What to Know About Unbundling Trustee Fees

A trustee is an individual or institution responsible for managing assets held within a trust for the benefit of its designated beneficiaries. As compensation for these duties, trustees are entitled to a fee. These fees can be presented as a single, comprehensive charge or broken down into individual costs, a practice known as “unbundling.” For those involved with a trust, understanding the structure of these fees is part of overseeing the trust’s administration and its associated costs.

Components of a Trustee Fee

Trustee compensation is most commonly a “bundled” fee, which is a single charge calculated as a percentage of the assets under management (AUM). For example, a trustee might charge an annual fee of 1% on the first $2 million of assets and a lower percentage on amounts above that. This single fee is intended to cover all services the trustee provides.

An alternative is the “unbundled” or itemized fee model, which assigns a separate cost to each service. A primary component is investment management, which covers developing an investment strategy, market research, and executing trades to grow the trust’s principal.

Administrative services are another component that can be itemized. This category includes tasks like detailed record-keeping, preparing account statements, processing distributions, and handling communications. Asset custody is a separate charge for the secure holding of the trust’s assets, such as stocks and bonds, by a qualified financial institution. This service ensures the physical and digital protection of the trust’s property.

An unbundled statement also details fees for tax compliance and discretionary duties. Tax compliance involves preparing and filing the trust’s annual fiduciary income tax returns (Form 1041). Discretionary duties may incur special fees for complex decisions, such as evaluating a beneficiary’s non-standard request for funds, which requires careful judgment.

Tax Treatment of Trustee Fees

Historically, the main motivation for unbundling trustee fees was tax planning. Before 2018, the tax treatment of fee components varied, and separating them was necessary to maximize deductions on a trust’s income tax return. The U.S. Supreme Court case Knight v. Commissioner clarified which trust administration costs were fully deductible versus those subject to limitations.

Before the tax law changes, costs unique to trust administration were fully deductible when calculating the trust’s adjusted gross income (AGI). In contrast, investment advisory fees were miscellaneous itemized deductions. These fees were only deductible to the extent they exceeded 2% of the trust’s AGI. Unbundling allowed a trustee to separate the fully deductible costs from the investment fees subject to the 2% floor, reducing the trust’s tax liability.

The Tax Cuts and Jobs Act (TCJA) of 2017 altered this landscape by introducing Internal Revenue Code Section 67. This provision suspended all miscellaneous itemized deductions for trusts and estates for tax years 2018 through 2025. Because investment advisory fees fell into this category, the federal income tax incentive for unbundling them was largely eliminated.

While the federal tax benefit is suspended, understanding the fee components is still relevant for assessing their reasonableness. IRS guidance confirmed that costs unique to trust administration remain fully deductible and are not affected by the suspension. Some state tax codes did not conform to the federal changes, so a tax benefit for unbundling may still exist at the state level.

Requesting an Itemized Fee Statement

Beneficiaries of a trust have a legal right to be kept informed about the trust’s administration, including its expenses. This right allows a beneficiary to request a detailed accounting of the fees being charged. Understanding these costs helps ensure the trustee’s compensation is reasonable for the services provided.

A beneficiary should make a formal request to the trustee in writing, which creates a clear record of the inquiry. The request should be specific, asking for a detailed, itemized breakdown of all fees for a particular period, such as the most recent year. It is helpful to ask for the costs of investment management, administrative tasks, asset custody, and tax preparation to be listed separately.

Upon receiving the itemized statement, the beneficiary can review it for reasonableness. The breakdown allows for a direct assessment of what is being paid for each service. The investment management fee can be compared to industry standards, and administrative charges can be evaluated against the trust’s complexity. If any charges seem unclear or excessive, the statement provides a basis for a follow-up conversation with the trustee.