To pay or not to pay or how to pay

To what extent should your fiduciary get paid? Well, it depends on who is serving and the extent of their responsibility. There are basically three fiduciary positions that typical estate planning papers create. They are: (1) agent, (2) personal representative, and (3) trustee.

An “agent” under a power of attorney has the responsibility to act in the best interest of the principal (the one who created the power of attorney). A “personal representative” under a Last Will is nominated in the Will and appointed by the court after proper application is made with supporting documentation. They have the duty to properly administer the estate and comply with all the statutory requirements that govern personal representatives. A “trustee” under a Trust has the duty to act in accordance with the terms of the trust. All of these roles carry with them a tremendous amount of responsibility. Fiduciaries have the duty to act with the utmost of integrity.

Now, should they get paid? In most cases, where we name family members we direct: (1) they are to be reimbursed for expenses, (2) they are not paid, and (3) they are encouraged to hire a lawyer for assistance.

What does this do? It assures a professional will be involved to assist with the myriad responsibilities. In short, a professional can provide the professional objective perspective a grieving family will need. The biggest thing it does, however, is make it so they will not be subject to income tax on the pay they get. In other words, if you want to compensate a fiduciary such as a trustee, it is worth considering that they get a specific bequest as opposed to pay. Why? There is no income tax on a gift made by will or trust.

If an institution (a bank or trust department) is to serve as a trustee, then care should be taken to assure that the beneficiaries have the ability to change the trustee. You may want to have a big institution such as Vanguard or Fidelity to serve as trustee. In these cases, they will require payment for their services. Furthermore, if you do not provide your beneficiaries with the ability to change the trustee (perhaps, to another big institution) then you run the risk of giving the trustee too much power. Accordingly, if an institution serves as trustee, it is wise to direct the beneficiaries can change the trustee under certain circumstances. To illustrate, imagine the proverbial dog with a bone.

Dogs do not like to let go of their bone. Trustees, if they are being paid a hefty fee, do not like to be stripped of their position. So, if an institution is the trustee of a trust for the benefit of your child or children and your family has no ability to remove them from office, then the institution may have too much power. This could be detrimental to your family. There are no simple one size fits all answers to these questions, but the above should provide some insight.

Contributed by:

Mark F. Winn, J.D., Master of Laws, LL.M. in Estate Planning, is a local tax, asset protection and estate planning attorney.