Estate Planning 101

Understanding Trustee Fees in Montana

Understanding Trustee fees is a critical factor in setting up and operating a Trust in Montana. 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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Within the landscape of estate planning, trustee fees stand as a significant element, especially in Montana. Whether a trustee is a corporate entity, a professional, or an individual, understanding the financial implications can greatly impact the overall management of a trust. Trustee fees in Montana can vary based on the type and complexity of the trust, the responsibilities involved, and the agreement established between the grantor and the trustee. This blog post aims to offer an in-depth overview of trustee fees in Montana, enabling you to navigate this crucial aspect of estate planning more effectively.

Professional and Non-Professional Trustees: A Comparative Look

In Montana, trustees are generally categorized into two main types: Professional and Non-Professional trustees. The differences between these types significantly influence the structure of trustee fees.

Professional trustees are usually corporate entities or individuals with a specialized background in law, finance, or estate planning. They bring their professional skills and experience to the forefront, ensuring that the trust is managed efficiently and in compliance with legal requirements. Due to their expertise and the time commitment involved, professional trustees typically charge a fee based on a percentage of the trust's assets or a flat rate for their services.

Non-Professional trustees, on the other hand, are often family members or close friends chosen by the grantor. While they may not possess professional expertise, they are typically chosen for their close relationship with the grantor and the beneficiaries. Non-professional trustees are typically compensated for their time and effort, but the fee structure is more flexible. They may receive an hourly wage, a flat fee, or even a small percentage of the trust's assets, depending on the agreement with the grantor.

How are Trustees Paid?

Trustee fees in Montana can be structured in several ways, depending on the type of trustee, the complexity of the trust, and the specific agreement established during the creation of the trust.

Professional trustees often charge a flat fee or a percentage of the trust's assets. Flat fees provide a set amount that the trustee charges for their services, regardless of the time spent or the complexity of the trust. Alternatively, a percentage-based fee is more common for larger or more complex trusts, with the percentage typically ranging from 0.5% to 2% of the trust's assets per year. This fee structure aligns the trustee's compensation with the performance of the trust, encouraging the careful management of the trust's assets.

Non-professional trustees, such as family members or close friends, typically have a more flexible fee structure. They could be paid an hourly rate for their time, a flat fee for their service, or a small percentage of the trust's assets. The specific arrangement is usually determined by the grantor when creating the trust.

The type of trust also plays a role in trustee compensation. For example, a simple family trust may require less time and expertise to manage, therefore incurring lower fees. In contrast, a complex trust with various assets and tax implications may demand higher fees due to the increased responsibility and skills required.

Trustee Fees in Montana

Trustee fees in Montana are typically determined based on the "reasonable fee" standard as there are no 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 generally charge a flat fee or a percentage of the trust assets. The percentage typically ranges from 0.5% to 2% annually, but the actual rates can vary. Some firms might charge at the higher end of the spectrum, particularly for complex trusts. Conversely, for simpler trusts or smaller estates, professional trustees might charge a flat fee that could range anywhere from $1,500 to $3,000 per year.

Non-professional trustees' fees are more flexible. If the trustee is a family member or a close friend, they may forgo a fee altogether. If they do choose to take a fee, it could be an hourly rate, which might range from $20 to $75 per hour, a flat fee, or a small percentage of the trust's assets. All trustee fees are subject to the approval of the probate court, which reviews the fees to ensure they are reasonable and commensurate with the tasks performed by the trustee.

Trustee Fees by Type of Trust

The complexity and specific duties required of a trust can significantly impact the fee structure. Here, we'll delve into some common types of trusts and how trustee fees might vary among them.

  • Revocable Living Trusts: These trusts are quite common and typically less complex, as they primarily serve to avoid probate. For these trusts, a family member (non-professional trustee) may serve without compensation, but if a professional trustee is hired, the fee might range from a flat yearly fee of $1,500 to $3,000 or a modest percentage of the trust's assets.
  • Irrevocable Trusts: These trusts are typically more complex and may involve more time and expertise to manage, especially if they hold business interests or are designed for tax planning. The trustee fees for irrevocable trusts are typically a percentage of the trust assets, often between 0.5% and 2% annually, though the exact amount can vary depending on the specific intricacies of the trust.
  • Charitable Trusts: These trusts are established to benefit a charitable organization and may involve some unique responsibilities for the trustee. As such, the fees could be higher, typically a percentage of the trust assets, similar to irrevocable trusts.
  • Special Needs Trusts: These trusts are set up for a beneficiary who is physically or mentally disabled. Due to the specialized knowledge needed to manage these trusts and comply with government benefit rules, trustee fees can be higher and are usually a percentage of the trust's assets.

When are Trustees Paid?

The timing and method of trustee payment depend on the terms set out in the trust agreement and the nature of the work performed. Generally, trustee fees are paid out of the trust's assets.

For professional trustees charging a percentage of the trust's assets, the fees are usually paid annually. The annual fee is often divided and disbursed quarterly. For those charging a flat fee, payment terms will likely be specified in the agreement, but it's common for these fees to be paid annually as well.

Non-professional trustees who charge an hourly rate might invoice the trust for their time monthly, quarterly, or annually, depending on the time commitment and tasks performed.

In the case of the trustee handling the final distribution of assets and the closing of the trust, they may receive their final payment at the end of the process, once all other expenses and taxes have been paid.

Are Trustee Fees Taxable?

Yes, trustee fees are considered taxable income by the Internal Revenue Service (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, the process is slightly different. 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.

It's also important to note that the payment of trustee fees can reduce the taxable income of the trust itself, as they are typically considered an administrative expense.

Given the complexity of tax laws, it's always a good idea to consult with a tax professional or an estate planning attorney to ensure accurate reporting and compliance with all relevant tax regulations.