In Texas, an Executor or Trustee is entitled to reasonable compensation unless the will or trust expressly provides that the executor or trustee is not to be paid or provides a method for determining compensation. However, there are different definitions of “reasonable compensation” for Executors and Trustees under Texas law.
Executors
The Texas Estates Code defines reasonable compensation for an Executor under a will as a commission of 5% on all sums that actually are received in cash by the Executor, and 5% on all sums the Executor pays out in cash. In calculating the 5% commission on all “sums received,” the cash received that is on deposit in a financial institution, life insurance proceeds, certificates of deposit and similar items are excluded. Similarly, the 5% commission on “sums paid out” does not include distributions to beneficiaries of the estate.
Trustees
The Texas Trust Code provides that a Trustee is entitled to “reasonable compensation” unless the trust expressly provides that the Trustee is not to be paid or provides a method for determining compensation. However, the statute does not provide guidance regarding what is considered “reasonable.” “Reasonable” can have all sorts of meanings, depending on the circumstances surrounding the trust and its assets, although typically it is taken to mean the amount that would normally be charged for like services by a corporate trustee in the area where the trust is administered. This can be anywhere from 1% to 1.5% of the market value of the assets on an annualized basis.
The following factors may be considered in determining the amount of compensation which is reasonable:
- The amount of time the trustee spent working on trust matters;
- The gross income of the trust;
- The appreciation in value of trust property
- The trustee’s unusual or special skills or experience (e.g. being an attorney or accountant)
- The trustee’s degree of fidelity or disloyalty to the trust;
- The amount of risk and responsibility the trustee assumed;
- The fees charged by other trustees in the local community for similar services;
- The character of the trustee’s work, that is, did it involve skill and judgment or was it merely routine or ministerial?
- The trustee’s own estimate of the value of the services.
The Trustee may then take this “reasonable” amount from the trust without court approval. If a beneficiary or co-trustee believes the fee is excessive, that person may seek judicial review. The court may deny compensation to a Trustee who commits a breach of trust.
Compensation is Taxable
Those persons serving as Executors or Trustees should note that any compensation actually received is income that is taxable to them. Accordingly, the person serving should consider consulting with their accountant to determine the resulting tax ramifications of accepting or declining such compensation.
