The Essential Executor's Handbook: A Quick and Handy Resource for Dealing With Wills, Trusts, Benefits, and Probate (2016)
What’s in It for You
The settlement of the vast majority of estates (all four of them) takes most people at least a year and manages to siphon off countless hours of your life in the process. The problems, the deadlines, and the stress are often palpable. As a result, the Law of Estates and Trusts has long recognized your right to compensation. And, as we shall see in this chapter, there are a number of ways your pay can be calculated and a number of ways for you to take it.
That being said, when it comes to what you get for your efforts, there are two schools of thought: yours and the beneficiaries’. It has been my experience that, to a beneficiary, all of your hard work does not appear to be all that hard. It is not unlike the old complaint that estate lawyers hear all the time: “Why do you charge so much for a will and a trust? All you have to do is push a button on your computer and out it comes.” What can I say? For some, ignorance is its own reward. Do not let that dissuade you. You have accepted a job that holds you to the highest standard of care known to the law. You have accepted a job that puts you at risk of lawsuits, fines, and even jail time. And, not to put too fine a point on it, you have accepted the job that nobody else wanted. You deserve to be paid.
First things first. You need to understand the difference between compensation and reimbursement. You are compensated for your time, but you are reimbursed for your out-of-pocket expenses. For example, being the responsible one in the family, it is not uncommon for the executor to put the funeral on his American Express card. Many times, after a respectable mourning period, the executor may bring this up, asking siblings or other beneficiaries if they couldn’t see their way to “chip in” and reimburse him for some of the cost. The usual response is crickets. Not to worry. The estate itself owes you reimbursement and, once you have control of the Probate Estate or the Trust Estate, feel free to write yourself a check. You are well, well within your rights to do so.
And it is not just funeral costs that need to be reimbursed. You may not be from the same state as the decedent. You may, in fact, live thousands of miles away. But you have a job to do and that job usually involves being where the decedent lived. You are going to have to appear in the local court at least once to be made executor. You are going to have to survey the home, arrange for repairs, and get it ready for sale. It may be necessary to meet with family or other beneficiaries to calm their fears and answer their questions as a group (assuming e-mail is not a viable alternative). In short, unless you lived near the decedent, you’re going to be traveling. And travel costs are reimbursed to you as well.
The cost of car, bus, train, or air travel are reimbursed using different standards. Car travel is reimbursed at 56 cents per mile (as of 2015). Bus and train fare are reimbursed at cost. Air travel, on the other hand, raises a question. Can you be reimbursed for a first-class seat? Since first class on most airlines can run from $1,000 to $5,000, it would seem to be an extravagance that the estate should not have to bear. On the other hand, if you are living in California and your decedent was from Virginia, the cost of driving from coast to coast, and back again, including hotels and meals, is going to add up to at least $4,000. So, in reality, flying first class is less of an expense. Besides, when you agreed to take on this project, you did not agree to be a martyr—and nothing says “martyr” like riding 3,000 miles in coach.
In addition to funeral reimbursement and travel costs, you should take reimbursement for just about anything that can be considered an ordinary and necessary expense of settling an estate including, but not limited to, legal fees, accounting fees, court costs, home repair costs, bonding premiums, and so on. Ideally, you will pay for these things out of the estate’s or trust’s checking accounts but, if circumstances require that you pull out your MasterCard, be sure to write yourself a check.
It is important to understand that, although they often provide guidelines on compensation, Probate Courts rarely tell you what can be reimbursed. For our purposes, you are going to rely on the most conservative of all financial institutions—the Internal Revenue Service. Everything I have said about reimbursement comes from IRS regulations and guidelines. Most courts have absolutely no problem with that. And, bonus, it gives you grounds to dismiss the beneficiary who believes that your cross-country travel should be by pack animal.
You have devoted a year or more of your life to settling your decedent’s estate. Time to get paid. But how do you calculate your pay? There are four methods for calculating your commission: Stated, Formula, Court Decree, or Beneficiaries Agreement.
The Stated method of calculating your commission is a prime example of look before you leap. That’s because many wills and trusts state what the executor or trustee’s commission shall be. If the will or trust says that you get $10,000 to settle the Probate Estate or the Trust Estate, that’s your commission. Except for out-of-pocket reimbursements, that’s all you get. To make matters worse, some wills and trusts specify that the executor and trustee get nothing. The lesson to take away from this is to always read the documents that you are about to administer. Just because you are named the executor, doesn’t mean you have to take the job.
The Formula method is the most common. Put simply, your pay is tied to the value of the estate you administer. For example, here is a common formula for an executor’s commission:
First $400,000 of Estate Assets ……………5%
Next $300,000 of Estate Assets …………..4%
Next $300,000 of Estate Assets …………..3%
Estate Assets in excess of $1,000,000 ……….2%
Estate Assets in excess
of $10,000,000 ……………. By agreement with the Probate Court
plus 5% of income generated by the Probate Estate each year.
Easy, right? So, for example, your estate had assets worth $800,000. In addition, the estate generated $10,000 in income (e.g., interest and dividends) during the year it took for you to settle it. According to the formula above, your commission is $35,500: $400,000 × 5% plus $300,000 × 4% plus $100,000 × 3% plus $10,000 × 5%. On the one hand, $35,500 is less than the average wage for a full-time job. On the other hand, settling an estate is not really a full-time job.
As noted in the formula, commissions on exceedingly large estates often require prior agreement by the Probate Court. There is a good reason for this. Let’s say, for example, that your decedent had only one asset. He owned $50 million worth of stock in a single company all held with one brokerage. It would be very hard to justify a commission in excess of $1 million to liquidate one stock.
On the other hand, perhaps in the course of your administration, the board of directors were suspected of insider trading. So you initiated a stockholder suit that dragged out for years, consumed your days and nights, took a toll on your health, led to your divorce but, ultimately, resulted in $100,000,000 in compensatory and punitive damages. The court may agree that you are entitled to your $1 million commission. Every case is judged on its merits.
The final method of calculating your commission is by Beneficiaries Agreement. There are times when even the beneficiaries agree that you are not getting paid enough. So, for example, your decedent owned two homes. Both are in horrendous condition when you take control of them. First, you have to enlist a realtor to tell you what condition they need to be in before they can be sold for a reasonable price. Then you have to get estimates from competing contractors to learn what all the repairs are going to cost. Then you have to dutifully monitor the pace and workmanship of your contractor. Then you have to submit to county inspection. And so on, and so on, and so on. As a result, you put more time into unloading these fixer-uppers than anybody thought would be necessary. The beneficiaries may agree to give you more of a commission than the formula mandates. It is rare for beneficiaries to be generous, or even considerate, but it happens. The Probate Court will always accept this method of calculating a commission so long as the agreement of the beneficiaries was unanimous and put in writing.
While an executor is, on occasion, entitled to more than the calculation provides, the opposite is also true. An executor may actually be entitled to less. This occurs in two situations: (1) when the executor hires someone else to do his job, and (2) when there are multiple executors.
The courts have long maintained that you are entitled to hire a lawyer to handle court proceedings or an accountant to prepare tax returns. However, where your lawyer has become the executor or the accountant has to dig through all of the decedent’s papers to find the raw numbers needed to prepare the return, the courts tend to balk. The rule of thumb is that you accept the responsibility of being executor and you do the legwork that any layman can do. If you are delegating to the professional work that does not require professional expertise then the professional’s fees will be deducted from your commission.
This is not necessarily a bad thing. If you are already too busy to complete even simple tasks, you have the right to delegate that work to others. So, if you don’t really need the commission, delegation may be an ideal solution. Additionally, if the professional fees exceed what would have been your commission, you are not billed for the overage; the fees remain a cost of administration to be borne by the estate.
The second scenario requiring a reduction in your commission is where you have one or more co-executors. The rules generally require the commission to be divided evenly among the co-executors. A perfectly sound policy where the executors share the workload equally. It can become an issue, however, where the will names your broke, lazy, irresponsible, and occasionally felonious sibling to be your co-executor. The first thing you should do is ask your sibling to decline appointment as co-executor. The law does not force anyone named as executor to actually accept the responsibility. If that doesn’t work, outline the tasks and responsibilities you expect your sibling to perform and then, for good measure, explain that neither of you gets paid until after the estate is settled. Use whatever other arguments you can conjure, valid or specious, to persuade the black sheep of the family that it just isn’t worth it. Don’t forget to mention the possibility of imprisonment. Trust me, you do not need to make your job any more difficult than it already is.
As they say, no good deed goes unpunished. You are entitled to compensation for your efforts as executor, but your reward is taxable. Well, at least it may be.
When a client comes in to do estate planning, I ask a lot of questions. One question is how they would like to compensate the executor and the trustee? I tell them that they have two choices. First they can say nothing in the will or the trust and leave it up to the executor and trustee to calculate the commission using a formula. Or, I tell them that they can make a bequest. The commission is taxable, the bequest is not. Now before you accountants out there jump all over this proposal with cries of “form over substance,” allow me to explain.
The IRS does indeed live and breathe by the policy that if it walks like a duck and it talks like a duck, it’s probably a duck. In other words, a taxpayer cannot extoll form over substance. Accordingly, the argument goes, whatever label we apply to it, something that is meant as compensation must be treated as compensation and, therefore, taxed. However, a bequest of say an additional 5% of the Probate Estate, 5% of the Trust Estate, 5% of the sum of the two or, for simplicity sake, 5% of the sum of all the estates, with no strings attached, is just what it appears to be, a bequest.
For example, in my father’s trust, his five children were left equal shares of the Trust Estate. My younger brother, however, was bequeathed an additional 5%. And that was all I drafted the clause to say. He was not required to do anything additional for his inheritance bump. As a bequest, it was tax-free to him. Had I not been able to perform my duties as the trustee, he was next in line for the job. Unless he took a commission, he would not have been taxed in any way. Nor could the Internal Revenue Service argue that his additional 5% was actually a commission in disguise unless they wanted to argue that merely helping out turns a tax-free bequest into compensation—an argument I seriously doubt would prevail in court.
But, as they also say, nothing is perfect. If you bequeath an additional sum to the person you expect to settle your estate, you have to be certain that the person does not also take a commission. You could simply state that your fiduciary, whoever that may be, is not to receive a commission. But, in that case, should your intended fiduciary not settle your estate, for whatever reason, there is not a lot of incentive for anyone else to do it either. The best approach is to bequeath an extra sum to the fiduciary-apparent and trust that this trustee or executor will be honorable.
It bears mention at this point that, if you are the appointed executor or trustee and also the sole beneficiary of the estate, it makes absolutely no sense for you to take a commission. Why convert any part of a tax-free inheritance into taxable compensation? You are getting it all in any case, tax-free. On the other hand, if you are not the sole beneficiary, and you have not been left a little something for your potential services as the fiduciary, then taking a commission gets you something extra, even after taxes.
Commissions are classified as an expense of administration. As such, the trust or estate may deduct them on the fiduciary income tax return. If the deductions exceed the income, the loss is passed through to the beneficiaries. So, if you are both executor and one of the beneficiaries, you will at least get your share of the estate’s deduction, thereby attenuating your tax burden somewhat.
If you are going to undertake the thankless chore of settling an estate, you are entitled to compensation. Your compensation can be established by the will or trust, it can be calculated by an accepted court formula, it can be decreed by the Probate Court, or it can be agreed upon by all of the beneficiaries. In addition to your commission, remember to reimburse yourself for any ordinary and necessary expenses that you have paid on behalf of the estate. Do not assume that an expense is extravagant until you have calculated the cost of the alternatives. Finally, remember that your commission is taxable but your inheritance is not. Enough said.
Things to Do
1. Use a book or spreadsheet to track your out-of-pocket expenses.
2. Reimburse yourself for out-of-pocket expenses.
3. Calculate and take your commission.