The California Court of Appeal (Sixth District) has clarified when a Trustee’s compensation can be limited in Thorpe vs. Reed, decided this month. Thorpe involved a special needs trust that had be created for Danny Reed, who had been the victim of two separate auto accidents. Danny’s mother, Jolaine Allen, was initially appointed the Trustee of the special needs Trust and everything went along fine for a few years.
Then the financial crisis hit in 2008 and Jolaine was concerned that all of the Trust’s cash (about $650,000) held in Washington Mutual would be depleted if Washington Mutual became insolvent, which did in fact happen. Jolaine went to Court and obtained an order withdrawing the money so that it could be re-deposited at other banks at $100,000 per deposit. Unfortunately, Jolaine did not have a photo identification and, therefore, could not open any new bank accounts. A mess ensued, but nothing damaging.
In the meantime, the Court stepped in, removed Jolaine as Trustee and appointed a new temporary Trustee, Thomas Thorpe, to act until things could be sorted out. The problem is that the Trust document specifically stated that no successor trustee was entitled to compensation. Since Mr. Thorpe was a professional fiduciary (someone who regularly acts as a trustee for a fee) the no-fee provision in the Trust was a bit of a problem.
Mr. Thorpe filed a petition with the Court asking that the Trust be modified to, among other things, increase the Trustee’s compensation. But Mr. Thorpe’s appointment as Trustee was not made without a fight, and Danny’s family was prepared to fight to get the Trustee removed and appoint Danny’s sister, Audelith Reed, as successor Trustee—Audelith was willing to serve without compensation.
After a series of hearings, Mr. Thorpe was removed and Audelith was appointed successor Trustee. Mr. Thorpe then filed a petition asking the Court to pay him and his attorneys the following fees: $65,844.08 for Mr. Thorpe, $31,047.85 for one attorney for Mr. Thorpe, and $11,879.44 for another attorney. These fees were for four and a half months of services by Mr. Thorpe and his attorneys (it’s good to be a Trustee).
Audelith objected to the fees on the basis that the Trust specifically restricted Trustee compensation. The Trial Court disagreed. The Court cut Mr. Thorpe’s fees, but not to zero. Mr. Thorpe was awarded $27,006; $19,540.61 to one attorney; and $4,739.02 for the other.
Justice Premo, writing on behalf of the Sixth District Court of Appeals, disagreed with the Trial court. Citing Probate Code Section 15680, the Appellate Court stated that compensation for a Trustee is set by the Trust document. If a Trust document states that a Trustee is to receive no compensation, then so be it. A court can issue an order increasing compensation where appropriate, but such an order only applies prospectively—not to past services that occurred before the order is issued. If a Trustee does not like the compensation provisions, then they can either (1) not agree to act as Trustee, or (2) have an interested party petition the Court and ask for additional compensation before acting.
Of course, any Trust that prohibits Trustee compensation is not going to attract many Trustees who want to act. But in Danny’s case, it may have helped to ensure that his family would act as Trustee rather than a professional—which is what Danny wanted.
The point is, be sure to read the Trustee compensation provisions before agreeing to act as a Trustee. If you don’t, you may find yourself working for free.