Professional trustees and financial institutions acting as trustees often include a “termination fee” as part of their published fee schedules. Contrary to the name’s suggestion, a trustee might charge the fee not only at trust termination but also upon the transfer to a successor trustee after the original trustee has resigned or been removed. Even when fully disclosed, a termination fee often comes as a surprise to beneficiaries, who view the fee as unjustified and unfair, making the trustee’s termination fee a hotly litigated and contested issue.

As with other types of compensation received by a trustee, the overriding consideration when charging a termination fee is the reasonableness of the fee in light of all relevant facts and circumstances. Colorado statutes and official comments to the Uniform Trust Code indicate that a trustee should consider, among other things, the following factors when charging a termination fee:

• whether the trust authorizes a termination fee;
• whether the published fee schedule specified how and when a termination fee would be charged;
• the complexity and amount of work required to be performed;
• customary fees and practices in the community; and
• the reasonableness of the trustee’s overall compensation, including the termination fee.

Colo. Rev. Stat. § 15-10-603; UNIF. TRUST CODE §703 cmt. (2010).

As a preliminary matter, where the trust expressly prohibits the trustee from charging a termination fee, the trustee should not attempt to charge it. Conversely, where the trust authorizes the trustee to take a termination fee (or indicates that a trustee may be compensated in accordance with its published fee schedule), the trustee must still consider other factors supporting the reasonableness of its fee. A published fee scheduled including termination fees helps support a finding of reasonableness particularly if the fees are similar to those charged by other trustees in the community. However, a trustee should not base its decision to charge a termination fee solely because it is included in a published fee schedule.

The complexity and amount of work required to be performed is a key factor. A trustee can justify a termination fee where the trust’s termination required the trustee to perform additional work unique to the winding up of the trust, such as disposing of closely-held assets, transferring real estate, and resolving other final trust affairs. The more labor and complexity involved, the more likely the termination fee is reasonable. In contrast, when a trustee is transferring a trust to a successor trustee, the trustee should be mindful that less work might be required; and accordingly, a termination fee may need to be reduced or waived altogether. The termination fee is an important fee that a trustee should consider and have available in its toolbox. Absent such fee, a trustee might find itself completing a large amount of unexpected and undercompensated work at trust termination. Nonetheless, the fee has been and will remain controversial. The trustee’s best course of action to minimize conflict and avoid litigation is transparency and communication – both through the disclosure of the fee before and at the time of accepting a trusteeship and through communications with the beneficiaries documenting the reasons and basis when a trustee does decide to take a termination fee.