Where’s the Uniformity? Trustee Compensation

By David E. Wolff

David E. Wolff is the founder and managing attorney at Wolff Law in Hallandale Beach, Florida. He is a member of the Florida Bar’s Real Property, Probate, and Trust Law Section.

Currently, there exists little uniformity among states in determining what is appropriate trustee compensation under the circumstances. Indeed, within the states that use “reasonable compensation” as the metric for determining trustee fees, there is no uniform framework of factors; courts instead conduct a fact-based inquiry to determine what is “reasonable.” Though some courts will cite to the list of nine factors provided by the Restatement (Third) of Trusts, other courts examine fewer factors than the Restatement, use more factors than the Restatement, take a totality-of-the-circumstances approach, or, in some cases, disallow trustee fees for extraordinary services and even set a ceiling on trustee fees. This article will examine whether the Florida factors set forth in West Coast and analyzed in the famed Estate of Rauschenberg should be uniformly adopted by states using reasonable compensation as the standard.

Survey of Jurisdictions Adopting Reasonable Trustee Compensation or Statutory Fees

The following states use reasonable compensation as the metric in determining testamentary trustee fees, with some states using statutory factors, specific allowances for extraordinary services, or ceilings on trustee fees:

• Alabama (Ala. Code § 19-3B-708),

• Alaska (Alaska Stat. § 13.16.440),

• Arkansas (Ark. Code Ann. § 28-73-708),

• Delaware (Del. Code Ann. tit. 12, § 3561),

• District of Columbia (D.C. Code § 19-1307.08),

• Florida (Fla. Stat. § 736.0708),

• Idaho (Idaho Code § 15-7-205),

• Illinois (760 Ill. Comp. Stat. 5/7),

• Indiana (Ind. Code § 30-4-5-16),

• Iowa (subject to a statutory ceiling; Iowa Code § 633A.4109),

• Kansas (Kan. Stat. Ann. § 59-1717),

• Louisiana (La. Stat. tit. 9 § 2181

• Maine (Me. Stat. tit. 18-B, § 708, with statutory factors to consider),

• Maryland (Md. Code Ann., Est. & Trusts § 14-103)

• Massachusetts (Mass. Gen. Laws ch. 203E, § 708)

• Michigan (Mich. Comp. Laws § 700.7708)

• Minnesota (MN Stat § 501C.0708 (2016))

• Mississippi (MS Code § 91-8-708),

• Missouri (Mo. Rev. Stat. § 456.7-708, with reasonable compensation allowed in excess of fee schedule for corporate fiduciaries),

• Montana (Mont. Code Ann. § 72-38-708, with extra compensation allowed for extraordinary services),

• Nebraska (Neb. Rev. Stat. § 30-3864),

• Nevada (Nev. Rev. Stat. § 153.070, with extra compensation allowed for extraordinary services),

• New Hampshire (N.H. Rev. Stat. Ann. § 153.070, with extra compensation allowed for extraordinary services),

• New Mexico (N.M. Stat. Ann. § 46A-7-708),

• North Carolina (with list of factors, N.C. Gen. Stat. § 32-54),

• North Dakota (N.D. Cent. Code § 59-15-08),

• Ohio (Ohio Rev. Code Ann. § 5807.08, allowing for reduction for cause),

• Oklahoma (Okla. Stat. tit. 60,

§ 175.48, with extra compensation allowed for extraordinary services),

• Oregon (Or. Rev. Stat. § 130.635, with extra compensation allowed for extraordinary services),

• Pennsylvania (20 Pa. Cons. Stat. § 7768),

• Rhode Island (18 R.I. Gen. Laws § 18-6-1),

• South Carolina (S.C. Code Ann. § 62-7-708, subject to statutory ceiling of 5%),

• South Dakota (with factors to consider; S.D. Codified Laws § 55-3-14),

• Tennessee (Tenn. Code Ann. § 35-15-708),

• Texas (Tex. Prop. Code Ann. § 114.061, with extra compensation allowed for extraordinary services),

• Utah (Utah Code Ann. § 75-7-708),

• Vermont (with factors to consider;

Vt. Stat. Ann. tit. 14A, § 708),

• Virginia (Va. Code Ann. § 64.2-761),

• Washington (Wash. Rev. Code § 11.98.070(26)),

• West Virginia (W. Va. Code § 44D7-708, with extra compensation allowed for extraordinary services), and

• Wyoming (Wyo. Stat. Ann. § 4-10-708, with extra compensation allowed for extraordinary services).

The following states have adopted statutory testamentary trustee fees:

• Georgia (Ga. Code Ann. § 53-12-210),

• New Jersey (N.J. Stat. Ann. § 3B:1823 et seq.), and

• New York (N.Y. Surr. Ct. Proc. Act Law § 2309).

The following states have no statutes that address reasonable compensation for testamentary trustee fees:

• Colorado,

• Connecticut (but see Hayward v.

Plant, 98 Conn. 374 (1923), setting forth factors to consider for reasonable compensation), and • Kentucky.

Differing Factor Analysis Between States

The Restatement (Third) of Trusts enumerates the following nine factors for determining trustee compensation: local custom, trustee’s skill and expertise, time devoted to the trustee’s duties, amount and character of trust property, degree of difficulty, level and type of responsibility, risk assumed, nature and cost of the services, and quality of such party’s performance.

Maine has a specific statute that uses only six factors for aiding the court in assessing reasonable compensation for trustees: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the service properly; (2) the likelihood, if apparent to the trustee, that the acceptance of the particular employment will preclude the person employed from other employment; (3) the fee customarily charged in the locality for similar services; (4) the amounts involved and the results obtained; (5) the time limitations imposed by the trustee or by the circumstances; and (6) the experience, reputation, and ability of the person performing the services. See Me. Stat. tit. 18-B, § 708, Connecticut, in Hayward v. Plant, used nine factors that its courts should weigh to determine what constitutes reasonable compensation, which are different from those provided for in the Restatement: (1) the size of the estate; (2) the responsibilities involved; (3) the character of the work required; (4) the special problems and difficulties met in doing the work; (5) the results achieved; (6) the knowledge, skill, and judgment required of and used by the executors; (7) the manner and promptitude with which the estate has been settled; (8) the time and service required; and (9) any other circumstances that may appear in the case and are relevant and material to this determination.

Only six states provide statutory fee schedules for trustees, including New York and New Jersey, both of which limit statutory fees to individual trustees and allow corporate fiduciaries reasonable compensation. In New York, the court can decline statutory commissions where the trustee has engaged in fraud, gross neglect of duty, intentional harm to the trust, sheer indifference to the rights of others, or disloyalty. In re Lasdon, 105 A.D.3d 499, 500 (N.Y. App. Div. 2013); In re Pavlyak, 139 A.D.3d 1338, 1340 (N.Y. App. Div. 2016); Matter of JP Morgan Chase Bank, N.A., 133 A.D.3d 1292 (N.Y. App. Div. 2015); see Kim v. Solomon, 132 A.D.3d 463 (N.Y. App. Div. 2015).

Delaware uses Sections 3560 and 3561 of Title 12 of the Delaware Code to analyze reasonable compensation for trustees. Section 3560(a) allows the court to fix or allow greater or lesser compensation allowed under the instrument (i) where the duties of the trustee are substantially different from those contemplated when the trust was created, (ii) where the compensation in accordance with the terms of the trust would be unreasonably low or high, or (iii) in extraordinary circumstances calling for equitable relief. See Amended Petition, In re Trust Created Under the Will of Harold S. Schutt, 2018 WL 3619890 (Del. Ch. July 24, 2018).

Florida courts, in contrast, consider the totality of the trust or estate administration and draw from the precedent set by the 1958 Florida Supreme Court ruling of West Coast Hospital Association v. Florida National Bank, 100 So. 2d 807 (Fla. 1958), which proscribes a more expansive set of criteria than the Restatement, with 11 criteria to be consider in determining reasonable trustee fees: (1) the amount of capital and income received and distributed by the trustee; (2) the wages or salary customarily granted agents or servants for performing similar work; (3) the success or failure of the administration of the trust; (4) any unusual skill or expertise that the trustee may have provided; (5) the fidelity or lack thereof displayed by the trustee; (6) the amount of risk and responsibility assumed; (7) the time commitment required; (8) the custom in the community as to allowances to trustees by settlors or courts and as to charges exacted by trust companies and banks; (9) the character of the work done in the course of administration, whether routine or involving skill and judgment; (10) any estimate that the trustee has given of the value of their own services; and (11) payments made by the cestuis to the trustee and intended to be applied toward compensation.

An analysis of each factor can weigh in favor of or against the trustee’s compensation petition or the trustee’s request for extraordinary compensation. These factors are not all-inclusive, however, and courts throughout the United States currently consider other facts and circumstances in determining the amount of compensation due to a trustee. In making its decision, whatever elements of proof are acceptable to a court in awarding trustee compensation, it is fundamental that the compensation be supported by evidence, be it testimony, documentation, or both. See Hood v. Marvin & Kay Lichtman Found., 832 So. 2d 941 (Fla. 3d DCA 2002). Testimony from fiduciary experts can prove critical in supporting a trustee’s application for fees, as discussed further infra. As it stands, Florida, Missouri, Montana, Nevada, New Hampshire, Oklahoma, Oregon, Texas, West Virginia, and Wyoming currently permit additional allowances for extraordinary services. The following factors set forth in West Coast should be considered by courts across the country, especially in situations involving complex estates or where a trustee applies for additional allowances for extraordinary services.

Capital and Income Received and Distributed

In trust or estates comprising complex, unique assets, such as real estate, art, and closely held business interests, additional compensation may be contemplated as closely held businesses and unique assets require time, consideration, appraisals, third-party experts, and constant attention by the trustee to preserve value for the benefit of the beneficiaries. An analysis of the amount of income generated for the income beneficiary, and depending upon the amount of capital appreciation for the remainder beneficiaries, the court can adjust trustee compensation upward or downward based on this factor. In Robert Rauschenberg Foundation v. Grutman, 198 So. 3d 685 (Fla. Dist. Ct. App. 2016), the trial court awarded $24,600,000 in trustee fees based, in part, on the trustee’s increase of the original value of the estate by a factor of 3.5.

Wages or Salary Customarily Granted to Agents Performing Similar Work

If the trust or estate comprises assets such as real estate or closely held businesses, analysis of median base salaries of managers of these assets or companies may be needed to establish a baseline. For example, reports by the Economic Research Institute or CompAnalyst could serve to establish reasonable compensation for the trustee’s management and services associated with the unique asset or closely held business. The court also should consider the feasibility and availability of a corporate fiduciary willing to handle a complex trusts or estate similar to that before the court.

The Success or Failure of the Administration of the Trust

The trustee’s experience, knowledge, and planning can make or break the administration of the estate or trust, especially if there exist unprecedented or uncertain economic circumstances at the time. The trustee’s adaptability and flexibility to ever-changing market and economic conditions can have a substantial effect on the profitably and efficiency of the administration. Typically, the success of the administration can be best demonstrated by the increase in value of the gross estate as a percentage, or the amount of distributions made to the beneficiaries after taxes. The court should consider favorable or unfavorable market conditions as a contributing element of this factor.

Unusual Skill and Expertise Provided by the Trustee

If a trustee possesses special skills, those special skills must be used for the benefit of the trust and the beneficiaries. In conjunction with the success of the administration, this factor also may weigh in favor of the granting of extraordinary compensation in favor of the petitioning trustee when special skills are used, resulting in significant capital appreciation in trust assets. In Rauschenberg, the trial court found that the selection of the trustees was an extraordinary choice; each had intimate knowledge of Rauschenberg’s art, his business; they had experience with estates of other artists all over the art world; and they assisted Rauschenberg with his investments and tax and estate planning, as well as acquisition and disposition of property.

Fidelity Displayed by the Trustee

The trustee’s compliance with the duty of loyalty and adherence to principles of impartiality can weigh in favor of substantial or extraordinary compensation. In situations where structuring or refinancing of trust assets is needed, the trustee’s use of neutral third-party agents or experts can provide valuable insight into the decision-making process. Additionally, in situations where the trustee is forced to navigate the troubled waters of defending the trust from litigation, this also can support the grant of extraordinary compensation depending on the result. In sum, trustees who are loyal to the settlor’s vision and maintain a focus on maximizing the beneficiary’s interests will be compensated accordingly.

The Amount of Risk and Responsibility Assumed by the Trustee

Trustees assume a matrix of potential risks in undertaking appointments. First among these risks is the operational risks unique to each of the trust’s unique assets. These operational risks, from an asset and liability perspective, can be compounded by unprecedented or uncertain economic circumstances. Potential audits and tax liability are also an ever-present concern for trustees managing large estates or trusts. In some situations, corporate fiduciaries are unwilling to accept an appointment of complex estates or trusts comprising unique assets because of enormous responsibility and risk, even in light of trusts containing exculpation clauses. In these circumstances, personal trustees should be compensated commensurate with the risk they shoulder, especially when a trustee’s reputation is on the line.

The Time Commitment Required of the Trustee

Serving as trustee is a time-consuming and incredibly detail-oriented endeavor. A trustee must be committed to devoting the time necessary to administer the trust or estate. In the same vein, the time for administration may need to be assessed as reasonable under the unique circumstances of the estate or trust. Corporate fiduciaries typically do not provide personal trust services for estate administration on a billable-hour basis. Corporate fiduciaries do charge hourly fees for special services beyond the base compensation published in their fee schedules. A trustee’s time expenditures consulting with trust counsel and other advisors or third-party experts or appraisers in developing a plan of administration and determining distribution schedules, as well as taking into account tax considerations, can prove beneficial in supporting a trustee’s petition for compensation. The trustee’s responsiveness to the beneficiaries’ inquiries and efforts to keep them reasonably informed regarding the administration of the trust or estate throughout the administration is also a component the court should consider. Once again, time spent by the trustee defending litigation also should be evaluated as part of the court’s inquiry into this factor. In analyzing this factor, the court typically reviews the length of the administration period and whether the nature of the trust or estate allowed for a quick turnover or required studied planning.

The Custom in the Community for Charges Exacted by Trust Companies and Banks

In analyzing a personal trustee’s compensation, the court should consider the custom in the community for corporate trustee compensation. Corporate fiduciary fee schedules typically break down trustee compensation into two categories: base compensation and additional compensation for special services. Each corporate trustee uses different variables and factors in calculating trustee compensation. In determining reasonable trustee compensation, a corporate trustee can calculate the base fee from the gross value of the decedent’s estate at time of death in compliance with the IRC. Usually, this is a one-time fee amortized over the term of the administration. Each institution reserves the right to charge additional fees if the term of administration lasts longer than two years. With regard to unique assets such as closely held businesses and real estate, corporate fiduciaries typically appoint a fiduciary officer to the corporate governance structure of the operating businesses or to manage the unique assets and are entitled to additional fees for managing such unique assets. The circumstances of each trust or estate and the composition of each trust or estate’s assets must be considered by the court in analyzing this factor. In Rauschenberg, the court did not afford substantial weight to this factor, finding that it would result in unreasonably high fees, especially those for extraordinary services.

The Character of the Work Done in the Course of the Administration

Each trust or estate has its own unique circumstances and composition of assets. Unique operating business, real estate, art, and other assets typically require specific market knowledge and operational experience to achieve a successful administration for the benefit of the beneficiaries. If seeking extraordinary compensation, a trustee must be involved with each of the trust’s unique assets from a top-down basis, including the overall supervision of the management of the closely held businesses (e.g., debt restructuring; tax planning; hiring, supervision, and management of employees, key personnel, contractors, and vendors; maintaining insurance coverage and handling claims; and payroll), and maintain a handson approach with regard to real estate (appraisals, listings, leasing, repair, etc.). A trustee possessing specific expertise in a particular asset class along with intimate knowledge of the settlor’s business and operational structure could likely weigh in favor of substantial compensation, whereas if the trustee needed to engage outside experts to aid in the administration, that could weigh against substantial compensation.

Trustee’s Estimate of the Value of Their Services

A personal trustee’s generation of a significant appreciation in value of the trust assets, timely resolution of creditor claims, and protection of the trust from protracted litigation should be considered in analyzing this factor. The court also should consider the personal trustee’s request for compensation as compared to what a corporate trustee would typically charge for like services or for dealing with the challenges inherent to the complexity of the assets.

Payments Made by the Cestuis to the Trustee and Intended to Be Applied Toward Compensation

What compensation (if any) the trustee has already received can play a part in a reduction of the compensation sought by the trustee, especially if overpayments were made or reimbursements or advancements were made.

Additional Considerations

There are several other considerations the court should take into account— namely, what should be considered to be reasonable compensation when there are multiple trustees involved and also how the determination is made regarding the allocation of a trustee’s fees from principal versus income. Several key factors are taken into account when determining how fees will be divided among multiple trustees, including whether or not the overall fee should be taken from the principal or income of the trust; whether certain beneficiaries should pay more than others; and whether specific language in the trust controls or Florida Statutes §§ 738.701 and 738.702 should govern.

The Rauschenberg Precedent

In Rauschenberg, the trustees of the iconic and prolific artist’s estate petitioned for between $51 million and $55 million in fees based on West Coast and the extraordinary increase in asset value the trustees generated. The Foundation asserted that the trustees were entitled to only $375,000 based on the lodestar method. See Fla. Patient’s Comp. Fund v. Rowe, 472 So. 2d 1145 (Fla. 1985), modified, Standard Guar. Ins. Co. v. Quanstrom, 555 So. 2d 828 (Fla. 1990). Quoting Bogert’s Trusts & Trustees § 976, and after analyzing the legislative history of Florida Statutes § 746.0708, the Second District Court of Appeal upheld the trial court’s calculation of the trustee’s fees based on West Coast, finding the trial court “properly applied the West Coast factors” supported by expert testimony and evidence presented at trial. Charles W. Ranson, fiduciary expert for the trustee, testified that the trustees were an extraordinary selection by Rauschenberg, that the trustees shouldered enormous responsibility and no bank or trust company would have been willing to handle the estate, and that had a bank or trust company accepted the case, its fees would have been significant. The trial court ultimately ordered that the trustees were entitled to $24,600,000 in trustee fees based on the West Coast factors and that the trustees were able to increase the value of the assets by 3.5 times the original value of the estate, especially considering the complex nature of the trust and its assets.

Conclusion

The current landscape of rapidly evolving technology presents unique challenges to trustees administering complex estates comprising digitized assets and novel asset classes. For this reason, a uniform framework of factors for evaluating the efforts and skill of trustees is necessary. In determining reasonable compensation or extraordinary compensation to which a trustee is entitled, the court is best aided with expert opinion and analysis. For large, complex estates involving hard-to-value assets, trustees should be prudent in selecting a situs that allows for extra compensation for extraordinary services such that trustees who are successful in increasing value for the beneficiaries are permitted by the court to be compensated accordingly. Although caselaw and statutes do not currently afford weight to one factor over another, the success of the administration and the trustee’s percentage increase to the gross value of the assets of the estate could serve as one of the more reliable metrics for awarding extraordinary compensation.

An individual trustee’s use of any special skills and expertise in the administration and management of trust assets should be analyzed and compared to the cost and feasibility of corporate fiduciary services. Moreover, as our society continues to become more litigious, a trustee’s demonstration of loyalty and fidelity in the presence of sensitive or adversarial family dynamics also should be considered. In other words, a trustee who is able to mitigate and manage the risks and responsibilities assumed in the administration of the trust yet also devote the time required to successfully administer the trust are factors that may weigh heavily in support of extraordinary compensation.

In some cases, the court should consider how a personal trustee’s plan of administration would have differed from that of a corporate fiduciary. For example, corporate fiduciaries typically attempt to close estates, liquidate assets, and distribute cash to beneficiaries as soon as practicably possible. But this rapid plan of administration does not always create maximum value. A trustee with special skills in real estate or art, for example, may be able to create additional value by restructuring the assets, creating a plan of sale or marketing of the assets over time, or planning an exhibition during particular times of year in specified locations with the aid of local or national experts. According to some corporate fiduciary fee schedule disclosures, a corporate fiduciary’s role as trustee or agent for the trustee is to collect, organize, and distribute the assets, and not to implement an active investment strategy to increase income or the value of trust assets over any time period. In some cases, corporate fiduciaries choose not to accept certain trust administrations because of the unique nature of the assets or inherent risks associated with closely held operating businesses. Moreover, the trustee’s character of the work done in the course of the administration may be unique and specialized, and this factor should weigh in favor of the trustee’s petition for compensation if the trustee possessed the requisite skill and experience to administer the trust for the benefit of the beneficiaries. Ultimately, a trustee who is successful in using his or her special skills and is able to maximize the value of unique assets should be compensated accordingly.