Taxation & Estate Planning

Some thoughts on, what is reasonable compensation?

By Joel A. Schoenmeyer

One of the questions asked most often of me is this: "I am acting as executor (or administrator or trustee), and want to take compensation. How much compensation is appropriate?"

For the most part, the law isn't helpful on this point. Most Wills and trusts talk about "reasonable compensation," language echoed in the Probate Act:

Sec. 27?1. Fees of representative. A representative is entitled to reasonable compensation for his services....

and the Trusts and Trustees Act:

Sec. 7. Compensation. The trustee... shall be entitled to reasonable compensation for services rendered.

Not particularly helpful -- the caselaw isn't either, really. So what is reasonable compensation? Here are some of my thoughts on the issue:

1. Reasonable compensation is whatever the beneficiaries are willing to agree to. If all the beneficiaries agree in writing that your fee is OK, isn't that per se reasonable?

2. Of course, compensation is often sought in contested cases. One thing I hear from fiduciaries: "I wasn't planning to pay myself, but my parent/siblings have been so annoying and I've put in so much work that I want to get paid!" In these cases, some persuasion may be necessary.

3. I tell fiduciaries to keep records of what they do, just like attorneys should. Be able to tell the beneficiaries what you did, and how long it took you. Presentation and detail are important -- people are more willing to consent to a $10,000 bill if you point out, in detail, what you did, and the benefit to the estate or trust.

4. The tricky part is taking the above time (let's call it 200 hours), and determining an amount from it. What's your hourly rate? I can see two approaches:

a. Set a fairly minimal hourly rate ($25 or $50), on the grounds that that's what it would take to hire someone to do fiduciary tasks.

b. Just use the rough hourly rate for your regular career. If you are an accountant and make $75 per hour, charge that. If you are a surgeon who makes $700 per hour, charge that. Of course, the higher the rate, the better chance that the beneficiaries are going to take you to court to protest. And I seriously doubt that any judge is going to allow you to take a fee based on $700 per hour.

5. One thing I run into occasionally is attorneys trying to charge their hourly attorney rate to do fiduciary tasks. I object to these attempts almost as a matter of course. It's almost an incapacity/undue influence argument. No one (or, at least, very few people) in their right mind would agree to pay someone $300 or $400 per hour to perform administrative tasks like preparing an accounting, or collecting assets. And, if the attorney/fiduciary also prepared the Will or trust that names him or her as fiduciary, then I have questions about whether the decedent understood what was happening. To me, there's little difference between leaving the drafting attorney $50,000 as a bequest (a big no-no) and leaving the drafting attorney with the ability to charge $50,000 to the estate or trust in fees. Absent signed, informed consent from the client, this seems like an abuse.

6. Some states determine compensation based on the value of an estate. To me, these things have little relation. The lives of the poor can be very complicated; the lives of the rich may not be.

Full post as published by Death and Taxes Blog on March 28, 2008 (boomark / email).