If you have been named the executor (or personal representative or administrator) for an estate for someone who has died you may know that you may be entitled to an executor’s fee. The fee can be specified in the will, or it may not be explicitly addressed in which case the executor can charge a percentage of the value of the estate (up to certain limits).
In either case, there are certain things to consider when you are also a beneficiary of the estate. If you receive money from the deceased’s estate as directed in the will, you do not pay tax on this amount. If you claim an executor’s fee, you must include this on your tax return as taxable income and pay tax on it.
So you can see that if you were the only beneficiary of the estate, it might not make much sense to claim a fee at all since you would have tax to pay on that fee. If you waived the fee altogether, then more money would pass to you on a tax-free basis.
For example, let’s assume for simplicity’s sake that there is $100,000 of cash to be disbursed to you. If you just waived your fee, you would have $100,000 tax-free. If you took a 5% executor’s fee then you receive $95,000 tax-free and $5,000 which is taxable – if your marginal rate was 40%, you will owe $2,000 in tax leaving you with just $98,000 after-tax.
If there are other beneficiaries of the estate it becomes more complicated as you have more than just tax issues to consider. However, it may make sense (from purely a tax perspective) to take an executor’s fee if there are more beneficiaries than just yourself – in fact, it becomes more appealing as the number of beneficiaries increases.
Example: If you and your brother are the beneficiaries of the $100,000, then you would receive $50,000 tax-free if you waived the executor’s fee. If you instead took 5% as a fee then you would receive $47,500 tax-free and $3,000 after-tax from the $5,000 executor’s fee (assuming a 40% marginal rate) for a total of $50,500.
If you have 9 other brothers and sisters, then you would each receive $10,000 after-tax if you waive your fee. If however, you took a 5% fee then you would receive $9,500 tax-free plus $3,000 after tax for a total of $12,500.
Please note: I am not a lawyer. Please seek the counsel of a qualified lawyer before acting on any information contained in this article. There are more than just tax issues to deal with in respect to estate planning.
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RRSPs: The Definitive Book on Registered Retirement Savings Plans