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If You Are An Executor Of An Estate, It Might Be Better Not To Take An Executor's Fee

 

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).

Writing-fortaxwriteoff.jpgIn 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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  1. The Benefits of a Professional Executor
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  3. Professional real estate analyst weighs in on Canadian real estate (Podcast)

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About Preet

Preet Banerjee is a Canadian personal finance commentator. He is a television host for The Oprah Winfrey Network, a Money Expert for The W Network, a personal finance columnist for The Globe and Mail, and a regular panellist on CBC's The National with Peter Mansbridge. He also appears frequently as a guest commentator on a variety of other programs and media.

Comments

  1. Four Pillars says:

    Interesting post – I had no idea that the executor’s fee was taxable income.

    I would assume that they executor can claim expenses incurred in the line of duty?

    Mike

  2. Preet says:

    Hi Mike, the estate would re-imburse the out of pocket expenses incurred by the executor and the executor should provide a statement of accounting for all the beneficiaries. But before doing so, I believe the executor can pay expenses from the estate directly (and provide accounting for such expenses accordingly as well).

  3. Nicolas says:

    Salutations,

    You are correct, the executor can pay reasonable expenses directly from the estate in order to accomplish his mandate. And, as you also mentioned, he must account for those to the beneficiaries (In order to make sure the expenses were reasonable).

    You did raise one situation that raises an issue. It seems to me that being executor and beneficiary might raise potentially serious conflict of interest (unless you are the sole beneficiary of course).

    Nicolas

  4. Preet says:

    Yes it can be a touchy subject. I recently had a friend who was both a beneficiary and executor of his father’s estate. Luckily the family was tight nit and even-keeled. But I can only imagine if this situation ever arises with a family that are at-odds with each other…

  5. Hi Preet,
    Good post. I recently posted about the rules for executor fees allowed in various provinces and, as usual, they are all over the map. Some have a cap of 5%, like BC, while others like Ontario have a de facto guideline of 2.5-3%. In most cases, the Trustee Act allows a will to set out different fees, probably higher, than the legislated amount. I say probably higher since an executor can decline the job if they feel it will be too much work for too little pay. One reference I found mentioned that 3% is usually not enough for these days for professionals to do the job …. with your insider connections, Preet, maybe you could find out what the going rate is these days at trust companies? Executor fees are meant to reflect the amount and dfficulty of work involved, as well as the skill and results achieved, so an executor who feels they have been paid too little can apply to the court for more.

    Re Nicolas’ comment about conflict of interest … the law obliges such a person to act impartially. The other beneficiaries can take you to court if they don’t like what you do. One source I found suggested that if the beneficiary-executor starts to see things get dicey, he/she should hire two lawyers, one to advise the beneficiary, the other to advise the executor! Maybe it helps to be schizophrenic?

    One other benefit a professional executor has in dealing with the various bureaucracies in government and financial services is the greater cooperation accorded to someone “in the business”. Even if you know what you are doing, they assume you don’t and if they are wrong (like one nameless discount brokerage that would not accept a testamentary trust account because they believed a separate trust document was required other than the Will), it is impossible to convince them otherwise.

  6. Preet says:

    Hi Jean, I did indeed read your excellent post on the topic. The rules and regulations are indeed all over the map! I did some digging and found some guidelines for professional executor’s fees (at least from our firm). You can see the comments in the linked post by clicking here.

  7. Michelle says:

    We have hired a lawyer to start the paper work for probate. He did not ask if we were going to ask for executor fees and we were planing to. Is it to late?
    Michelle

  8. Preet says:

    @ Michelle: I think that is a question for your lawyer, and you should ask him/her ASAP.

  9. David Young says:

    I am an executor of an estate in New York State.
    May I take a partial disbursement of the executor fee
    in advance of closing the estate?

  10. Preet says:

    @ David Young – I’m not familiar with New York State, or American federal regulations in these matters. Unfortunately you’ll have to do some digging. My (unverified) understanding is that you can charge a percentage as you go based on the qualifying transactions that are being processed as they happen. But again, best to check with a professional in your jurisdiction.

  11. JD says:

    A question on dual executors.

    My dad died 5 1/2 years ago and we are still dealing with the estate. Basically a few years before my dad died he had a heart attack and the woman he lived with had him sign a mirror will in the hospital.

    A year or so later they had a common law separation the estate divided. A year later he died but had not changed his will nor had she (she since has). She was the sole executor and beneficiary but through the separation agreement she was removed from her duties.

    From there the will dropped down to co-executors that she had picked – her daughter (whom my father loathed) and my sister. We have never been a family with as we are older and this was a rocky relationship for the several years together. My dad’s former girlfriend said, admittedly to us when she thought she was in control of the estate, her kids were only put in the will in case something happened to her hence the mirror will. This was the case before she knew she was to be removed, once removed was furious and is using her daughter to “get what they could” even though she had already took a large part only a year prior in the separation. In total there are now the 4 beneficiaries of the mirror will – the 4 kids all in our 30′s – my sister, myself and this women’s daughter and son.

    Both my sister and I live om Toronto 500 km from my father’s home but we were trying to sell his house of which the other executor, who lives in the next town, decided to move in and throw out the tenant living there (who was paying rent to cover the cost of mortgage and insurrance). She lived there for 13 months and now 5 years later with everything finally wrapped up somewhat, (as she thwarted everything along the way and did not respond for months on end) she is trying to claim $3600 for living expenses in the house (gas money to her work in the next town).

    We sent numerous letter saying we did not want her the house, personally talked to her several times asking her to leave but she refused. The mortgage came out of the estate while she moved in and lived rent free with her boyfriend and 2 kids – basically like a squatter we could not get her to co-operate and leave the home instead she invited us to stay if we wanted (I believe some advice given to her by one of the several lawyers she retained and fired). She would not approve any real estate agent we wanted for almost a year and then when she did the house was sold in less then a couple months.

    She insists that she was there to maintain the house and contents through out the winter but really she was stalling for rent free living while her mother stayed at the residence as well a which went against another section in the separation agreement. She has not submitted any monies for cars, lawn equipment ect. she was given to sell. We have conceded on so many continuous issues over the years, swallowed our pride just to move things along, even if my dad would be rolling in his grave.

    My sister and I want this behind us so we can move on but this business of claiming gas money to travel to and from work from his home is ridiculous after rent free living and the other co-executors disproval

    We really don’t want to bend on this issue as well but she refuses to let it go and continues to hold up the closing of the estate as she has no other interest except getting what she can? She is tenacious in her tactics and while over the years the estate lawyer feels compassion for us he believes we should just except to finish this off. He said we should sue after and would stand as a witness for us but the reality is for the money, time and headache it is not worth it? We know only half the monies she wants actually comes out of our pocket (as she and her brother our beneficiaries) but it’s principle and another strong arm tactic to ultimately get her way.

    What are her rights in this matter and our rights as co-executor and beneficiaries?

    Sorry for the long preamble but I believe the story is necessary for our argument

  12. Gina LeVangie says:

    My husband lost both his parents around the same time , His father had a will,but the trustee did not finish his job and was paid for what he did not finish,like 11 or 12 thousand dollars,there is land that is still in his dead mothers name,there was no deeds done up, or anything we should not have to pay for what they should have finished,how can i go about getting help,sooo desperate for an answer or someone to help?

  13. Jim Smith says:

    Also, You forgot to mention that Executor Fees in Canada ,are subject to Income Tax and CPP witholdings (but EI exempt in most cases). Therefore, you must register with CRA to get a business# for Payroll deductions, deduct and remit the Tax and CPP deductions to CRA, on or before the 15th of the month following in which you pay the executor fees (if you don’t remit on time you could be subject to a late remitting penalty). Futher, you are also required to report income and deductions on a T4 and T4 summary due no later than Feb 28th of the year following the payment of the executor fee (if you don’t you could be subject to a late filing penalty of the complete T4 supp./T4 summary).

    There is a $3500 exemption for CPP to keep in mind, so on any amounts exceeding $3500, there is the CPP rate of 4.95%, plus a matching portion of CPP-called the employer portion-which you can’t get back .You can only get the employee portion back when you file your T1 return if more than the CPP max.was deducted from all sources of income.

    Another consideration is that taking an executor fee ,because its taxable on the T1 return,could reduce certain credits like the child tax benefit, the GST/HST credit,and possible other credits for lower income Canadians.

  14. kathy says:

    I have an issue-aunt dies with two executors on her will-a niece and a friend-friend was given house-balance of estate deviced evenly between all nieces-nephews. House was sold two years prior to death when aunt moved to nursing home-she looked after sale herself with no problems-but never changed her will. Now-friend wants funds from house which 50 thousand is spent on her care. She refuses to probate will or meet with lawyer-what now

  15. TG says:

    We are dealing with a situation, where my father died two weeks ago, and my sister and I have been left all assets, and we have no issues about splitting things down the middle. We are 20 & 23 years of age, and through the WILL, have executor handling things. Our issue, is, we have not been provided with full disclosure, of all assetts, debts, or even the day to day earnings being generated from a business that was part of the assets. We are very frustrated at this time, as we feel, that we have been put in a allmost desparate situation, as numerous offers have submitted to the executor to purchase this business and we have no idea, what the status of the business is, or its worth, and we are being urged to sell the business by the executor, and he has refused the right to discuss our concerns, with the book keeper or other employees. Question being, must we go to probate or since there is no issues, may we take charge of all assets and or get rid of the executor asap.

  16. jade says:

    My sister and myself have been named as executors of my mothers estate. However, my sister was previously executor for my father 25 years ago. She is saying that she is entitled to charge fees for administrative duties for doing probate and other secretarial tasks over past 25 years. Can a person charge for adminstrative executor’s fees years later?

  17. Abe Paul says:

    Hi Preet. I always enjoy your discussions with Peter Mansbridge on CBC.
    I had an exclusive relationship with my girlfriend for about 10 years, although we each had our own residence. She recently succumbed to cancer, and I am co-executor with a neighbour. Her beneficiaries are her niece and nephew in Denmark, with whom I have an amiable relationship.
    We plan on splitting the 5% executor fees and have in addition claimed expenses only for travel. Based on CRA guidelines, we are using $0.53 per KM for our personal cars, although that seemed high.
    My main question is what can/should be included in estate that is subject to the 5% fee? My friend had investments which were paid directly to beneficiaries and did not appear in estate or will, so we are NOT planning on including them. The beneficiaries visited here from Denmark shortly after their aunt’s death, and with our permission took some of deceased’s belongings, mainly jewelry, back home with them. These items we were also not planning in including in estate assets, therefore not charging executor fees – should we? Finally, we arranged to ship some items to Denmark, and the insured value is $35,000, much less than actual value. Is it reasonable for us to add $35,000 to estate value, thereby collecting the 5% fee on this amount?

  18. Diane says:

    I am in the position to pay tax on fee received. Where do I put this amount on my taxes? Is it other income??