Trustee Fees: What Are They and Who Pays?

When creating an estate plan, you may have to name a trustee to handle your assets. For example, if you’re establishing a revocable living trust to pass on wealth to your spouse or children, a trustee would be responsible for managing it. While you could name yourself as a trustee, some situations may require that another individual or organization, such as a bank, fill the role. Trustees assume certain responsibilities when managing assets for a trust, and trustee fees help to compensate them for their time and efforts.

You may benefit from the hands-on guidance of a financial advisor in choosing a trustee or planning your estate.

Trustee Fees Explained

Trustee fees are the compensation paid to the individual or institution responsible for managing the trust’s assets and ensuring that the trust operates according to its terms. These fees can vary widely depending on the complexity of the trust, the responsibilities involved and whether the trustee is a professional or a family member. Typically, trustee fees are outlined in the trust document, but they can also be subject to state laws and regulations.

Trustees can perform various duties, depending on the terms outlined in the trust document. Their main job is to ensure that the assets held in a trust are managed according to the wishes of the grantor (meaning the person who created the trust) on behalf of the trust’s beneficiaries.

So, for example, that can include things like handling tax filings for the trust, distributing payments or assets from the trust to its beneficiaries or managing investments held in the trust. For these activities or anything else the trustee is obligated to do, they can be paid a fee.

Trustee Fee Structure

Typically, you’d specify the terms of payment for a trustee in the trust document itself when you’re creating it. With that in mind, there are different ways to structure trustee fees. For example, you might pay the trustee a figure that represents a set percentage of the assets in the trust each year. This is typically done when you have a larger trust with significant assets that continually appreciate or generate ongoing income.

In the case of a smaller trust, a different fee structure might be used. For instance, instead of a percentage, you might pay the trustee a flat dollar amount each year. Or if the trustee doesn’t have as many duties, they could earn an hourly rate for their time.

When writing a trust document, the grantor can set the terms of payment, including putting a limit on how much can be paid out in trustee fees. They can also set different payment terms for any successor trustees named in the document as well.When a grantor doesn’t mention trustee fees in the trust document, state laws can determine the fee. Typically, states use the same guidelines for executor fees when determining trustee fees. The fees can either be charged as a percentage of assets or as a percentage of transactions associated with money moving in or out of the trust. State laws can also specify how successor trustees can and should be paid.

Typical Trustee Fees

While there are no set rules for determining how much trustees can charge for their time, there are some commonly accepted baselines. For example, it’s not unusual for trustees to charge a1% fee when dealing with larger trusts that have substantial assets. So, for a trust with $5 million in assets, the fee would work out to $50,000 a year.

With smaller trusts that use a flat fee model, the numbers can look very different. For example, say you have a trust that has $200,000 in assets. Using the 1% rule as a guideline, your trustee would be able to collect $2,000 a year for their services. But if the trust doesn’t require much hands-on management, it might make more sense for you to offer them a flat fee of $1,000 instead.

If you’re choosing a person instead of an institution to serve as a trustee, you may be able to negotiate a fee structure that works for both of you. With banks and other financial institutions that act as corporate trustees, you can ask them to explain their fees upfront so you know what you’ll pay before deciding to give them the trustee role.

And if you’re asked to serve as a trustee, consider what kind of commitment is expected of you and what your time is worth. If you’re not a licensed estate attorney, then it likely wouldn’t be realistic to charge an hourly rate similar to what an attorney would. That said, you don’t want to shortchange yourself either.

How Trustee Fees Are Paid

Trustee fees don’t come directly out of the grantor’s pocket. Instead, they’re paid out of the trust’s assets. Depending on what you specify in the trust document, payment of trustee fees can occur once per year or biannually, though quarterly is more common.

It’s also important to note that trustees are entitled to reimbursement for any expenses they pay out of pocket. That includes things like travel expenses, storage fees, taxes, insurance or any other expenses they incur related to the management of the trust.

Those expenses are reimbursable, regardless of whether the trust document specifies any guidelines for reimbursement. The trustee, however, would need to keep accurate records of their out-of-pocket expenses, including mileage, to be able to claim reimbursement.

How Trustee Fees Are Taxed

There are two important tax rules to know if you’re planning to set up a trust and name a trustee, or if you’re named as a trustee by someone else. First, trustee fees are tax-deductible from the trust. And second, trustee fees are considered taxable income for the trustee. Professional trustees also have to pay self-employment tax on the fees they receive.

If you’re creating a trust, it helps to know what is and isn’t deductible when managing taxes in your estate plan. If you’re asked to be a trustee, you should consider how collecting fees as part of your taxable income may affect your tax liability when it’s time to file.

How to Choose the Right Trustee

Selecting a trustee is an important part of creating a trust. The person or institution you choose will be responsible for managing assets, keeping records and following the trust’s terms as written. Trustees are fiduciaries, meaning they must act in the best interests of the beneficiaries and follow applicable laws and trust provisions.

You may name an individual, such as a relative or close associate, or a professional entity like a trust company or bank. Individual trustees may be familiar with the family and its circumstances, while professional trustees often have specialized knowledge and administrative resources. The decision can depend on the type of assets in the trust, its size and the level of management required.

It is common to name a successor trustee in case the original trustee cannot continue in the role. Providing clear instructions for succession in the trust document can help reduce administrative issues later.

Because a trustee has ongoing legal and financial obligations, it may be helpful to review your options with an attorney or financial advisor before finalizing your choice.

Bottom Line

Trustee fees can be an overlooked part of the estate planning process, but you can’t afford to forget about them.

Trustee fees are payments made to the person or institution that manages a trust. They cover tasks like handling assets, paying beneficiaries, and following the trust’s terms. Fees vary based on the trust’s complexity and the trustee’s role. Professional trustees, such as banks, often charge a percentage of the trust’s assets, while individual trustees may charge a flat or hourly fee.

Estate Planning Tips

Consider talking to a financial advisor about the implications of paying trustee fees. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re considering a trust to protect investments or other assets, do your homework in comparing trust options. For example, some types of trusts are designed specifically for real estate investments, while others can be used to provide for special needs beneficiaries or shield assets from creditors.