A successor trustee steps in and assumes control and management of a revocable living trust under two circumstances: The grantor—the individual who formed the trust—has either died or has become incapacitated to the point where they can no longer manage their assets on their own.
The job might be somewhat finite in the first scenario. They'll disburse the trust's assets to its beneficiaries and close it. But it can be an ongoing, open-ended job if the grantor is incapacitated.
The successor trustee is entitled to be paid for the services they provide on behalf of the trust, but how much and when can depend on this distinction and many other factors. Some general guidelines can shed light on how much compensation is suitable.
Did the Grantor Address Fees in the Trust Agreement?
Check the provisions of the revocable living trust if you're being asked to eventually serve as someone's successor trustee. Determine whether the grantor has made any mention of estate trustee fees.
Some grantors choose to limit the fees to a specific dollar amount, while others opt for allowing the payment of reasonable fees based on services rendered and applicable state law. Still others leave their successor trustee a specific bequest instead of a fee. This provides an income tax benefit for the successor trustee because bequests aren't taxable, but fees are taxed as ordinary income.
What Does State Law Provide For?
Applicable state law will take over if the revocable living trust is silent regarding fees, or if it provides for the payment of "reasonable" fees. Who's to say what's reasonable? The state's laws should provide guidance.
A court might have to consider how complex the trust will be to administer or settle, whether the grantor's estate is likely subject to an estate tax, and whether the validity of the trust or the choice of successor trustee is likely to be challenged by trust beneficiaries. All these factors could result in more compensation under state law.
Is There More Than One Successor Trustee?
State law will also dictate fees paid to each successor trustee if the grantor has named co-trustees to serve jointly, particularly if the revocable living trust is silent as to how much each individual is to be paid.
The laws in some states require that multiple fiduciaries divide the fee equally between them, while each fiduciary can collect the full fee that one fiduciary would be entitled in other jurisdictions.
Is the Successor Trustee an Institution?
Some grantors name banks or investment firms to step in as their successor trustees, and this can further complicate the matter.
Find out if the revocable living trust specifies that an institutional fiduciary is entitled to receive compensation in accordance with its published fee schedule. These fee schedules are similar to the state laws that calculate an executor's or personal representative's fee as a percentage of the value of the gross estate.
State law will dictate the institution's fee if the revocable living trust is silent on this issue.
Is the Successor Trustee Also the Attorney for the Trust?
Some revocable living trusts appoint both a successor trustee and an attorney...or they'll appoint the same individual to both roles.
Check to find out if the trust addresses the fees that are to be paid to an attorney who's also acting as the successor trustee. Sometimes the grantor and the attorney will enter into a written agreement as to what compensation the attorney will be entitled to receive in this case.
Again, state law will dictate whether the attorney can collect fees as both the successor trustee and as the attorney for the trust if the revocable living trust is silent on this issue.
What Has the Successor Trustee Paid Out of Pocket?
The successor trustee is entitled to be reimbursed for any expenses they've paid out of their own pocket, in addition to being paid for their services. These might include expenses that had to be paid before the successor trustee could take over the trust assets, such as doctor and funeral bills, utilities, property taxes, insurance, and storage fees.
When Will the Successor Trustee Receive Payment?
Out of pocket expenses and reasonable trustee fees are typically paid periodically throughout the course of the trust administration.
When the Court Has the Final Word
State law only gets involved when there's some issue with or ambiguity about the trust's formation documents and what they say about the successor trustee's compensation. In either case, beneficiaries of a trust can challenge the fees by filing a lawsuit if they believe that the successor trustee's fees are unreasonable.