Duty: Section 7 of the Uniform Prudent Investor Act directs that “… a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.” This duty to only incur reasonable costs includes the trustee’s duty to pay themselves only reasonable fees. Unfortunately, few trust documents define what the trustee compensation should be or how it should be arrived at. Typically, the only instruction the trust document provides is that the trustee compensation shall be “reasonable”. The trustee is left in the awkward position of determining how much to pay themselves.
Factors to Consider: Fortunately, the Uniform Trust Code identifies for trustees and their advisors the “factors to consider” when establishing the trustee’s compensation. These factors include (1) the custom of the community; (2) the nature and costs of services rendered by others; (3) the trustee’s skill, experience, and facilities; (4) the time devoted to trust duties; (5) the amount and character of the trust property; (6) the degree of difficulty, responsibility and risk assumed in administering the trust, including making discretionary distributions; and (7) the quality of the trustee’s performance (Uniform Trust Code 708). Nearly every state has integrated these factors into their probate code or some version of their rules of court.
The Record: A prudent trustee will create a record that explores each of these factors as they conduct the analysis of what they should be paid. Failure by the trustee to establish a rational basis for what they get paid and how that amount is arrived at would be considered, by some, to be imprudent and a breach of one of their duties of care.
Factor #1 – Custom of the Community: One of the factors that is to inform the trustee’s compensation is the “custom in the community”. This first consideration is whether it is the custom in the community to charge an hourly rate or a percentage of trust assets when calculating the trustee’s compensation. Based on our experience, we believe that the percentage of trust assets is slightly more common than using an hourly rate. To support this position we point to the findings that is offered in Loring and Rounds treatise on trust administration which notes, “The prevailing practice in this country is to calculate the trustee’s compensation on the basis of a fixed percentage of principal and/or income (Loring and Rounds 2018 edition: A Trustee’s Handbook – §8.4 p. 1011). Furthermore, the Uniform Trust Code, the rules of court, cases interpreting the statue and the market rate of fiduciary services provided by corporate trustees, suggest that an asset-based fee is more appropriate for trusts of material size and complexity.
Factor #2 – Cost of Services Rendered by Others: If the trustee determines that a percentage of the trust assets is the most reasonable approach to calculating their compensation, they must then decide WHAT percentage of assets is appropriate. Again, the Loring and Rounds Trustee’s Handbook has a helpful schedule of trustee fees listed by trust size and geographic location (Boston, Chicago, Los Angeles, Miami and New York). A schedule of the average fees across these regions follows:
A trustee is advised to NOT simply use this average fee schedule as a determination of a fair fee. Adjustments to this schedule should be made based on several factors including, but not limited to, whether asset management functions have been delegated to investment managers or if a portion of the trust assets are held in real estate which may justify a higher fee.
More to Come: This is Article 1 of 3 in which we consider each of the seven-factors identified by the Uniform Trust Code as informative to the final determination of the trustee’s compensation. In subsequent articles we will provide analysis of the remain six factors that a trustee is to consider.
Give Me a Call: If you or your clients serve as a trustee and a further discussion would be helpful regarding this duty, I am available for a phone call to discuss the facts. Besides developing and implementing an ongoing governance process for trustees, Anodos also provides focused governance engagements such as (1) trustee compensation studies, (2) performance evaluations, (3) diversification studies and (4) expert testimony in court proceedings.
Josh Yager, Esq., CFP®, ChFC®
Anodos helps trustees (ERISA, individual, and endowment) save time, reduce their personal risk, and fulfill their fiduciary duties. We do this by helping the trustee conduct audits of the money managers to whom investment duties have been delegated. Fiduciaries have an affirmative duty to provide ongoing and independent oversight of the money managers. What makes us unique is that we do not manage money or sell insurance. Doing fiduciary audits, benchmarking studies, and performance attribution is all we do.
We do what trustees should do, but don't know how
Anodos develops and maintains an investment governance process for trustees so that their fiduciary duties are fulfilled.