A trust is a legal arrangement that allows a third party, or trustee, to hold assets on behalf of beneficiaries. There are a number of types of trusts (see below), but the most common is a "living trust", so named because it is established while the original owner is still alive, often years before the owner actually passes away.
The primary advantage of such a trust, from the perspective of an executor, is that it does not need to go through probate. However, most trusts should still be included in the gross estate for tax valuation purposes.
Common Types of Trusts
There are 3 common types of trusts that you are most likely to encounter (see Investopedia for other types):
- Simple Living Trust — A simple living trust is designed simply to enable the assets it contains to avoid probate. If you are dealing with such a trust, all you have to do is distribute the assets as described above, with no worries about external creditors, probate, and the like. Of course, while this is indeed simpler than the alternative, you must still keep careful records, and it will still likely take several months. EstateExec is well-suited for handling most such trusts.
- Bypass Living Trust — An AB trust is more complicated than a simple living trust, and is designed to shelter substantial assets from estate and inheritance taxes. While EstateExec may be helpful in tracking such bypass trusts, you will definitely also wish to engage a lawyer to deal with the complex tax ramifications.
- Testamentary Trust — A testamentary trust is one that the will creates upon death, after the assets pass through the normal probate process. Testamentary trusts are usually established by the will to care for a minor child or a disabled relative, and often persist for some time. Such a trust may be managed by EstateExec, but it may make more sense for the long haul to use something like Quicken® or even a professional asset manager.
Trustees & Executors
The document that establishes the trust also establishes a trustee, whose role is similar to the standard executor's role addressed throughout much of this guide. Just like an executor for an estate, a trustee for a trust is responsible for managing and distributing the assets, in this case in accordance with the terms of the trust.
The executor for the estate generally has no official control over a trust, per se, but it's common for the same person to be the trustee for the trust, and executor for the entire estate.
If you are the executor of an estate whose decedent created a revocable trust, you should list the trust as an asset in the estate, since its value should be included in estate tax calculations. If the trust is irrevocable, then it's probably best not to list it, since irrevocable trusts are not subject to probate, not included in estate tax calculations, and the executor (in that role) has no control over the trust.
If you are the trustee of an estate, you may wish to create an EstateExec "estate" to manage the details of trust administration, so you can generate accounting reports specifically for the trust, deal with the trust beneficiaries exclusively, and so forth.
Even if you are both the executor for the estate and the trustee for the trust, you MUST NOT commingle funds between them. This doesn't mean that you can't track things together, but it does mean that you can't pay estate expenses with trust funds, or deposit estate cash into the trust account. While you could track everything from a single EstateExec account, it may make more sense to simply create one EstateExec estate for the trust, and one for the general estate (assuming you are handling both).
Similarities to Estates
Just like the executor of a will, a trustee must inventory the current state of assets held within the trust, and in some manner distribute those assets to the heirs. This may mean liquidating some of the assets to make the proceeds easier to partition, or to pay debts incurred by the trust, and it may mean coordinating with the heirs to understand who would prefer which assets, trying to make everything work out equitably and in accordance with the terms of the trust. Trust asset cost basis is handled similarly to that of estate assets, with most assets benefitting from a step-up in basis. Finally, trusts, like estates, must make annual income tax filings if income exceeds a small threshold.
Differences from Estates
Trusts generally do not have to go through probate, so you can skip much of the interaction with the judicial system, and some trusts are shielded from creditors so you don't have to worry about notifying and paying the decedent's creditors. However, other types of trusts have additional legal obligations, for example, officially notifying the beneficiaries that you have assumed control of the trust.
Compensation of trustees is often similar to that of executors (see Executor Compensation), but there can be significant differences. For example, trustees are normally paid every year, while in most cases executors are paid once, at the end of the estate settlement (because trusts are expected to last for years, while estates are usually settled in 6-18 months).
In general, terms of a Trust may specify desired compensation for trustees (just as wills may specify desired compensation for executors), but these terms may be overridden by a judge, particularly if the duties of the trustee end up being substantially different from those contemplated when the trust was created, or if compensation in accordance with the terms of the trust would be inequitable or unreasonably low or high.
If compensation terms are not specified in the Trust documents, some states require specific approaches (see State-Specific Trustee Fee Rules below), but as general rules of thumb:
- Professional trustees commonly charge between 0.3% to 1.5% annually of the trust net value, although this can vary depending on the nature and complexity of the trust.
- Generally, the larger the value, the smaller the percentage.
- Non-professionals often charge on the lower end of the scale, sometimes very little, particularly if not much work is required.
- Professional trustees often charge extra for investment management services.
- If there are multiple trustees, the fee is usually split between them, according to their individual services rendered.
- Alternately, trustees sometimes charge an hourly rate.
- Trustees may charge extra for "extraordinary" services, such as selling a piece of real estate.
Many states require only that compensation be "reasonable". Factors commonly considered in determining the reasonability of a fee include:
- Responsibilities and risks involved
- Nature of the work involved (time, effort, difficulty, skills required)
- Amount and character of the assets
- Quality of results
- Nature and costs of services delegated to others
- Any time limitations
- Compensation customarily charged (in the community for similar services)
State-specific rules (note that there are often important additional nuances and details found in the associated regulatory link):
|AK||Reasonable compensation under the circumstances||Alabama Code § 19-3B-708|
|AL||Reasonable compensation under the circumstances||Alaska Statutes § 13-36-055|
|AR||Reasonable compensation under the circumstances||Arkansas Revised Statutes § 28-73-708|
|AZ||Reasonable compensation for fiduciary services||Arizona Revised Statutes § 14-9114|
|CA||Reasonable compensation under the circumstance||California Probate Code § 15681|
|CO||Reasonable compensation||Colorado Revised Statutes § 15-5-708|
|CT||Reasonable compensation under the circumstances||Connecticut General Statutes 45a-499yy|
|DE||Reasonable compensation||Delaware Code § 3561|
|FL||Reasonable compensation under the circumstances||Florida Statutes § 736.0708|
|GA||As agreed with beneficiaries or court, or sliding percentage scale of asset value, or published reasonable fees for a corporate trustee||Georgia Code § 53-12-210|
|GU||Reasonable under the circumstances||Guam Code Title 15 § 3313|
|HI||Published reasonable fees for a corporate trustee; for individuals 5% of trust income plus a codified sliding percentage scale of asset value, as well as startup and termination fees||Hawaii Revised Statutes § 607-18|
|ID||Same as an estate executor (i.e., reasonable)||Idaho Statutes § 68-103|
|IL||Reasonable under the circumstances||Illinois Compiled Statutes § 760 ILCS 3/708|
|IN||Reasonable compensation for acting as trustee||Indiana Code § 30-4-5-16|
|IA||Reasonable under the circumstances||Iowa Code § 633A.4109|
|KS||Reasonable under the circumstances||Kansas Statutes § 58a-708|
|KY||Reasonable under the circumstances||Kentucky Statutes § 386B.7-080|
|LA||Reasonable for services||Louisiana Revised Statutes § 2181|
|MA||Reasonable under the circumstances||Massachusetts General Laws Chapter 7 § 708|
|MD||Defined sliding percentage scales of asset value and income, or published reasonable fees for a corporate trustee||Maryland Code § 14.5-708|
|ME||Reasonable under the circumstances||Maine Revised Statutes § 708|
|MH||Nothing unless specified by terms of trust, agreed by beneficiaries, or ordered by the court||50 MIRC Ch.1 § 119|
|MI||Reasonable under the circumstances||Michigan Laws § 700.7708|
|MN||Reasonable under the circumstances||Minnesota Statutes § 501C.0707|
|MO||Reasonable under the circumstances||Missouri Laws § 456.7-708|
|MS||Reasonable under the circumstances||Mississippi Code § 91-8-708|
|MT||Reasonable under the circumstances||Montana Code Annotated§ 72-38-708|
|NE||Reasonable under the circumstances||Nebraska Revised Statute § 30-3864|
|NC||Reasonable under the circumstances, listing specific factors similar to above section||North Carolina General Statutes § 32-54|
|ND||Reasonable under the circumstances||North Dakota Code § 59-15-08|
|NH||Reasonable under the circumstances||NH Rev Stat § 564-B:7-708|
|NJ||6% commissions on income, a sliding percentage scale of corpus received, and 0.2% of the value of the corpus; also a percentage termination fee depending on trust duration||New Jersey Statutes 3B § 18|
|NM||Reasonable under the circumstances||New Mexico Statutes § 46A-7-708|
|NV||Just and reasonable for services||Nevada Revised Statutes § 153.070|
|NY||Just and reasonable, including 1% of all money paid out, and a sliding percentage scale of principal||New York Consolidated Laws § 2309|
|OH||Reasonable under the circumstances||Ohio Revised Code § 456.7-708|
|OK||Reasonable for services rendered and responsibilities assumed||Oklahoma Statutes § 60-175.48|
|OR||Reasonable under the circumstances||Oregon Revised Statutes § 130.635(1)|
|PA||Reasonable under the circumstances, with some consideration factors explicitly allowed, such as trust size and income||Pennsylvania Consolidated Statutes Title 20 § 7768|
|PR||Court sets compensation considering nature of trust, trust value, and relevance of trustee's duties||Laws of Puerto Rico Title 32 § 7768|
|RI||Reasonable for services rendered||Rhode Island General Laws § 18-6-1|
|SC||Reasonable under the circumstances||South Carolina Code of Laws § 62-7-708|
|SD||Reasonable for the performance of duties, but no more than specified (if specified)||South Dakota Codified Laws § 55-3-14|
|TN||Reasonable under the circumstances, unless settlor if living, or otherwise a majority of beneficiaries, agree otherwise||Tennessee Code § 35-15-708|
|TX||Reasonable compensation||Texas Property Code § 114.061|
|UT||Reasonable under the circumstances||Utah Code § 75-7-708|
|VT||Reasonable under the circumstances||Vermont Statutes Title 14A § 708|
|WA||Reasonable compensation considering all circumstances including the time, effort, skill, and responsibility involved||Revised Code of Washington § 11.98.070(26)|
|WI||Reasonable under the circumstances||Wisconsin Statutes Property § 701.0708|
|WV||Reasonable under the circumstances||West Virginia Code § 44D-7-708|
|WY||Reasonable under the circumstances, with additional compensation possible if all beneficiaries agree||Wyoming Statutes § 4-10-708|