Estate Planning 101

Understanding Trustee Fees in Delaware

Understanding Trustee fees is a critical factor in setting up and operating a Trust in Delaware. In this article, we'll look at the typical fee ranges for different types of trusts, when trustees are paid, and whether trustee fees are considered taxable.
October 6, 2023

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Navigating the waters of estate planning can be complex, especially when it comes to understanding the nuances of trustee fees. In Delaware, the fees associated with being a trustee, whether you're a corporate entity, a professional, or an individual, can significantly impact the overall management of a trust. Trustee fees in Delaware can vary depending on the type and complexity of the trust, the responsibilities involved, and the agreement between the grantor and the trustee. This blog aims to shed light on the intricacies of trustee fees in Delaware, helping you better understand this critical aspect of estate planning.

Professional and Non-Professional Trustees: Understanding the Difference

In Delaware, trustees generally fall into two categories: Professional and Non-Professional trustees. The differences between these types play a significant role in determining the trustee fees.

Professional trustees are typically corporate entities or individuals with specialized expertise in law, finance, or estate planning. Given their professional skills and experience, they are often chosen to manage trusts. The fees for professional trustees are usually calculated as a percentage of the trust's assets or as a flat fee, depending on the complexity and size of the trust.

On the other hand, non-professional trustees are often chosen due to their close relationship with the grantor and the beneficiaries. Although they may not have the same level of expertise as professional trustees, they are typically compensated for their time and effort. The fee structure for non-professional trustees is more flexible, with the possibility of an hourly wage, a flat fee, or even a small percentage of the trust's assets, as per the agreement with the grantor.

How are Trustees Paid in Delaware?

The structure of trustee fees in Delaware can take various forms, depending on the type of trustee, the complexity of the trust, and the agreement set forth during the creation of the trust.

Professional trustees often charge a flat fee or a percentage of the trust's assets. Flat fees provide predictability but may be higher than an hourly rate if the trust is straightforward. Alternatively, a percentage-based fee is usually charged for larger, more complex trusts. The percentage typically ranges from 0.5% to 2% of the trust's assets per year, incentivizing the trustee to manage the trust carefully as their compensation is tied to the trust's performance.

Non-professional trustees, like family members or close friends, usually have a more flexible fee structure. They could be paid an hourly rate, a flat fee, or a small percentage of the trust's assets. The specific arrangement is usually agreed upon by the grantor when creating the trust.

The type of trust also plays a role in determining the trustee compensation. Some trusts may require less time and expertise to manage, therefore incurring lower fees. Conversely, a complex trust with various assets and tax implications may demand higher fees due to the increased responsibility and skills required.

Trustee Fees in Delaware

Trustee fees in Delaware are usually determined based on a "reasonable fee" standard, rather than strict statutory guidelines. This standard is subjective and takes into account factors such as the complexity of the trust, the responsibilities involved, the expertise required, and the time commitment.

Professional trustees typically charge a flat fee or a percentage of the trust assets, ranging from 0.5% to 2% annually. However, the actual rates can vary depending on the trust's specifics and the firm involved.

Non-professional trustees, particularly if they are family members or close friends, may choose not to take a fee. If they do, it could be an hourly rate, which might range from $25 to $100 per hour, a flat fee, or a small percentage of the trust's assets. Each arrangement is subject to the approval of the probate court, which reviews the fees to ensure they are reasonable and commensurate with the trustee's duties.

Trustee Fees by Type of Trust

The complexity and specific duties of a trust can greatly influence the associated trustee fees. Let's explore how trustee fees might vary among some common types of trusts.

  • Revocable Living Trusts: These are common and relatively straightforward trusts, primarily aimed at avoiding probate. For these trusts, a family member (non-professional trustee) may serve without compensation. If a professional trustee is chosen, they typically charge a flat yearly fee or a modest percentage of the trust's assets.
  • Irrevocable Trusts: These trusts are often more complex and require more time and expertise to manage. The trustee fees for irrevocable trusts are typically a percentage of the trust assets, though the exact amount can vary depending on the intricacies of the trust.
  • Charitable Trusts: Established for the benefit of a charitable organization, these trusts may come with unique responsibilities for the trustee, resulting in higher fees usually calculated as a percentage of the trust assets.
  • Special Needs Trusts: These trusts are set up for a beneficiary who is physically or mentally disabled. The specialized management required for these trusts often results in higher trustee fees, usually a percentage of the trust's assets.

When are Trustees Paid?

The timing and frequency of trustee payment are usually dictated by the terms set out in the trust agreement. Generally, trustee fees are paid out of the trust's assets.

Professional trustees usually receive their fees annually, often divided and disbursed quarterly. Non-professional trustees who charge an hourly rate might invoice the trust monthly, quarterly, or annually, depending on the time commitment and tasks performed.

When the trustee is responsible for the final distribution of assets and the closing of the trust, they typically receive their final payment once all other expenses and taxes have been paid.

Are Trustee Fees Taxable?

Yes, trustee fees are considered taxable income by the IRS. This applies to both professional and non-professional trustees. Trustees must report the fees they receive as income on their personal tax returns. For professional trustees, these fees are generally reported as business income.

For non-professional trustees, if the trustee fee is the only income from self-employment, it might not be subject to self-employment tax. However, it should still be reported as income on their tax returns.

Trustee fees are generally considered an administrative expense, which can reduce the taxable income of the trust itself. Given the complexity of tax laws, it's always advisable to consult with a tax professional or an estate planning attorney to ensure accurate reporting and compliance with all pertinent tax regulations.