Friend Trustee – Fees

My father left his assets in two trusts -- for the benefit of myself and my sibling. His best friend is the trustee who has delegated all responsibilities to both an investment house and high-end law firm. He takes a .4% fee -- with all fees now totaling 2.25% to 3%. What is legal? What is moral?

The answer will depend in great part on state law. Determining which state law applies may itself be an issue depending on which state your father died in, which state the trustee resides in, where trust assets are, and so forth. The Prudent Investor Act (PIA) permits a trustee to delegate investment management to a skilled investment advisor. If your state enacted a version of the PIA that should be reviewed. Also your state laws on trustee fees should be reviewed. The PIA does address this but the laws are relatively speaking new so there may not be a lot of case law defining your situation. As for hiring a law firm, that is certainly a reasonable step for a trustee to do. However, the issue might be has the trustee delegated authority or responsibilities that he or she is required by state law to perform to the attorney. If the trustee has paid from the trust for others to perform services that the trustee is generally required to perform there may in fact be an issue as to fees. However, you need to first compare the .4% fee you say the trustee is taking to what the trustee would be entitled to take in the absence of such delegations. Presumably if the trustee has hired a "high-end" law firm they have researched the issues and advised him. Also, in evaluating the aggregate fees you should compare them to the aggregate fees others charge for similar work. Is there unique risk or other administrative burdens that the trustee is bearing? Many state laws permit additional commissions to fiduciaries if there are additional burdens. While your facts sound like this is not the case, you need to be sure that the trustee agrees with you.

As for the moral issue, that's tough to call without understanding what the trustee does. You've also mentioned nothing about the assets in the trusts, the rates of return realized, whether extra services were performed in a particular year, and so on. However, the moral obligation of the trustee should be to carry out your father's wishes. That should be the guiding principal for everyone involved. On the flip side would your father want you to sue a lifetime close friend?

Perhaps the best approach is to request a meeting with the trustee and present your concerns. Considering that investment advisers and financial planners often suggest a withdrawal rate from a trust in the order of 3-5% and many states Principal and Income Acts (PIA) provide for elections to make distributions based on those percentages of trust assets, the overall fee structure could have a negative impact on the economics of the entire trust. So you're right to address the issue.

Before meeting with the trustee meet with a trust attorney in the state whose laws govern the trust and review the trust document, fee structure and applicable state law. You want to be prepared before the meeting (even if you meet informally without lawyers).

If the trustee won't reasonably address your concerns, then you'll have to hire an attorney to address the issues with the trustee. But if the trustee is being advised by a "high-end" law firm presumably he or she has documented the basis for the fees involved.