Special needs trusts can help provide extra benefits for someone receiving Supplemental Security Income (SSI), Medicaid or (in Arizona) AHCCCS or ALTCS services. Anyone planning to leave money for an individual on public benefits should consider a special needs trust. Keep in mind, though, that there will be trustee fees for any professional serving as trustee.
How much will trustee fees cost?
Family members or close family friends may be willing to serve as trustee without charging any fees. Special needs trusts can be challenging to interpret, though, and using a professional trustee is almost always a good idea. Sometimes there is no choice — courts, for instance, are often reluctant to appoint family members.
But how much will a professional charge to act as trustee of a special needs trust? Some charge on an hourly basis, and assign different individuals to separate tasks. The overall fees might be lower, but unpredictable.
Many professional trustees set a fixed fee based on the size of the trust. Typically the trustee fees are a percentage of trust assets — often in the range of .8% to 1.5% per year. Sometimes trustees set their fees as a percentage of the trust’s income instead. Many trustees reduce any percentage fee for larger trusts.
Many banks and trust companies publish their fee schedule in advance. You can either look up, or ask, the trustee what they would charge to manage a trust of a certain size. Once a corporate trustee sets a percentage trustee fee, it will usually cover all of the ordinary functions of trust management. That probably means no additional cost for accounting, tax preparation, payroll management and other items handled by the trustee.
A recent California case
Trustees of special needs trusts often (but not always) have to file an annual accounting with a local court. The judge overseeing the trust will review the expenditures, investments and fees, and either approve, modify or reject the trustee’s report.
A corporate trustee in California recently filed its seventh annual accounting with the San Diego county probate judge. Six previous accountings had been approved, mostly without question, but this time the judge raised his own concerns about the trustee fees.
The trustee, a major national financial institution, had long published a fee schedule for acting as trustee. The trust document, originally approved by the probate judge, even referred to that fee schedule. It said that any corporate trustee could charge “a reasonable fee based upon its published schedule for fiduciary fees for similar trusts.”
According to the fee schedule, the annual trustee fees were set at about .8% of the trust balance, collected in monthly payments. Because the trust held about $4 million, the annual fees ran to over $35,000.
The trustee had reported, and collected, those fees in each of the first six accountings approved by the court. In the seventh accounting, though, the size of the trust had risen somewhat, and the fee totaled $41,875.23.
The history of trustee fees in this case
Three years before, the same probate judge had raised some concerns about the trustee fees charged in that year’s accounting. The judge had asked the corporate trustee to explain its fee setting and the amount of work it had done. After that hearing, the judge approved the fee, ruling that it was “at the low end” of fees for similar work. The judge had noted, though, that he might have a different view of the reasonableness of the trustee fees in future years.
In this most recent accounting, the judge did raise those same concerns, but more forcefully. Because the trustee could not produce time records showing exactly how much time was spent, and by which employees, the probate judge lowered the trustee fees to $26,000 and ordered the trustee to refund the difference.
The probate judge ruled that between $50 and $150 per hour would be a reasonable rate. It was impossible to determine exactly how much time had been spent by the trustee’s employees, however, since they did not keep contemporary time records.
The California Court of Appeal ruling
The corporate trustee appealed the order reducing its fee. The Court of Appeal agreed that the probate judge was analyzing the fee application incorrectly. According to the appellate court, the probate judge could not reduce the fees retroactively. He could, though, set a different fee basis going forward.
The trust document itself approved the corporate trustee’s fee schedule, and authorized the collection of fees on a monthly basis. Even the probate judge had agreed that the fees were competitive and that the trustee’s had done a good job. In that circumstance, ruled the appellate judges, the probate court could not order return of a part of the trustee fees properly collected. Edward Jones Trust Company v. Duong, November 29, 2017.
And in Arizona?
The California case, of course, does not apply directly in Arizona. Most of the logic would likely be similar. The case, however, is an “unreported” appellate decision — which means it would not be persuasive as precedent for an Arizona trustee fees case.
Arizona’s law clearly authorizes collection of trustee fees based on percentage calculations — at least for professional trustees. Most banks and other financial institutions — and private professional fiduciaries like Fleming & Curti, PLC — charge percentage fees when they act as trustee (including but not limited to special needs trust work).