What is Reasonable Compensation?
That's the million dollar question. Really, it's just compensation that is appropriate for services performed under the circumstances. This article addresses what it means for compensation to be "reasonable" in the context of someone acting as a trustee or an agent under a power of attorney--these roles are collectively referred to as the "fiduciary".
A. Who determines if my compensation is reasonable?
Initially, it's really up to the fiduciary to come up with a calculation for compensation. Then, the proposed compensation will be reviewed by either a principal, beneficiary, or interested person to determine if they agree with the proposed compensation.
If they disagree with the proposed compensation, then a petition may be filed with the court to determine the reasonableness of the compensation. This usually depends on a cost-benefit analysis by the principal or beneficiary based on the cost and potential recovery to him or her personally (i.e., the proportional harm to a beneficiary's share may be much less significant to a beneficiary receiving 1% than a beneficiary receiving 99%).
In California, a probate judge is ultimately responsible for reviewing and determining whether the proposed compensation is reasonable, and if it deems that it is not reasonable, it the judge would determine what is reasonable.
B. How do I know if a court would agree with my calculation of compensation?
You don't. The goal is to determine an amount that you believe is justifiable based on various factors, and to document the services performed and the benefits of those services.
This is simply another reason to retain legal counsel because an experienced attorney will be able to provide you with more insight and understanding about how compensation works with a fiduciary role and the best ways to go about handling compensation.
C. What factors does a court consider to determine if my compensation is reasonable?
In essence, the court considers all of the relevant circumstances in determining whether compensation paid to a fiduciary is reasonable. California Rules of Court, Rule 7.776, sets forth various factors to assess the compensation of a trustee, which include (A) the gross income of the estate, (B) the successor failure of the trustee's administration, (C) any unusual skill, expertise, or experience brought to the trustee's work, (D) the fidelity or disloyalty shown by the trustee, (E) the amount of risk and responsibility assumed by the trustee, (F) the time spent in the performance of the trustee's duties, (G) the custom in the community where the court is located based on compensation authorized by settlors, allowed by the court, or corporate fee schedules for matters of a similar size and complexity, and (H) whether the work performed was routine or required more than ordinary skill or judgment.
This is not an exhaustive list, which means that if there are unique or other circumstances, the court may consider that when assessing the reasonableness of compensation. This is basically how the courts would assess the compensation of an agent--the court is looking at what happened and whether it makes sense for someone to be compensated for the work performed in the manner proposed. The more complex of an administration that you have, the more likely that a higher compensation would be found reasonable.
For example, if you have an administration involving a single bank account, there is much less time and risk involved than if you were managing an estate with ten business entities, five rental properties, foreign bank accounts, and other assets.
The probate judges get it. They understand that not every administration is funded equally, and they're not here to penalize people for trying their best at gauging a calculation of compensation, but they stand ready to penalize fiduciaries who act in a wanton disregard of the interests of the principal or beneficiaries.
Thus, this is but one of many reasons why a fiduciary would want the advice and counsel of an experienced attorney because an experienced attorney can assist you in determining what reasonable compensation would be under the circumstances, and can assist you in documenting and justifying that basis for the principal, beneficiaries, or ultimately the court.
It's difficult to travel back in time and justify compensation from months or years prior, but if you maintain a system for calculating and determining compensation, it makes it much easier to explain to a judge should there ever be litigation.
D. Can my compensation be hourly or percentage-based?
It really depends on the circumstances. Your compensation can be hourly, percentage-based, or a combination of the two.
An hourly fee structure requires an itemization of the services performed, the date the service was performed, the time expended on the service, and the hourly rate applied to the time expended. A benefit of this type of fee structure is that you document your actions and services performed--including the tracking the tracking of your time as that is maintenance of a trust record (a record of trustee services). A downside of this structure is that you may not capture all of the time you expended performing services.
A percentage fee structure requires that you use a percentage and multiply that by another figure (typically the value of the assets) to determine the compensation, and that the compensation is paid in some sort of frequency (typically annually). The percentage is typically 0.50% to 2.00%, and there is usually some mechanism for updating the asset values--usually the values of the assets are recalculated at the end of the compensation period (so the assets are revalued at the start of the next compensation period). A benefit to this type of fee structure is that it reduces the need to track each and every service performed. Two significant downsides to this type of fee structure are that there may not be a record of services performed unless you have kept track of the time expended for each service provided (in which case, why not use an hourly structure?), and the calculations can open the door for debate as to the calculation of asset values.
A combination of these structures may work in some cases, where ordinary services are charged at a percentage rate, while services deemed extraordinary are charged at an hourly rate. The benefit to this is that the time being tracked is for extraordinary services, and it would save time expended in tracking the time for ordinary services. The downside to this structure is that the question always arises: what is an extraordinary service? If you don't clarify this from the outset, it creates confusion and disputes down the line. Moreover, certain services may be ordinary, but in the context of the administration, it might turn into an extraordinary service.
Generally, we recommend that fiduciaries develop an hourly compensation structure only, which has staggered rates based upon the complexity of the services performed. This is often the easiest to deal with if there is ever litigation, and it provides the option for a simplified resolution to the court rather than a formal trial on the issues (assuming the other side agrees). It also substantially reduces disputes about services performed because the parties can review an itemization of services performed.
E. Is there a way to avoid disputes as to compensation?
Yes. There are two primary ways to minimize the likelihood of future disputes.
The first way is if the instrument itself dictates how the compensation is supposed to be calculated. If it does, then that's how the compensation should be calculated and it will avoid many disputes--this is often at the estate planning stage.
The second way, which is a more likely scenario, is to obtain an agreement with the principal or beneficiary. If you are an agent, then the principal should agree to the compensation structure you will receive. If you are a trustee, then the beneficiaries should all agree to your compensation. If the beneficiaries change in the future, then you should ensure that you obtain an updated agreement. This provides consistency and documents an understanding between the respective parties.
You may also be interested in:
- Can I Hire an Attorney as an Executor, Trustee, or Agent?
- Do I Get Paid to Serve as an Executor, Trustee, or Agent?
- How Much Does Probate Administration Cost?
- How Much Does Trust Administration Cost?
- What is a Probate?
- What is Probate Administration?
- What is Small Estate Administration?
- What is Trust Administration?
- Why Does Trust and Estate Administration Exist?
- Can I Recover My Attorney's Fees?
- Do I Have a Legal Claim?
- I'm a Trustee and I'm Concerned About Beneficiaries Suing Me.