Q: My question centers on costs that a trustee can pay from a trust. My parents died and appointed a cousin as the trustee of their estate. It is a sizeable estate, and my cousin is an experienced financial professional. We all felt he was a good fit for the job. When my cousin gave us the records for his work, we found that he paid money manager fees, accountants, lawyers and his own (substantial) trustee fees from the trust. I thought since he was so experienced, he would do at least some of the financial and accounting work himself so we would save on professional fees.
Also, the legal fees are huge because my sister was questioning everything he did so the lawyers dealt with her constantly. She is now threatening to sue him as trustee and we are wondering if those legal fees will be paid by the trust, as well. Or, if she sues him, will the legal costs be taken from her share? It doesn’t seem fair that if we do not participate in the lawsuit, we are all made to pay for it. Overall, my cousin seems to have done a good job, but I had no idea all the costs for his advisors would be charged to the trust and, ultimately, to all of us.
A: Generally speaking, costs for professional advisors are a usual administrative cost to a trust. However, a trustee is often selected to act as trustee because they have special skills that can make administration less expensive and smoother overall. Your cousin is, as you say, an experienced financial professional and, to the extent those skills are needed in the administration, he is required to use those skills.
For example, if your cousin is an investment professional, absent extenuating circumstances, he should not be paying a money manager’s fee to manage investments on top of his own trustee fee – he should be doing that himself. If this is the case, you could ask him to refund the money manager’s fees or reduce his own fees by the amount he paid to the money manager.
It is not uncommon that one or two beneficiaries cause more legal fees. Some beneficiaries question every action the trustee makes, and the attorneys need to be involved to either educate the beneficiaries or provide the information needed so those beneficiaries can feel more comfortable with the trust administration. On the other hand, it is important, indeed the trustee’s responsibility, to provide sufficient information to beneficiaries so the beneficiaries can protect their interests under a trust. The trustee should inform beneficiaries of actions they are taking like liquidating assets, incurring capital gains taxes, or obtaining a loan secured against trust assets, to name a few.
Finally, depending on how the trust is written, administration costs like legal defense, are charged against the trust and not to an individual beneficiary. If your sister brings a lawsuit against the trustee, all of you will, most likely, bear the cost of that defense. It could be that if the lawsuit is found to be frivolous, the court may order that the legal fees be charged against her share. You should discuss this with your attorney. Sometimes, when a trustee is charged with a serious issue like breach of fiduciary duties, they pay their own legal expenses and, if they prevail, ask the trust to reimburse them. On the other hand, if the trustee is found guilty of a breach of trust, they may be surcharged the expenses related to the suit and any other damages they may have caused to trust assets.
Liza Horvath has over 30 years of experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust Management Company. This is not intended to be legal or tax advice. If you have a question call (831) 646-5262 or email liza@montereytrust.com.
