Trustee Compensation and Taxes in California: Complete Fee Guide

One of the most common questions trustees ask is: "How much can I pay myself?" California law provides clear guidance on trustee compensation, but the tax implications are often misunderstood. This guide covers statutory fees, reasonable compensation standards, how fees are taxed, and best practices for taking trustee compensation.

California Trustee Compensation Law

Statutory Fee Schedule

California Probate Code §15681 provides default compensation:

Annual compensation:

Trust Principal	Annual Fee
First $1 million	1%
Next $9 million	0.5%
Over $10 million	Reasonable amount

Plus additional for:

• Extraordinary services
• Income collected
• Termination/distribution

Example:

• Trust worth $2,000,000
• Annual fee = ($1M × 1%) + ($1M × 0.5%) = $10,000 + $5,000 = $15,000/year

When Statutory Fees Apply

Default rule: Statutory fees apply ONLY if trust document is silent.

Trust document controls: If trust specifies compensation, that amount applies (can be more or less than statutory).

Example provisions:

• "Trustee shall receive $10,000 per year"
• "Trustee shall receive reasonable compensation"
• "Trustee shall serve without compensation"
• "Trustee shall receive statutory fees under California law"

Reasonable Compensation

If trust says "reasonable": Factors courts consider:

• Time spent on trust matters
• Complexity of trust
• Trustee's skill and experience
• Results achieved
• Customary fees in area
• Size of trust estate

Typical range: 0.5% - 2% of principal annually

Professional vs. Family Trustees

Professional trustees:

• Banks: 1% - 2% annually
• Trust companies: 0.75% - 1.5%
• Professional fiduciaries: 1% - 2%
• May charge minimums ($5,000-$10,000/year)

Family trustees:

• Often take lower fees
• May waive compensation entirely
• Can take statutory amount
• Should document decision

Extraordinary Services

Beyond routine administration:

• Selling business interests
• Defending litigation
• Managing complex investments
• Handling tax audits
• Contested beneficiary disputes

Additional reasonable compensation beyond annual fee

Example: Annual fee: $15,000 Plus extraordinary services (litigation): $25,000 Total compensation: $40,000

How to Take Trustee Compensation

1. Review Trust Document

First step: Check if trust specifies compensation method.

Common provisions:

• Fixed dollar amount
• Percentage of assets
• Hourly rate
• "Reasonable" compensation
• No compensation

2. Determine Amount

Calculate based on:

• Trust document terms, OR
• Statutory formula if trust silent, OR
• Reasonable amount

3. Document Decision

Keep records showing:

• How amount calculated
• Time spent (if hourly)
• Services provided
• Date compensation taken
• Trust principal value used

4. Account to Beneficiaries

Include in trust accounting:

• Amount of compensation
• Period covered
• Calculation method
• Services provided

Transparency prevents disputes.

5. Pay From Trust Account

Never:

• Mix with personal funds
• Take from personal account
• "Reimburse yourself" improperly

Always:

• Pay from trust checking account
• By check made out to yourself as trustee
• Keep copies

Tax Treatment of Trustee Fees

Federal Income Tax

Trustee fees are taxable income (ordinary income)

Reported on:

• Your personal Form 1040
• Schedule C (if you're professional trustee)
• Line 8 "Other Income" (if family trustee)

Not reported on:

• W-2 (you're not an employee)
• Form 1099-MISC or 1099-NEC (issued to you by trust)

Self-Employment Tax

Professional trustees:

• Subject to self-employment tax (15.3%)
• Report on Schedule SE
• Fees are business income

Family trustees (occasional):

• Generally NOT subject to self-employment tax
• Fees are "other income"
• One-time or infrequent service

Example: Professional trustee receives $50,000:

• Income tax: ~$12,000 (24% bracket)
• Self-employment tax: ~$7,650 (15.3%)
• Total tax: ~$19,650

Trust Tax Deduction

Trust deducts fees paid:

• Form 1041, Line 10
• Reduces trust taxable income
• Shifts tax from trust to trustee

Why this matters:

• Trust tax rates reach 37% at $15,200
• Trustee may be in lower bracket
• Net tax savings to family

Form 1099-NEC

Trust must issue if:

• Fees paid to non-family trustee
• Total fees $600 or more in year
• Trustee is providing services in trade/business

When NOT required:

• Family member trustee
• Corporate trustee (files own returns)
• Fees under $600

Form details:

• File by January 31
• Copy to trustee
• Copy to IRS
• Use trust EIN as payer

California Tax

Trustee fees taxable:

• Reported on Form 540 (personal return)
• Same character as federal (ordinary income)
• Subject to CA rates (up to 13.3%)

Estimated Taxes

If fees substantial:

• Make quarterly estimated payments
• Federal Form 1040-ES
• California Form 540-ES

Safe harbor: Pay 100% of prior year tax (110% if AGI >$150K)

Common Mistakes

1. Not Taking Compensation

Problem:

• Trustees work for free
• Don't realize they can be paid
• Feel guilty taking fees

Why you should:

• It's legal and appropriate
• Time has value
• Reduces trust tax (shifts to lower bracket)

Exception: If relationship close and estate small, waiving may be appropriate.

2. Taking Too Much

Problem:

• Exceeds reasonable amount
• No documentation
• Beneficiaries challenge

Consequences:

• Court may surcharge
• Require repayment
• Remove trustee

Solution: Stay within statutory or clearly document reasonableness.

3. Not Reporting as Income

Problem:

• Trustee doesn't report fees on tax return
• Treats as tax-free distribution

Consequence:

• IRS catches via Form 1099 or audit
• Back taxes plus penalties and interest

Solution: Always report fees as ordinary income.

4. Poor Documentation

Problem:

• No records of time spent
• Can't justify fees taken
• Beneficiaries suspicious

Solution:

• Keep time logs
• Maintain detailed records
• Include in accountings

5. Improper Payment Method

Problem:

• Write personal check then reimburse from trust
• Transfer to personal account without documentation
• Commingle funds

Solution:

• Always pay from trust account
• Clear check memo ("trustee fee Q1 2024")
• Keep copies

6. Ignoring Self-Employment Tax

Problem:

• Professional trustee doesn't pay SE tax
• Thinks fees are "passive income"

Consequence:

• IRS assesses SE tax plus penalties

Solution: File Schedule SE if you're professional fiduciary.

Special Situations

Multiple Trustees

Co-trustees:

• Split fees as agreed
• Or according to work performed
• Document arrangement

Example:

• Two co-trustees
• Total statutory fee: $20,000
• Each takes $10,000

Corporate Trustees

Banks and trust companies:

• Higher fees (1-2% annually)
• Professional management
• Not subject to individual income tax (corporate returns)

Successor Trustees

Taking over mid-administration:

• Entitled to fees from date of appointment
• Not fees for prior trustee's work
• Pro-rate annual fee

Declining Compensation

Can waive fees:

• Document waiver in writing
• Note in trust accounting
• Can change mind later (within reason)

Tax impact of waiver:

• No income if not taken
• Can't take deduction for "gift" of services

Late Payment

Can pay fees for prior years:

• Deduct on Form 1041 year paid (not accrued)
• Report on Form 1040 year received
• Document why delayed

Payment Best Practices

1. Take Compensation Regularly

Recommended:

• Quarterly payments
• Easier for trust budget
• Smooths tax impact
• Demonstrates ongoing service

Example:

• Annual fee $20,000
• Take $5,000 per quarter

2. Keep Detailed Time Records

Log:

• Date
• Service performed
• Time spent
• Result

Example entry: "1/15/24 - Reviewed estate appraisals, spoke with appraiser about valuation methods, prepared summary for beneficiaries - 3.5 hours"

3. Be Transparent

Include in accounting:

• Total fees taken
• Period covered
• Calculation method
• Comparison to statutory (if applicable)

4. Consider Beneficiary Relations

Family dynamics:

• Some families expect trustee to waive
• Others expect professional-level fees
• Communicate early about compensation

5. Get Tax Help

Consult CPA about:

• Estimated tax payments
• Self-employment tax
• Proper reporting
• State tax withholding

Example Scenarios

Scenario 1: Family Trustee, Small Estate

Facts:

• Daughter serving as trustee
• Trust worth $500,000
• Simple administration
• Completed in 9 months

Compensation:

• Statutory: $5,000 annual (0.5 year) = $2,500
• Daughter waives fee (family relationship)
• No tax consequence (nothing received)

Scenario 2: Professional Trustee, Large Estate

Facts:

• Professional fiduciary appointed
• Trust worth $3,000,000
• Complex business interests
• 2-year administration

Compensation:

• Year 1: $22,500 (statutory annual)
• Year 2: $22,500 (statutory annual)
• Extraordinary services: $35,000 (business sale)
• Total: $80,000

Taxes:

• Income tax (35% bracket): $28,000
• Self-employment tax: $12,240
• Net after tax: $39,760

Scenario 3: Bank Trustee

Facts:

• Bank serves as trustee
• $5,000,000 trust
• Bank fee schedule: 1.25% annually

Compensation:

• Annual fee: $62,500
• Bank pays corporate income tax
• No individual 1099 issued

Conclusion

Trustee compensation is legal, appropriate, and in most cases advisable. Understanding California's fee structure, proper documentation, and tax treatment protects both trustees and beneficiaries.

Key takeaways:

• Know what trust document says about fees
• Statutory fees are 1% of first $1M, 0.5% above
• Fees are taxable ordinary income
• Professional trustees pay self-employment tax
• Document all compensation decisions
• Keep detailed time records
• Pay from trust account with clear documentation
• Report fees on personal tax return

Taking reasonable compensation for your work as trustee is not only legal—it's often the right thing to do for tax efficiency and family dynamics.

Related Articles

Learn more about trustee compensation and trust taxes:

• Form 1041 Trust Tax Return Guide - How to report trustee compensation on Form 1041, deductibility of trustee fees, and impact on trust income.

• Income vs. Principal Trust Administration - How trustee fees are allocated between income and principal under California law and impact on beneficiaries.

• Trust Administration IRS Audit - How IRS examines trustee compensation during audits and documentation needed to justify reasonable fees.

• Common Trust Administration Mistakes - Avoid excessive trustee compensation disputes and improper fee structures that lead to beneficiary complaints.

• Trustee Removal California: Process and Grounds - How excessive compensation can be grounds for trustee removal and when beneficiaries can challenge fees.

Need Help With Trustee Compensation Issues?

If you have questions about trustee compensation, fee disputes, or tax treatment of trustee fees, our experienced trust administration attorneys can help.

Contact us for a consultation about your trustee compensation questions.

This article is for informational purposes only and does not constitute legal or tax advice. Trustee compensation and tax rules are fact-specific. Consult with qualified legal and tax professionals about your specific situation.