Can I take an executor fee for managing my relative’s estate?

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 Q. I’m the executor of my mother’s estate. It’s taking forever to close it out, and I’m spending a lot of time on the paperwork, and I’ve even had to take time off of work for meetings. I’ve heard I can take a fee to manage the estate. How much? And what do I tell my siblings?

A. You’re in luck. You can take a fee to manage the estate. The bad news is that it sounds like it may be hard to break it to your siblings.

An executor of an estate is generally entitled to compensation for administering the estate, generally called “commissions,” unless your mother’s will provides otherwise, said Frederick Schoenbrodt, an estaet planning attorney with Drinker Biddle & Reath in Florham Park.

He said in general, the state statute provides that commissions on principal will be calculated as follows: 5 percent on the first $200,000, 3.5 percent on the excess over $200,000 up to $1 million and 2 percent on the excess over $1 million.

“Commissions are based on the value of assets in the executor’s control and will generally not include non-probate assets like jointly-owned assets that pass to a survivor or assets with a beneficiary designation,” Schoenbrodt said. “The commissionable base may also exclude real estate unless and until it is sold by the executor. ”

Also, income commissions will equal 6 percent of all income received, which means interest and dividends received during the course of the administration.

“It is a good idea to enlist the advice of a knowledgeable trust and estate attorney or accountant in determining the amount of commissions to which you are entitled,” he said.

In addition, you may be reimbursed for reasonable out of pocket expenses incurred, such as parking, mileage and amounts paid to a professional for accounting or legal services, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park. An executor is not permitted to be compensated for loss of wages as a result of taking time off of work — absent a court order.

Romania offered this example of an estate consisting of two Certificates of Deposit (CDs) in the sum of $100,000, each of which were payable on death to a named beneficiary. The estate also has another $800,000 in stocks, bonds and other financial accounts, which pass under the will and which earned $30,000 during the period of administration.

In such case, Romania said, the executor would not be entitled to either income or principal commissions on the $200,000 in CDs because these pass directly to a named beneficiary and therefore never come under the control of the executor.

But, she said, the executor would be entitled to an income commission of $1,800 (6 percent of $30,000 income) and a principal commission of $31,000 ($10,000 on the first $200,000 plus 3.5 percent on the balance). If there were co-executors, in addition to sharing the aforesaid amounts, they would share an additional 1 percent of $800,000 ($8,000).

“A court may allow additional amounts if unusual or extraordinary services were provided,” she said. “The court may reduce the fee if a beneficiary makes such an application and demonstrates that the duties and risks incurred by the fiduciary were less than that normally incurred for an estate of similar size.”

The executor is entitled to retain a professional, such as an attorney or accountant, to assist in the administration of the estate and pay the professional directly from the estate or be reimbursed for such expenses paid out of pocket, Romania said. Therefore, it may be beneficial to delegate some of the duties to a professional so that you do not need to miss work, she said.

And one important note for your wallet: Although there is no income tax paid by a beneficiary upon the receipt of an inheritance, a commission is taxable income that must be reported on the income tax return of the recipient. Likewise, the commission is deductible as an expense of the estate, potentially reducing any estate tax liability.

“For this reason, in a close family situation commissions are sometimes waived by the fiduciary,” she said. “However, if you decide to take a commission, you should keep a diary as to the services performed and explain to your family members that you are entitled to be paid for such services to the estate pursuant to New Jersey statute.”

That diary should help your siblings understand the commission you plan to take, if you go that route.

A few other important notes, from Florham Park attorney Walter LeVine.

He said although commissions are the equivalent to wages, for the services rendered, they are not considered as wages for Social Security or Medicare purposes, so these taxes need not be deducted from the payment or paid as a self-employed person.
 
LeVine also said that because there can be high inheritance and estate taxes involved with an estate, “it may be worthwhile for an estate beneficiary, who is also the executor, to take a commission rather than inherit that amount, as the tax cost could be less reporting the commission as income, since the commission reduces the estate and, consequently, the inheritance and/or estate tax could be at a higher rate.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.