Compensating the executor who is designated in your will
In your will, you will designate an executor who will be empowered to act on behalf of the estate and guide it through the probate process.
State law regulates executor compensation, so consult local mandates first.
If your estate is particularly complex, you may want to pay your executor more than is required, or to include an additional gift in your will for the executor.
But if the executor is the sole beneficiary, they will likely be taxed less by waiving the fee and receiving that money as inheritance.
One of the biggest decisions when you are writing your will is deciding on the executor of your estate: Which person do you trust to ensure that your beneficiaries receive their inheritance? After you’ve found the right person, the next question is, how should they be paid?
Being a conscientious executor is a huge responsibility and a lot of work—they deserve fair compensation. At the same time, they have a fiduciary duty to look out for the interests of the beneficiaries first.
You’ll need to balance these two things when you decide how to structure executor pay.
Look at your local laws first
Some states allow you to include instruction as to how an executor should be compensated in your will; this may be a flat fee stated in the document, or the will may specifically leave the determination up to state law.
If there is no will or your will does not address the executor fee, the executor will be paid according to state law, which also determines a fee structure for co-executors. In all cases, executor fees are considered taxable income by the Internal Revenue Service.
There are estates that can be extraordinarily financially complex, or may have bickering or missing heirs. The executors may have to do a lot of work and deserve to be paid accordingly.
When an estate is particularly labor-intensive or probate goes on for longer than expected, the courts may agree to increase the executor’s statutory fees to address these factors, though an executor cannot unilaterally increase their fees.
If you are aware of extenuating circumstances around your estate and its heirs, you may wish to address this in your will with an additional gift, a higher flat compensation fee, or a list of conditions under which a higher fee will be paid. (The executor should keep scrupulous records of their expenditures, as they are not necessarily paid based on time, depending on the state.)
You may also consider leaving the executor a gift in your will, instead of (“in lieu of”) executor compensation. However, the executor may still be able to collect a fee from the estate, which may not be your intention.
What’s more, this “gift” is often classified as taxable because it is in exchange for services rendered, as it would be if the other beneficiaries chose to gift an amount equivalent to the compensation to the executor.
Expecting to receive a gift from the non-executor beneficiaries instead of compensation can also be risky for the executor, as the promise is not legally enforceable.
As much effort as administering an estate can be—even a small one—many people who accept the role of executor agree to waive compensation. There may be little money in the estate and the duties may be easily performed.
Other people may feel uncomfortable accepting payment because they think other family members will judge them as greedy or unfair, especially if they are better off than some beneficiaries.
Even if state laws predetermine compensation, they are entitled to waive that fee, and there’s nothing wrong with serving as an executor without pay, if that’s an agreement you pre-determine with them (or they decide on their own).
There’s one situation in which it rarely makes sense to collect a fee, and that’s when the executor is the sole or majority beneficiary. In that case, they are generally better off waiving the fee and inheriting the money, because inherited money usually isn’t taxable income.
When the executor is the sole beneficiary, they are generally better off waiving the fee and inheriting the money, because inherited money usually isn’t taxable income.
You may want to make sure they know this ahead of time or at least include this advice in your financial documents in case they don’t already know how to make this decision. (Caveat: If the estate is so large that it owes federal estate taxes, and the executor’s personal tax rate is lower than the estate’s, taking compensation may be a good tax move. If you’re consulting with a probate attorney, ask them which is best.)
As you decide on who will play the executor role for your estate, you could face some resentment over the executor’s fees depending upon the heirs and their relationship with you. Talk to your potential executor about your expectations on fees and their emotional and financial needs around taking on this role, so you can find an appropriate payment for the time and effort they will spent managing the estate ●
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