensation is discussed after the fact. For example, if a family member acts as a trustee and spends significant time on tasks like liquidating assets or managing real estate, they may later feel entitled to payment. This can create tension among other beneficiaries who may not have expected the trustee to be compensated. Some may question why a professional isn’t hired instead, while others may agree with the need for compensation but disagree on the amount.
Margolis notes that professional trustees typically charge higher fees, and it’s not always fair to expect a family member to be paid the same rate. However, a family member may have invested considerable time and effort into the trust, which could justify some form of compensation.
Tax Considerations
Another important aspect of trustee compensation is its tax implications. If a trustee is paid, that income is taxable. While trust distributions are generally not taxable to beneficiaries, any compensation for trustee services must be reported and taxed. This means that families should consider how compensation might affect their overall financial situation. It may be wise to negotiate a lower fee to avoid unnecessary tax burdens or resentment among family members.
Setting Compensation in Advance
Margolis emphasizes that it is better for the grantor to address compensation early in the estate planning process. Unfortunately, this issue is often overlooked. When the grantor sets expectations upfront, it can prevent misunderstandings and conflicts down the line. Attorneys and potential trustees should also raise the topic during discussions about estate planning.
The Role of Executors and Trustees
In some cases, the same person serves as both executor and trustee. While this can streamline the administration of the estate, it also means taking on a significant workload. The executor handles probate assets, while the trustee manages non-probate assets. This dual role can be efficient but also very demanding, especially if the process takes longer than expected.
Transparency is Key
Margolis advises that transparency is essential when it comes to trustee compensation. If a family member expects to be paid, it is best to discuss it early rather than waiting until the end of the process. Open communication can help avoid surprises and ensure that all parties understand the expectations.
Conclusion
Trustee compensation is a complex issue that requires careful consideration. While there is no one-size-fits-all answer, open communication, transparency, and early planning can go a long way in preventing disputes. Families should take the time to discuss expectations and ensure that everyone is on the same page before the trust is established.
