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: As noted in the first article of this series (Trustee Compensation: 1 of 3), the Uniform Trust Code identifies seven factors that are to be considered when establishing the trustee’s compensation. These are (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 in making discretionary distributions; and (7) the quality of the trustee’s performance (UTC §708). In this article we will address factors #3 – #7.
Factor #3 – The Trustee’s Skill and Experience: The senior partners of law firms and CPA firms tend to bill at higher hourly rates than their more junior associates. The skills and experience of the trustee are to inform the compensation that is ultimately paid to them. Most trustees are selected because they have some professional experience that was a consideration in the grantor’s decision to name them as trustee. Note that this “skill and experience” need not be directly related to tax or legal acumen. The trustee’s organization, clear communication style or prior board participation might be the types of skill or experience that would be noted in a trustee fee study.
Factor #4 – Time Devoted to the Work: Though a trustee is not required to have their fee set by the court using a “lodestar method,” the trustee is expected to be able to produce some reasonable estimate of the time they expect to devote to their administrative duties. A prudent trustee will establish a Governance Tasklist and Compliance Calendar to estimate the projected time that is to be devoted to the administration of the trust. (The “lodestar method” refers to an approach for computing attorney’s fees – not trustee’s fees – whereby the court determines the attorney’s compensation based on (1) the number of hours reasonably spent on a case, (2) a reasonable hourly rate for taking on the case and (3) any adjustment to the product of Hours and Rate for the risk accepted by the attorney seeking compensation.)
Factor #5 – The Amount and Character of the Trust Property: It is generally recognized that there is a positive relationship between the trustee’s fee and the size and complexity of the trust property. Many corporate trustees charge an “extraordinary fee” for assets that are of higher risk or burden to administer such as directly held real estate or operating businesses. If the trust is funded with any difficult to administer assets, the trustee should create a record of these assets and their plan for administration contemporaneous with their compensation decision.
Factor #6 – Difficulty, Responsibility and Risk: The complexity of administering a trust does not only manifest through the property held by the trust (see #5 above), but also by the beneficiaries served by the trust. The difficulty, responsibility and risk that the trustee has accepted is to be considered when establishing their compensation. Interestingly, the statute makes particular note of whether the distributions from the trust are to be made at the discretion of the trustee, which implies greater risk than some other distribution method like a Net Income or Unitrust distribution scheme.
Factor #7 – The Quality of the Trustee’s Performance: The final consideration to be made is how well the trustee has done their job. To be sure, the word performance as it relates to the trustee’s work is not to be confused with the performance of the trust assets. Good performance by the trust portfolio does not presume the trustee has done their job well. The converse is also true. We believe that the trustee’s administrative performance is best measured by the quality and detail of the administrative protocols that have been adopted. A prudent trustee will (1) identify their duties of care, (2) establish a series of policies and procedures to fulfill those duties, (3) create a contemporaneous record when the policy or procedure has been fulfilled and (4) file all the governance documents in one centralized location which we call the Compliance Library. Trustees who bring this level of vigor to their job would be considered to have a high quality of performance. Those with little record of their administrative process would not have performed their duties well.
More to Come: This is Article 2 of 3 in which we consider each of the seven factors identified by the Uniform Trust Code as informative to the decision of the trustee’s level of compensation. In the subsequent article we will provide analysis of other governance considerations that should be made before a final determination is made.
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.