How Are Trustee Commissions Calculated & Taxed?
If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets. States have different rules with regard to the trustee commission calculation. This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how
If you are the trustee of a trust, in most cases, you are allowed to be paid a commission from the trust assets. States have different rules with regard to the trustee commission calculation. This article will assist you in understanding how the commission is calculated, how the payments are taxed, the rules for commissions not taken in past years, and how the trust commissions are split between multiple trustees.
Trust Document
The trust document usually has a special section that addresses commissions paid to the trustee. It’s common for the trust document to include language that states that “the trustee shall receive annual commissions in the same manner and at the same rates as prescribed for testamentary trustees under the laws of the State of (Name of State)”.
For New York the formula is as follows:
1.05% of the first $400,000
0.45% of the next $600,000
0.30% of the rest
For example, a trust has $500,000 in assets as of December 31st, the calculation would be as follows:
$400,000 x 1.05% = $4,200
$100,000 x 0.45% = $ 450
Total Commission: $4,650
The trustee would be eligible to receive $4,650 from the trustee assets as their commission for the year.
How Are Commissions Taxed?
Commissions paid by the trust to the trustee are reported as income by the trustee on their personal tax return. The trust deducts the commission paid as an expense. We frequently receive the question, “does the trust have to issue a 1099-MISC tax form for the commission that was paid to the trustee?” Many tax professionals take the position that a 1099-MISC is not required to be issued because serving as trustee does not meet the definition of a “trade or business” which is the prerequisite for issuing a 1099-MISC tax form.
More Than 1 Trustee
What happens where there is more than 1 trustee? Do the trustees have to split the commission equally? The answer is “it depends”. It depends on the size of the trust and the number of trustees.
Again, I’m referencing New York State law her. The rules will vary for by state. For trusts with under $100,000 in assets, each trustee gets the full commission. If a trust has $80,000 in assets and there are 3 trustees, each trustee would receive $840 ($80,000 x 1.05%).
For trusts with assets between $100,000 – $400,000, if there are one or two trustees, each trustee is entitled to a full commission. If there are 3 or more trustees within this asset range, the single trustee commission is divided equally between the trustees. I don’t necessary understand the logic behind if there are two trustees the commission is doubled but if there are 3 trustees, a single commission payment is split between the trustees. But that’s how the law is written.
For trusts with more than $400,000 in assets, if there are 1 – 3 trustees, each trustee is entitled to the full commission amount. If there are more than 3 trustees, again, the commission is split equally amongst the trustees.
Can You Waive The Commission Payment?
As the trustee, you can voluntarily waive the commission payment. The money simply remains in the trust. Why would a trustee do this? Some trustees just don’t need the income. In some situations, the parents will setup a trust, they have more than one child, but only one of the children serves as trustee. The child that serves as trustee may decide to waive the commission payment to avoid conflict with their siblings about “taking money from mom and dad’s trust”.
Another reason for waiving the commission payment is the trustee may purposefully want to realize that income at a later date. Whatever the reason, I just wanted you to know that waiving the commission payment is an option.
Back Payments
We will frequently get the following question:
“I have been the trustee of this trust for the past 10 year but I have never taken a commission. Am I still entitled to the trustee commissions for past 10 years even though I did not take them?”
The answer is “yes”. The trustee is still entitled to receive those commissions for past years even though they did not take them in the year that they were due. The trustee would just need to be able to produce the records necessary to calculation the trustee commission for all of the past years.
In these cases, remember, commission payments to the trustees are taxed at ordinary income tax rates to the trustee. If you decide to “catch-up” on past commissions that are due to you and you receive $30,000 in trustee commissions in a single tax year that could bump you up into a higher tax bracket. It may make more sense from a tax standpoint to spread those past commission payments over the course of the next few years to reduce the tax hit.
Disclosure: This article is for educational purposes only. For legal advice, please consult an attorney.
Michael Ruger
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
