Estate Planning 101

Understanding Trustee Fees in Virginia

Understanding Trustee fees is a critical factor in setting up and operating a Trust in Virginia. 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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In the sphere of estate planning, understanding the nuances of various elements can make a significant difference. Trustee fees in Virginia stand as an important component that can greatly influence the overall structure of a trust. Whether the trustee is a corporate entity, a professional, or an individual, there are certain financial aspects that need careful attention. Trustee fees can vary greatly, depending on the type and complexity of the trust, the duties entailed, and the agreement between the grantor and the trustee. This blog post aims to throw light on the world of trustee fees in Virginia, providing you with the necessary knowledge to navigate this critical part of estate planning.

Professional vs. Non-Professional Trustees and Their Fees

Trustees in Virginia can be categorized into two broad types: Professional and Non-Professional trustees. Understanding these types is crucial as it can significantly influence the trustee fees.

Professional trustees, often corporate entities or individuals with a background in law, finance, or estate planning, provide their expert services to manage trusts. They usually charge a fee based on a percentage of the trust's assets or a flat rate for their services, depending on the complexity and size of the trust.

Non-professional trustees, often family members or close friends of the grantor, might not possess the same level of professional expertise. However, they're often chosen due to their close relationship with the grantor and beneficiaries. Non-professional trustees are typically compensated for their time and effort, but the fee structure is usually more flexible. They may receive an hourly wage, a flat fee, or a small percentage of the trust's assets, as per the agreement with the grantor.

How are Trustees Paid?

Trustee fees in Virginia can be structured in various ways, depending on the type of trustee, the complexity of the trust, and the specific agreement made during the creation of the trust.

Professional trustees often charge a flat fee or a percentage of the trust's assets. Flat fees are a set amount that the trustee charges for their services, regardless of the time spent or the complexity of the trust. Alternatively, trustee fees can be based on a percentage of the trust's assets. The percentage typically ranges 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.

Non-professional trustees usually 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 decided upon by the grantor during the creation of the trust.

The type of trust also plays a role in trustee compensation. 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 Virginia

Trustee fees in Virginia are not governed by statutory guidelines but are based on a "reasonable fee" standard. This standard is subjective and takes into account factors such as the complexity of the trust, the level of responsibility, the expertise required, and the time commitment involved.

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

Non-professional trustees, 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. These 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 of a trust can significantly affect the trustee fees. Here, we'll explore how trustee fees might vary among different types of trusts.

  • Revocable Living Trusts: These are common and relatively simple trusts, primarily serving to avoid probate. For these trusts, a family member (non-professional trustee) may serve without compensation. If a professional trustee is chosen, the fee might range from a flat yearly fee to a modest percentage of the trust's assets.
  • Irrevocable Trusts: These trusts are typically more complex and require more expertise to manage. The trustee fees for irrevocable trusts are usually a percentage of the trust assets, though the exact amount can vary depending on the intricacies of the trust.
  • Charitable Trusts: These trusts are established to benefit a charitable organization and may involve unique responsibilities for the trustee. As such, the fees could be higher, typically a percentage of the trust assets.
  • Special Needs Trusts: These trusts are set up for a beneficiary who is physically or mentally disabled. Due to the specialized knowledge required to manage these trusts, trustee fees can be higher, generally a percentage of the trust's assets.

When are Trustees Paid?

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

Professional trustees charging a percentage of the trust's assets usually receive their fees annually, often divided and disbursed quarterly. Those charging a flat fee may have different payment terms, typically specified in the agreement.

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

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, the IRS considers trustee fees as taxable income. 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 worth noting that the payment of trustee fees can reduce the taxable income of the trust itself, as they are considered an administrative expense.

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 relevant tax regulations.