Is Being an Executor an Honor or a Thankless Job?

Is Being an Executor an Honor or a Thankless Job? by Tom Sciacca{Read in 5 minutes}  Inevitably, when a client is sitting across the desk from me to write a Will, we will have a discussion about who should be the Executor of their Estate. While this is a practical conversation to have, as an attorney, it always interests me that clients sometimes have two very different reactions.

Some clients think that being named an Executor is a great honor, and people might be offended if they are not selected as an Executor. Conversely, some clients think that being an Executor is a great chore, the equivalent of having root canal surgery without Novocaine. What do I say to the latter group? I remind them that their Executors are entitled to get paid for their services rendered to the Estate.

An Executor’s “salary” is known as “commissions.” An Executor receives commissions as their compensation for doing their job as the Executor. The Executor’s commission is a fractional percentage of the Estate (5% of the first $100,000, 4% of the next $200,000, 3% of the next $700,000, etc., with the percentages getting lower as the dollar amount gets larger).

By way of example, on an estate of $1 million, an Executor’s commission would total $34,000. This is a worthwhile payment for the fair amount of work that the Executor will have to do. Obviously, when you are dealing with larger Estates, you could be talking about a commission that is double or even triple this amount, with the opposite being true for smaller estates.

It’s interesting to note that your Executor receives this percentage commission based solely on the value of the assets. It does not matter how much work or how many hours the Executor actually puts in. For example, an Executor that administers an Estate containing a single bank account with $1 million in it will have a much easier time than the Executor who has to sell real property valued at only $400,000. The first Executor may simply make one quick visit to the bank, write some checks, and be done, while the latter may spend hours cleaning out the decedent’s residence, perhaps making repairs or cleaning, listing the property for sale, working with the broker, and attending a closing at which the Estate sells the real property.

If that property is only worth $400,000, that Executor who is working much harder and probably putting in four times the number of hours as the first Executor will receive significantly less in commission.

Of course, the same rules apply to Administrators, for those who die without a Will.

If a client is dividing their Estate equally among several beneficiaries (such as adult children), or trusts for the benefit of minor beneficiaries, naming one of them as the Executor means that person gets paid the salary off the top, before the equal division. Therefore, that Executor/beneficiary gets more money than the other beneficiaries, which may be a concern for some clients.

In light of the above, clients can name Co-Executors if they wish. For example, if I’m leaving my money to my two adult children in equal shares, I can name them as Co-Executors so everything remains equal. The law allows multiple Executors or Administrators to split up to two full commissions (i.e., two Co-Executors would each receive one full commission, while three or more Co-Executors would split two commissions).  However, if my two adult children haven’t spoken to each other in 30 years, naming them as co-Executors may lead to some very quick estate litigation.

Although I may name one or more Executors, the Executor’s commission can also be advantageous if my Estate owes estate tax, or my Estate has a lot of taxable income that requires a fiduciary income tax return. Any commissions paid to my Executor are fully deductible and can lower the amount of taxes owed.

Finally, even though my Executors are entitled to a commission, they may not take it. As in my example above, if I name both of my children as equal beneficiaries and as co-Executors, they might not want to take the commissions (unless there is a valid tax reason to do so). Why? Because if they split everything equally, their inheritance passes free of income taxes. Whereas, if they split a salary, or if they each take salaries off the top and then split the balance, a portion of what they’re receiving from my Estate is compensation for services rendered – taxable income that they would need to report on their own personal income tax returns.

In conclusion, choosing an Executor may be a very important decision for a client to make. It is both a title of honor and of degradation. However, the rewards can sometimes be great.

For more information on this topic, please contact me.
Thomas Sciacca

 

Thomas Sciacca

www.sciaccalaw.com
Tom@SciaccaLaw.com
(212) 495-0317