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Monday, March 10, 2014

Calculating Trustee Commissions in NJ

From time to time, people ask me how executor's commissions and trustee's commissions should be calculated.  I have already written a post on calculating executor and administrator commissions, so this post will focus on Trustee commissions.

New Jersey statutes on trustee commissions are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not.  Additionally, there are different rules for testamentary trusts (trusts created under a Will) and intervivos trusts (a trust created while the Grantor was alive).  Going forward, if a particular rule applies to everyone, I will call that person a fiduciary.

To start, the Grantor of a Trust can specifically provide for a trustee commission.  However, for testamentary trusts, if the commission is higher than the amount allowed under the New Jersey statutes, the Will must specifically state that the testator is aware of the commissions allowed under the New Jersey statutes and expressly authorize payment in excess thereof.  N.J.S.A. 3B: 18-31.

Failure to expressly authorize a commission in excess of the NJ statutory limit or failure to state whether or not a trustee is even entitled to commission will result in the trustee being able to take a fee as provided in New Jersey Statutes 3B:18-23 through 3B:18-29.  These statutes also apply to Guardians and Conservators.

So how is the trustee's fee actually calculated?

Unlike an executor who typically takes a one time fee, Trustees are more likely to take annual commissions, especially if the trust goes on for a long time.

The fee is comprised of both an income commission and a corpus commission.  A trustee is entitled to annual income commissions of 6% without prior court approval. N.J.S.A. 3B: 18-24.

The corpus commission is a bit more complicated to calculate:. Normally an executor will take a one time commission as follows:
  1. 0.5% on the first $400,000 of all corpus received by the executor; plus
  2. 0.3% on the excess over $400,000.  (N.J.S.A. 3B: 18-25)
If there is more than one trustee, an additional 1/5 of all the commissions allowed above is authorized, provided that no one trustee shall be entitled to any greater commission than that which would be allowed if there were but one trustee involved.   (N.J.S.A. 3B:18-25.1)

A trustee is entitled to a minimum fee of at least $100 per year and corporate trustees may set their own rates.  

Upon the termination of a trust, the trustee is entitled to a termination fee in addition to the annual fees he or she may have taken.  3B:18-28.  The termination commission is as follows:
  1. If the distribution of corpus occurs within 5 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually taken by the fiduciary, plus an amount equal to 2% of the value of the corpus distributed
  2. If distribution of the corpus occurs between 5 and 10 years of the date when the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1 1/2 % of the value of the corpus distributed;
  3. If the distribution of corpus occurs more than 10 years after the date the corpus is received by the fiduciary, an amount equal to the annual commissions on corpus authorized pursuant to N.J.S. 3B:18-25, but not actually received by the fiduciary, plus an amount equal to 1% of the value of the corpus distributed; and
  4.  If there are two or more fiduciaries, their corpus commissions shall be the same as for a single fiduciary plus an additional amount of one-fifth of the commissions for each additional fiduciary.
An illustration of how to calculate the annual trustee commission

Let's presume the following facts:  Trust owns a house worth $500,000, a $1,400,000 in stocks and bonds, and $100,000 worth of cash. This is the value at the end of the previous year.

Let's also presume that there is only one trustee and in the year in question the stocks and bonds gave off $56,000 of income. 

Accordingly, the calculation would be as follows:

0.5% on the first $400,000 would be $2,000
0.3% on the next $1,600,000 would be $4,800
6% on the $56,000 of income would be $3,360
So the trustee would be entitled to a total commission of $10,160 for the previous year.

Final thoughts about trustee's commissions

Any commission that a trustee takes will be subject to an income tax.  As a result, if the trustee is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at a trustee if he or she takes a commission. You should think about the dynamics of your family before taking one.

A trustee that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  A trustee needs to prepare an annual accounting, and one that fails to adequately communicate with the beneficiary or otherwise behaves badly can be removed by the court.  If a trustee is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as a trustee may be entitled to a fee for legal services AND a commission.

5 comments:

Jonathon A. said...

Hi there! glad to drop by your page and found these very interesting and informative stuff. Thanks for sharing, keep it up! Bankruptcy Lawyer

Anonymous said...

The example shows 3.5% on the amount over $400,000, but the calculation is actually 0.3%. Your number - $4,800 - is correct but the 3.5% is wrong.

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 11/29/14,

Thanks - I fixed it.

What's Ethical and Moral? said...

If a trust is passed on to two beneficiaries, is it accurate to say the original trust "terminates" and two new trusts are created VERSUS the original trust is split into two trusts. The bank (an executor of my mother's will" wants to charge a termination fee equal to $38,000....seems a bit high to me!

Would LOVE your feedback!

Kevin A. Pollock, J.D., LL.M. said...

Dear Ethical and Moral post of 5/5/16,

A termination fee is typical. There is a lot of work involved including getting everybody to sign off on an accounting, getting the new trusts set up, and dividing the assets. Whether or not $38,000 is a lot depends upon how much is in the trust.