I received an email from a client last week asking about a family situation in another state.  A sister has been acting as executor and trustee of an estate.  The siblings were trying to resolve what the sister could and should be paid for her services to the rest of the family.  I realized that my answer might be of interest to you.

Here in Massachusetts, people who act as fiduciaries, like executors or trustees, are entitled to a “reasonable” fee for their services.  The question then becomes the definition of “reasonable”.  It varies based upon the size of the estate, type of assets, issues involved, actual time necessary, skills used, and results accomplised.  It’s usually an hourly rate for the services actually performed.  For a lay-person, that is generally $25-75/hour.

If the fiduciary is someone who normally bills their time at an hourly rate, then they can bill at that hourly rate, assuming they can show the lost income from acting as fiduciary.  So, if you were a bookkeeper and normally bill for your services at the rate of $125/hour and performed your duties as fiduciary during the work-week, you could bill the estate at $125/hour.  The idea is that since acting as fiduciary prevented you from working for your clients, you should be reimbursed at the same rate a client would have paid.

We recommend our clients keep a notebook to record the time they spend and what they do during that time.  Spontaneous time-keeping records help later if an heir contests the fee charged.  Creating the records later from memory are never sufficient, and are suspect in and of themselves.  How could anyone know that the records weren’t fabricated to support the fee requested?

Professional or corporate fiduciaries, like banks and trust companies, generally have rate schedules that bill an estate based upon a percentage of the estate value.  These percentages range from .5% to 3 or 4%, depending upon the size of the estate involved.  Two percent is average for estates less than $500,000; the larger the estate, the smaller the percentage.  That percentage is intended to cover all time spent by the corporate fiduciary.  It may request reimbursement for out of pocket expenses, like filing fees, but may not also charge for time spent by its in house attorneys.

That said, while 2% might be an average fee, or at least in the ballpark of reasonable, if a fiduciary had to perform a lot more work than one might expect for an estate, he/she shouldn’t be limited to that percentage.  Thus, the hourly rate for time actually spent.  For example, I served as administrator of an estate where the family was constantly fighting one another, making endless allegations, and could never agree upon anything.  We were in court numerous times for petty things that could not be resolved through agreement.  In that case, my fee for my time, at my usually hourly rate (not $25-75/hour), ended up at something like 25% of the total estate value and was approved by the court.  (All this could have been avoided with an up to date estate plan, utilizing a trust, but that’s another blog entry for another day.)

Ultimately, it all comes down to what the heirs will approve.  If the fiduciary wants to charge 5% and all the heirs agree, then 5% it is.  You really only need to worry about the rate or percentage if there’s a disagreement with one or more heirs, and the fiduciary must defend the fee in court.   Regardless, when a fiduciary takes a fee from an estate, there should be a 1099 generated, and the fee reported as income on the fiduciary’s income tax return.  It almost never happens, and I doubt the IRS is in a position to track down such small potatoes, but the fiduciary should at a minimum report the fee as income.

So, the next time you’re asked to serve as executor or trustee, or you’re naming someone to serve, keep in mind that they can ask for a fee for their services.  This can sometimes offset the emotional burden, what I call the put-upon-ness one sibling feels when serving to the benefit of other siblings.  It can also make you feel a little less burdening when asking a friend or trusted associate to serve.

Tags: Fiduciary Fees

This entry was posted on Monday, October 26th, 2009 at 10:55 am and is filed under Probate Administration. Follow comments to this entry through the RSS 2.0 feed. Leave a comment, or trackback from your own site.