North Carolina courts have provided that a “fiduciary relation” exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence. Furthermore, North Carolina courts provide that a fiduciary duty can arise by operation of law or based on the facts and circumstances. In the case of estate planning and estate administration, we are speaking of clearly defined fiduciary roles which arise as an operation of law. The primary examples are agent and principal under a power of attorney, personal representative and heir or devisee of an estate, and trustee/s and beneficiary/ies of a trust. Over the course of a three-part blog series, I will discuss these three relationships and how the principal, testator and settlor can approach compensating their fiduciaries.
As a general matter, N.C.G.S. § 32-54 provides some factors which should be considered in determining the reasonableness of compensation for all three of these fiduciary roles, to wit:
- The degree of difficulty and novelty of the tasks required of the trustee.
- The responsibilities and risks involved.
- The amount and character of the trust assets.
- The skill, experience, expertise, and facilities of the trustee.
(5) The quality of the trustee’s performance.
(6) Comparable charges for similar services.
(7) Time devoted to administering the trust.
(8) Time constraints imposed upon the trustee in administering the trust.
(9) Nature and costs of services delegated to others by the trustee.
(10) Where more than one trustee is serving, the reasonableness of the total fees paid to all
trustees.
Testamentary or Living Trusts: Trustee Compensation
Duties of a trustee under a trust can, in some cases, be the most intensive and long lasting of any of the fiduciary duties discussed in this blog series. Trustees have a fiduciary relationship with the beneficiaries of the trust. When a child is acting as a trustee for a parent’s trust, compensation may or may not be desired. In other cases, such as a professional acting as a trustee or a corporate trustee, it may be clearly appropriate or part of an agreed upon arrangement. Of importance, I always inform my clients that naming an individual as a fiduciary in their estate planning documents does not typically create a legal obligation for the nominated fiduciary to serve. Although you may have discussed it with the nominated person, circumstances change. Considering and ensuring adequate compensation in your estate planning can provide an incentive for the person you have nominated in your documents to serve especially in cases where they are not entitled to inherit from your estate.
A trust instrument can certainly specify a compensation scheme for a trustee. However, the same issues which are present with compensation schemes in powers of attorney are present with trusts. The trust or instrument which will create the trust is often created well in advance of when a particular trustee seeking compensation will be serving. In many cases, the owners of the trust assets are the initial trustees, so compensation is moot. Predicting a reasonable compensation scheme for the future successor trustees is a challenging task. Conversely, omitting a method for determining compensation locks the trustee into the requirements of Chapter 32 Article 6 of the North Carolina General Statutes. In short, the statute allows two cases where a trustee can be compensated without court order. First, when the annual amount of compensation does not exceed four-tenths of one percent (4/10 of 1%) of the principal value of the assets of the trust on the last day of the trust accounting year court approval is not required. Second, if the trustee gives notice to the beneficiaries which allows them 20 days to file a proceeding for review of the reasonableness of the compensation with the clerk of superior court in accordance with Article 2 of Chapter 36C of the General Statute.
As mentioned in Part 1 regarding agents under a power of attorney, an alternative method which can be used is to have the trust provide a particular person to determine the compensation and, therefore, opt out of the statutory framework provided above. For example, reasonable compensation to be “determined by a licensed North Carolina attorney in good standing” or a particular named attorney or firm. This method is often recommended because it adds flexibility for future economic and legal trends regarding reasonableness of compensation, bypasses the issues with predicting future uncertainty, and also avoids court intervention and challenges by disgruntled beneficiaries. That said, trustees are often tasked with growing and investing the trust so specifying a percentage or performance-based compensation schedule may be appropriate for trusts which are sure to have significant assets. For smaller trusts, a flat fee minimum or percentage-based hybrid scheme may be appropriate. In the case of corporate trustees, the corporate trustee will typically have a compensation schedule which must be accepted for their service as trustee.
Conclusion
In summary, along with the many other considerations to discuss with your estate planning attorney, compensation of your fiduciaries is of critical importance. There is no right or wrong approach, and your estate planning attorney can help you determine the approach the makes the most sense given your circumstances.
To start your estate planning, call our offices.