Decisions about trustee compensation are very important when it comes to creating your estate plan. Unfortunately, there are often competing interests at play when a trustee is also a beneficiary under the terms of your trust. It is therefore very important that you consider carefully both the advantages and the disadvantages of authorizing a trustee fee under the terms of your trust if that trustee also happens to be one of your beneficiaries. The fees paid to a Trustee-Beneficiary have many implications for the trust and the relationships and understanding of beneficiaries.
Paying Trustee Fees to a Trustee-Beneficiary
Following is an overview of the pros and the cons of including a trustee compensation provision in your trust when that trustee is also a beneficiary:
- Trustee fees are subject to income tax. Inheritances, however, are not. Therefore, if you compensate the beneficiary through a trustee fee, they will owe tax on that compensation.
- At least a portion of the trustee’s fee will be deducted from the share of the trust that the trustee will receive as a beneficiary. The net effect is that the trustee is essentially paying his fee to himself out of his share of the trust assets. That portion is then subject to a tax, as outlined above.
- On the other hand, it may be beneficial for larger estates to utilize trustee fees because the costs are deductible for estate purposes. They are considered an expense of administration. Estate tax rates are typically higher than income tax rates, meaning it may make more sense from a tax standpoint to give the trustee a higher fee. However, the other beneficiaries of the trust may be unhappy with this arrangement unless the tax savings is somehow set up so that it benefits them as well.
As you create your estate plan, it is often the less obvious details that can make or break the success of your plan. To stay up to date on the latest tips and news about creating a living trust in Orange County, we encourage you to sign up for our free newsletter today!