When someone passes away, their estate needs to be managed and settled. That’s where the executor comes in. This person is responsible for collecting the deceased’s assets, paying off any debts, and then distributing the remaining assets to the beneficiaries.
But how much does an executor of an estate get paid for all this work? The compensation usually comes from the estate itself, but the exact amount can vary significantly.
Several factors influence executor compensation, including state laws, the will’s instructions, and the complexity of the work involved. Let’s take a closer look.
Why executors get paid
Being an executor can take a lot of time and energy. Settling an estate is often a long, complicated process, and executors can be held responsible for mistakes they make along the way. Paying executors helps ensure that people who are good at the job are willing to take it on.
How executor fees are determined: What the will says vs. state law
When it comes to compensating an executor, there are two main factors at play: the will itself and the laws of the state in which the deceased person lived.
The role of the will
In their will, a testator (the person writing the will) can specify how the executor is to be paid. The will might outline specific payment terms, such as a flat fee or an hourly rate.
Keep in mind that some states require will-specified fees to meet a statutory minimum. In other words, the compensation can’t be so low that it’s considered unreasonable.
When state law rules
If a will doesn’t mention compensation for the executor, state law will govern how much the executor gets paid.
State laws differ quite a bit in how they calculate executor fees, but each state has laws to ensure that executors are paid a “reasonable” amount for their work.
Methods of Calculating Executor Compensation
So how do courts arrive at a fair compensation figure for the executor? Here are some of the formulas they use:
Percentage of the Estate
Some states determine executor fees by assigning a percentage of the estate’s total value to the executor. For example, California uses a tiered system based on the estate’s gross value. The executor might receive 4% of the first $100,000, then 3% of the next $100,000.
Texas, on the other hand, calculates the executor’s compensation based on what’s actually paid out of the estate, but it’s capped at a percentage of the estate’s total value. The standard executor compensation in Texas is 5% of cash received and paid out, also known as the “five-and-five rule.” This is capped at 5% of the estate’s total value.
Flat Fee or Hourly Rate
Some jurisdictions use flat fees or hourly rates to calculate executor compensation. These methods are less common, but they may be appropriate for smaller, less complex estates.
“Reasonable” Compensation
The Uniform Probate Code allows the probate judge to determine what constitutes “reasonable” compensation, based on the complexity of the estate and the efforts of the executor. The judge may also award “extraordinary” fees for handling complex tasks such as property sales or litigation.
Executor Compensation in Specific States: California and Texas
Executor compensation is handled differently from state to state. Here are a couple of examples.
California’s Tiered System
California uses a tiered percentage system to calculate executor fees. Here’s how it works:
- 4% of the first $100,000 of the estate
- 3% of the next $100,000
- 2% of the next $800,000
- 1% of the next $9 million
- 0.5% of the next $15 million
For estates over $25 million, the court decides what a “reasonable” fee would be.
So, if you were the executor of a $500,000 estate in California, you’d be entitled to a fee of $13,000.
Texas’s “Five-and-Five” Rule
Texas follows what’s known as the “five-and-five” rule. An executor is entitled to a 5% commission on money the estate receives and pays out. However, the total commission can’t be more than 5% of the estate’s gross fair market value.
There are a few exceptions to the 5% rule. For example, the executor doesn’t get 5% on funds held in financial institutions, life insurance proceeds, or money distributed directly to heirs.
The court may also order a different amount if the executor is managing a farm, ranch, or business.
Here’s an example of how it works:
- Estate gross fair market value: $1,000,000
- Cash collected during administration: $500,000
- Cash paid out for expenses and debts: $200,000
- Cash distributed to heirs: $200,000
- Maximum commission: $35,000
Additional Factors Affecting Executor Compensation
Keep in mind that a few other factors can come into play when determining how much an executor is paid.
Multiple Executors
If more than one person is serving as executor, the compensation is generally split between them. Depending on state law, that split may be equal, or it may be awarded based on how much work each executor performed.
Institutional Executors
Banks or trust companies that are named as executors often have pre-defined fee schedules.
Executor as Attorney
If an executor is also an attorney, their compensation is generally based on state law or any existing agreements.
Judicial Override
A court can deny or reduce an executor’s compensation if the executor acted improperly or was removed from their position.
Reimbursement and Taxes
Executors can be reimbursed for expenses. These might include court filing fees, appraisal fees, and travel expenses related to managing the estate.
It’s important to remember that executor fees are considered taxable income, which could influence whether or not someone chooses to accept payment. To protect yourself, keep detailed records of everything you spend while administering the estate.
Can an executor refuse payment?
Yes, executors can decline compensation. This is especially common if the executor is also a beneficiary of the will.
Before you turn down the fee, consider how much time you’ll be spending on estate matters. Waiving the fee might make sense if it creates tax advantages or simplifies the settlement process.
Conclusion
As you can see, executor compensation and estate administration can get complicated quickly. That’s why it’s important to seek legal advice from an experienced estate planning attorney.
An attorney can guide you through state-specific laws, help you navigate the probate process, and ensure you comply with all applicable regulations.
Whether you’re an executor or a beneficiary, understanding your rights and responsibilities is essential for a smooth and fair estate settlement.