If You Are An Executor Of An Estate, It Might Be Better Not To Take An Executor’s Fee

April 8th, 2008 • Related • Filed Under
                                                         

If you have been named the executor (or personal representative or administrator) for an estate for someone who has died you may know that you may be entitled to an executor’s fee. The fee can be specified in the will, or it may not be explicitly addressed in which case the executor can charge a percentage of the value of the estate (up to certain limits).

Writing-fortaxwriteoff.jpgIn either case, there are certain things to consider when you are also a beneficiary of the estate. If you receive money from the deceased’s estate as directed in the will, you do not pay tax on this amount. If you claim an executor’s fee, you must include this on your tax return as taxable income and pay tax on it.

So you can see that if you were the only beneficiary of the estate, it might not make much sense to claim a fee at all since you would have tax to pay on that fee. If you waived the fee altogether, then more money would pass to you on a tax-free basis.

For example, let’s assume for simplicity’s sake that there is $100,000 of cash to be disbursed to you. If you just waived your fee, you would have $100,000 tax-free. If you took a 5% executor’s fee then you receive $95,000 tax-free and $5,000 which is taxable – if your marginal rate was 40%, you will owe $2,000 in tax leaving you with just $98,000 after-tax.

If there are other beneficiaries of the estate it becomes more complicated as you have more than just tax issues to consider. However, it may make sense (from purely a tax perspective) to take an executor’s fee if there are more beneficiaries than just yourself – in fact, it becomes more appealing as the number of beneficiaries increases.

Example: If you and your brother are the beneficiaries of the $100,000, then you would receive $50,000 tax-free if you waived the executor’s fee. If you instead took 5% as a fee then you would receive $47,500 tax-free and $3,000 after-tax from the $5,000 executor’s fee (assuming a 40% marginal rate) for a total of $50,500.

If you have 9 other brothers and sisters, then you would each receive $10,000 after-tax if you waive your fee. If however, you took a 5% fee then you would receive $9,500 tax-free plus $3,000 after tax for a total of $12,500.

Please note: I am not a lawyer. Please seek the counsel of a qualified lawyer before acting on any information contained in this article. There are more than just tax issues to deal with in respect to estate planning.

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There Are 10 Responses So Far. »

  1. Comment by Four Pillars on 8 April 2008:

    Interesting post – I had no idea that the executor’s fee was taxable income.

    I would assume that they executor can claim expenses incurred in the line of duty?

    Mike

  2. Comment by Preet on 8 April 2008:

    Hi Mike, the estate would re-imburse the out of pocket expenses incurred by the executor and the executor should provide a statement of accounting for all the beneficiaries. But before doing so, I believe the executor can pay expenses from the estate directly (and provide accounting for such expenses accordingly as well).

  3. Comment by Nicolas on 8 April 2008:

    Salutations,

    You are correct, the executor can pay reasonable expenses directly from the estate in order to accomplish his mandate. And, as you also mentioned, he must account for those to the beneficiaries (In order to make sure the expenses were reasonable).

    You did raise one situation that raises an issue. It seems to me that being executor and beneficiary might raise potentially serious conflict of interest (unless you are the sole beneficiary of course).

    Nicolas

  4. Comment by Preet on 9 April 2008:

    Yes it can be a touchy subject. I recently had a friend who was both a beneficiary and executor of his father’s estate. Luckily the family was tight nit and even-keeled. But I can only imagine if this situation ever arises with a family that are at-odds with each other…

  5. Comment by Jean Lespérance on 25 August 2008:

    Hi Preet,
    Good post. I recently posted about the rules for executor fees allowed in various provinces and, as usual, they are all over the map. Some have a cap of 5%, like BC, while others like Ontario have a de facto guideline of 2.5-3%. In most cases, the Trustee Act allows a will to set out different fees, probably higher, than the legislated amount. I say probably higher since an executor can decline the job if they feel it will be too much work for too little pay. One reference I found mentioned that 3% is usually not enough for these days for professionals to do the job …. with your insider connections, Preet, maybe you could find out what the going rate is these days at trust companies? Executor fees are meant to reflect the amount and dfficulty of work involved, as well as the skill and results achieved, so an executor who feels they have been paid too little can apply to the court for more.

    Re Nicolas’ comment about conflict of interest … the law obliges such a person to act impartially. The other beneficiaries can take you to court if they don’t like what you do. One source I found suggested that if the beneficiary-executor starts to see things get dicey, he/she should hire two lawyers, one to advise the beneficiary, the other to advise the executor! Maybe it helps to be schizophrenic?

    One other benefit a professional executor has in dealing with the various bureaucracies in government and financial services is the greater cooperation accorded to someone “in the business”. Even if you know what you are doing, they assume you don’t and if they are wrong (like one nameless discount brokerage that would not accept a testamentary trust account because they believed a separate trust document was required other than the Will), it is impossible to convince them otherwise.

  6. Comment by Preet on 25 August 2008:

    Hi Jean, I did indeed read your excellent post on the topic. The rules and regulations are indeed all over the map! I did some digging and found some guidelines for professional executor’s fees (at least from our firm). You can see the comments in the linked post by clicking here.

  7. Comment by Michelle on 20 March 2009:

    We have hired a lawyer to start the paper work for probate. He did not ask if we were going to ask for executor fees and we were planing to. Is it to late?
    Michelle

  8. Comment by Preet on 20 March 2009:

    @ Michelle: I think that is a question for your lawyer, and you should ask him/her ASAP.

  9. Comment by David Young on 29 August 2009:

    I am an executor of an estate in New York State.
    May I take a partial disbursement of the executor fee
    in advance of closing the estate?

  10. Comment by Preet on 30 August 2009:

    @ David Young – I’m not familiar with New York State, or American federal regulations in these matters. Unfortunately you’ll have to do some digging. My (unverified) understanding is that you can charge a percentage as you go based on the qualifying transactions that are being processed as they happen. But again, best to check with a professional in your jurisdiction.

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