In re Trust Under Item Ten (2024) & Trustee Fees

We’ve discussed at some length the basics of trusts: we’ve gone over different types of trusts, the basic functionality and purpose of trusts, the appointment of trustees, the identification of beneficiaries, and so forth. As we’ve noted, trusts can be highly useful instruments to ensure that certain assets are distributed to certain beneficiaries. Trusts may be created via last will and testament, or they may be created independently. What we haven’t discussed too much thus far are the many issues which might be encountered by trustees as trustees go about administering a given trust. How is trustee compensation negotiated and settled? What happens if the trustee contracts with a related party during the course of administering the trust? What happens if a trustee wishes to perform additional services for a trust while simultaneously acting as trustee? This last question is one we will address today, and hopefully we can return to answer other questions in the future.

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In the case of In re: Trust Under Item Ten (2024), the court was faced with this question of whether a trustee could legally be compensated with trust funds for additional services. Specifically, the trustee – a licensed and actively practicing attorney – performed legal services for the trust, and then sought separate compensation for these services. Let’s examine this case more closely.

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Facts of the Case

The trust in question was established under “Item Ten” of the decedent’s last will and testament. The trust was divided into two parts, parts A and B. Part A had certain real property which was to be used or sold for the benefit of the identified beneficiaries, while part B contained the residuary estate of the decedent. At first, the trust was managed by a trustee who was not an attorney, but ultimately a new successor trustee was appointed, and that trustee was also a practicing attorney.  

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The trustee ended up performing legal services on behalf of the trust during the sale of the properties contained within group A of the trust. More specifically, the trustee retained the services of the law firm which he himself contracted with as a 1099 independent contractor. The trustee then filed a fee petition with the court in order to receive fair and reasonable compensation for legal services performed for the trust. This fee petition was denied, as the court held that the trustee’s services as a lawyer on behalf of the trust were barred by ET § 14.5-802(c) of the Maryland Trust Act. The trustee appealed the decision and the case went under review.

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Ruling & Post-Ruling Discussion

Maryland has laws in place to prevent trustees from engaging in “divided loyalty” transactions while serving as trustees. Divided loyalty transactions present conflicts of interest, and those conflicts may jeopardize the interests of the beneficiaries. This means, for example, that trustees cannot contract with entities in which they themselves have a significant business interest. This is just one example of a potential conflict of interest. These prohibitions are codified under ET § 14.5-802 of the Maryland Trust Act.

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As mentioned, the trial court referenced ET § 14.5-802(c) when determining that the trustee was barred from compensation for legal services performed, but the trustee cited ET § 14.5-802(f)(2) in his appeal. This subsection provides an exception for a payment of “reasonable compensation” for services performed if everything is fair to the beneficiaries. The trustee argued that this exception was applicable for several reasons, one of which was that hiring an outside attorney would’ve been more difficult and less beneficial for the beneficiaries under the circumstances. Ultimately, the appellate division concurred with the trustee and overturned the trial court’s ruling with respect to the fee petition.  

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Contact the Murphy Law Firm for More Information

To learn more about trustee fees, compensation for non-trustee services performed by trustees, creating an irrevocable trust, or any other related estate planning topic, contact one of the estate planning attorneys at the Murphy Law Firm today by calling 240-219-1187.

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