TRUSTEE FEES -Stop, Look and Listen

When consulting with clients who are in the mist of preparing, or reviewing, their estate planning documentation, they may ask your opinion as to benefits of the use of trusts and what considerations they should give in the selection of a Successor Trustee. They may ask your opinion as to whether you recommend that the trustee be an individual, a trust company or a bank trust department.

If your client is considering appointing a trust company or bank trust department, we suggest that you recommend that your client review carefully the proposed fee structure of the proposed trust company, or bank trust department, for any surprising, questionable or inappropriate charges.

Historically the fees charged by corporate trustees have been rather stable and fairly consistent, institution to institution. A percentage of assets managed was charged on an annual basis, with hourly or fixed fees charged for special services like preparing an estate tax return, selling real estate or operating an existing business.

Fees In Lieu of Probate

Today, there are two fees charged by many corporate trustees that need to be examined and discussed. The first is called "a fee in lieu of probate." This is a fee that comes into play if you have a funded revocable living trust with the husband and wife as the initial co-trustees and a corporate trustee as the successor after the husband and wife die.

Typically, in this situation, there is no probate since title to all of the assets was transferred into the living trust at the time of creation or shortly thereafter. If there is a probate and the corporate trustee is named as a personal representative, the corporate trustee is clearly entitled to a fee for undertaking the fiduciary responsibility over the probate process. That fee could be two percent of the assets in the probate estate.

On the other hand, if there is no probate and the assets are already in the trust, how does a corporate trustee justify charging a percentage "fee in lieu of probate"? The rationalization provided by several corporate trustees is that the fee is for marshalling the assets and payment for services in connection with the death of the surviving settler. Currently, the typical fee being charged for what appears to be phantom service is one half to two thirds of the fee charged if a probate did take place and the corporate institution was named as the personal representative. In view of this seemingly disproportionate charge, it is fortunate that not all institutional trustees are charging a "fee in lieu of probate."

It is no secret that one of the major reasons why living trusts are created by families is to avoid probate and probate fees. It is revealing and quite amazing that some corporate trustees are quietly demanding this probate fee even when there is no probate. Describing this fee as gross overreaching would be a serious understatement. It might be more accurate to conclude that George Orwell would be proud of the technique.

Termination Fee

The second fee that many corporate trustees are now charging is referred to in the fee schedule as a "termination fee." This fee is being charged when, for whatever reason, the trust is terminated. It could occur if the beneficiaries decide to change the corporate trustee from one institution to another. Or it could occur if the trust terminates after the designated purposes are fulfilled.

The fee for termination varies from one half of one percent to one percent of the assets in the trust. Is there a rational basis for a percentage termination fee? In our opinion, there is not.

In a recent discussion with a local bank representative, the representative was willing to compromise and reduce the fee to one half of one percent from a full one percent. That so-called compromise resulted in a proposed termination fee of $27,000!

Let's assume that all of the assets are being invested in the bank's inside pooled funds. How much time does it take to liquidate the trust's position and distribute the cash to the beneficiaries? The corporate trustee is entitled to and should be compensated on an hourly basis for whatever time it takes to make the distributions. A windfall to the corporate trustee, on the other hand, does not seem to be deserved.

Trustee Fee Disclosure

Perhaps the most disturbing aspect of the "fee in lieu of probate" and "termination fee" charges is the lack of disclosure by some of the corporate trustee institutions. While a number of corporate trustees have sufficient detail in their fee schedules to put customers on notice, many do not.

At least three corporate trustees surveyed did not have any detail in their promotional material on fees. The balance have fee schedules in their promotional material, but some institutions use small print or ambiguous language to obscure the nature of the fee or, in at least one case, simply omit reference to the termination fee on the basis that it is a well-known and accepted practice in the industry.

One highly respected corporate trustee does not use the phrase "a fee in lieu of probate" but rather states that when it "serves as personal representative of a decedent's estate, or when it serves as trustee following a grantor's death," whether it "succeeded on the death or was already trustee, a death administration fee of one percent of the value of the decedent's assets is charged." In this instance, even when the corporate trustee is already serving and collecting percentage fees before the grantor dies, an extra one percent fee is charged when the grantor meets his or her maker.

Stop, Look and Listen

In light of the information we have learned over the past two years, before recommending a specific corporate trustee or corporate trustees as a class, we recommend suggesting to your client that each institution's fee schedule needs to be read carefully. If a "fee in lieu of probate" or a "termination fee" is included and it is based on percentage of the assets in the trust, either try another institution or negotiate those fees out of the relationship. If there is no reference to either or both of the two fees, ask if these fees will be asserted in the future. If the answer is in the negative, confirm the institution's representations in writing.

Short of following the above due diligence, the beneficiaries of our clients' trusts may be shell-shocked at a later date by unjustified fees, such as these, and our clients will probably ask their new advisors why we, their prior advisors, did not properly inform them of "fees in lieu of probate" and "termination fees" when recommendations were made of a particular corporate trustee.

David R. Frazer is a co-founder and senior partner in the law firm of Frazer, Ryan, Goldberg & Hunter, L.L.P. in Phoenix. His areas of specialization include estate and corporate tax planning, exempt organizations, income tax litigation and estate administration.

James W. Ryan is a co-founder and the managing partner in the law firm of Frazer, Ryan, Goldberg & Hunter, L.L.P. His areas of specialization include estate and corporate tax planning, transactional business matters, estate administration and estate controversy resolution. Both attorneys are Certified Specialists.