Yes, both trustees and executors are entitled to be compensated for the services they provide in administering a trust or estate. In California, the law provides specific guidance on compensation, and both state and federal tax authorities treat that compensation as taxable income.
Trustee compensation is governed by California Probate Code §15681, which states that a trustee is entitled to “reasonable compensation under the circumstances.”
Unlike executor fees, which follow a statutory schedule, trustee fees are not fixed by law unless the trust document includes a specific fee arrangement. If the trust is silent, then the fee must be reasonable. What qualifies as reasonable depends on several factors, including the size of the trust estate, the complexity of the assets, the level of responsibility involved, the time and expertise required and local standards for compensation. For example, a professional trustee handling a $2 million trust might charge between 0.75 and 1.5 percent annually, which would equate to a fee of $15,000 to $30,000 per year. Individual trustees – such as family members – often charge less or may choose to waive compensation entirely, especially if they are also beneficiaries of the trust. However, in more complex trusts involving rental properties, businesses or difficult family dynamics, a fee may be appropriate even for a family member.
Trustees may also be entitled to additional compensation for extraordinary duties not normally associated with routine trust administration. These duties could include managing a closely held business, resolving tax issues, dealing with litigation or overseeing the sale of complex real estate. While there is no statutory cap on trustee fees, beneficiaries have the right to object if they believe the compensation is excessive, and courts have the authority to reduce unreasonable fees.
Executor compensation is addressed in California Probate Code §10800. The statute provides a formula based on the gross value of the probate estate. Executors are entitled to 4 percent of the first $100,000, 3 percent of the next $100,000 and 2 percent of the next $800,000, with additional percentages for larger estates. For instance, if an executor handles an estate worth $1 million, the statutory fee would be $23,000. Like trustees, executors may also receive additional compensation under Probate Code §10801 for extraordinary services, subject to court approval.
Both trustee and executor compensation is considered taxable income. Under Internal Revenue Code §61(a), this type of income is categorized as ordinary income and must be reported on the individual’s federal tax return. In most cases, the estate or trust will issue a Form 1099-MISC to the fiduciary. California conforms to federal tax treatment, so this income must also be reported on the state income tax return. If the individual acts in a fiduciary capacity as part of a business – such as a professional fiduciary – the compensation may also be subject to self-employment tax under IRC §1402(a).
In conclusion, while trustees and executors are legally entitled to reasonable compensation for their work, they should be aware that this compensation is fully taxable. Detailed recordkeeping and consultation with a CPA or estate attorney are highly recommended.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues. This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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