Calculating Trustee Compensation

I recently had a call with Vincent, a newly appointed trustee for his mother’s trust. He’d been meticulously handling the administration – paying bills, managing investments, navigating property sales – and was understandably frustrated when his siblings questioned the lack of any trustee fee. They saw “free labor” while Vincent saw months of unpaid work and increasing complexity. The argument escalated, resulting in legal threats and a fractured family. Ultimately, the cost of litigation far exceeded what a reasonable trustee fee would have been, and the trust assets diminished as a result.

What are the rules for paying a trustee in California?

As an estate planning attorney and CPA with over 35 years of experience here in Escondido, I can tell you that trustee compensation is a surprisingly common source of family conflict. Many people assume trustees are volunteers, or that any fee must be exorbitant. The truth is that California law allows trustees to be compensated for their services, but the rules are specific and require careful adherence. Trustees are entitled to reasonable compensation, as outlined in Probate Code § 15400. However, ‘reasonable’ isn’t simply what the trustee wants to charge; it’s determined by several factors.

How is “reasonable compensation” determined?

The first place to look is the trust document itself. Many well-drafted trusts will include a provision outlining how the trustee will be compensated – a fixed amount, an hourly rate, or a percentage of the trust’s assets. If the trust is silent, California law provides guidelines. We generally look at a combination of factors. First, the trustee’s time commitment—the more complex the trust administration, the more time it reasonably takes. Second, the trustee’s skill set; a trustee with a professional background (like accounting or law) may command a higher fee. And third, the size of the trust’s assets. A trustee managing a $1 million trust will typically receive less than a trustee managing a $10 million trust.

What is a “reasonable” percentage or hourly rate?

There’s no hard and fast rule, but generally, trustee fees fall within these ranges:

• Small Trusts (under $500,000): 1-3% of the trust’s value, or an hourly rate of $50-$150.
• Medium Trusts ($500,000 – $5 million): 1% of the trust’s value, or an hourly rate of $100-$250.
• Large Trusts (over $5 million): Less than 1%, often tiered, or an hourly rate of $200-$400+ depending on the complexity.

It’s important to remember that these are just guidelines. A trustee can’t simply charge a percentage and call it a day. The fee must be demonstrably reasonable in light of the services provided. For example, if a trustee performs a simple asset distribution on a small trust, a 3% fee would likely be deemed excessive.

How does my CPA background help with trustee compensation?

As a CPA, I bring a unique perspective to trustee compensation. Many attorneys primarily focus on the legal aspects, but overlook the tax implications. Properly documenting trustee fees as a legitimate expense is critical. If a trustee isn’t paid reasonably, the IRS could view the amounts as constructive distributions to the beneficiaries, creating unwanted tax liability. Furthermore, I can assist with establishing a clear basis for the fee, backing it up with detailed time records and supporting documentation. This documentation is essential when a beneficiary questions the fee, or during an audit. I also understand the importance of maximizing the step-up in basis for trust assets, properly valuing assets to minimize potential capital gains taxes upon distribution—a critical function often overlooked when solely focused on the hourly fee.

What if the trust assets include a business, like an LLC?

When a trust holds business interests, such as a limited liability company (LLC), the calculation becomes even more complex. While we’re navigating trustee fees, we also must stay up-to-date on the latest regulations regarding the entity itself. As of March 2025, domestic U.S. LLCs held in a living trust are exempt from mandatory BOI reporting thanks to the FinCEN 2025 Exemption; however, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days. The trustee’s compensation must account for any specialized knowledge required to manage the business, plus the additional administrative burden of compliance.

What happens if assets are accidentally left out of the trust?

It’s surprisingly common for a small asset – a bank account, a forgotten investment account – to be overlooked when funding a trust. For deaths on or after April 1, 2025, if a primary residence intended for the trust was accidentally left out (valued up to $750,000), it qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). This is a crucial point: we refer to this as a “Petition” (Judge’s Order), NOT an “Affidavit,” as many outdated guides still suggest. The trustee will need to handle the petition and related expenses, which must also be factored into their overall compensation.

What determines whether a California trust settlement remains private or erupts into public litigation?

California trusts are designed to bypass probate and maintain privacy, yet they often fail when assets are not properly funded, trustee duties are ignored, or ambiguous terms trigger disputes. Even with a signed trust document, families can face court battles if the “operations manual” of the trust isn’t followed strictly under the Probate Code.

Ultimately, the success of a trust depends on the details—proper funding, clear terms, and a trustee willing to follow the rules. By anticipating friction points and documenting every step of the administration, fiduciaries can protect the estate and themselves from liability.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a home (up to $750,000) is left out of the trust, this Petition avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.