While getting your estate planning affairs in order, you might wonder whether your executor or trustee is entitled to payment for their services. Read on to find out whether executor and trustee compensation is needed and, if so, how much is reasonable.
What are executors and trustees?
An executor is an individual you designate to carry out the wishes of your last will and testament after you die. If you don’t name an executor, one will be appointed by the court system.
The primary duties of an executor include gathering estate assets, paying estate debts, accounting to estate heirs, and making estate distributions to beneficiaries in accordance with the terms of the will and the probate rules in your state.
Almost every last will and testament names an executor to carry out the wishes outlined in the document.
The executor named in a will might be:
- The deceased’s surviving spouse
- One or more adult children of the decedent
- A trusted friend, relative, or professional
- A trust company
A trustee is responsible for managing and administering a trust for the benefit of its beneficiaries. Typically, the person who creates the trust is the initial trustee. When they pass away, the successor trustee takes over.
Trustees and executors are fiduciaries, which means they are legally obligated to act in your best interest. An executor is an individual that handles a probate estate while a trustee manages a trust.
Duties of executors and trustees
The duties of executors and trustees are similar and involve managing the affairs of your estate. This includes:
- Acting as the legal owner of your trust assets
- Managing the trust assets
- Settling your estate and distributing inheritances to your heirs according to the last will and testament or trust
- Representing the estate for legal purposes
- Managing the expenses of the estate
- Filing the deceased person’s tax returns
Executor compensation
While uncommon, some wills have specific terms regarding the amount of compensation that an executor is entitled to. For example:
- The will may provide a specific dollar amount for executor compensation
- The will may provide for a certain percentage of the estate as executor compensation
- The will may direct that the executor is to receive no compensation other than reimbursement of reasonable expenses
- In the absence of a provision in the will, many states have statutes that entitle an executor to a percentage of the estate as compensation for executor services
- Executor compensation is generally considered taxable income to the person who earns it, while an inheritance is typically income tax-free
Why is executor and trustee compensation important?
By this point, you might be wondering if you should provide instructions in your will regarding executor or trustee compensation. Here are some things to keep in mind:
- Doing so can cause animosity among the heirs of an estate or the beneficiaries of a trust
- Some executors and trustee may abuse their compensation rights
- It’s important to include language in your will or trust regarding compensation to prevent mismanagement and state intervention
Executor and trustee compensation by state
If you don’t specify how your executor or trustee should be paid in your will or trust agreement, compensation will be determined by state law.
In some states, executor and trustee compensation is based on the value of the estate and has a tiered payment structure. For example:
New York:
- 5% on the first $100,000
- 4% on the next $200,000
- 3% on the next $700,000
- 2.5% on the next $4 million
- 2% on anything above $5 million
California:
- 4% on the first $100,000
- 3% on the next $100,000
- 2% on the next $800,000
- 1% on the next $9 million
- 0.5% on the next $15 million
Other states may have a flat rate. For example, in Texas, executors receive a flat rate of 5% of whatever money they distribute while carrying out their duties.
Trustee compensation
Many people establish trusts during their lifetime to help their assets avoid the expensive and time-consuming probate process when they die. The person who settles a trust upon the trust creator's death is often referred to as the “successor trustee” and might be entitled to payment for their services.
Both executor and trustee compensation can be a flat rate, hourly fee, or a percentage of the estate, which is described in the trust documents or last will and testament in the case of the executor. If fees are based on a percentage of the estate’s value, it is usually on a tired model, for example, 5% of the first $100,000, 3% of the next $100,000, etc. Executors or trustees that go beyond the scope of normal duties are entitled to higher compensation.
The executor and trustee compensation is paid out of the estate, not the beneficiaries. Additionally, executors may need to get express permission from the court system before receiving their first payment.
All else being equal, the role of an executor of a probate estate can be more challenging than a successor trustee of a trust due to the complex probate requirements that an executor must meet.
Statutory trustee compensation rules do not exist. Most states provide that a trustee’s compensation must be “reasonable.” When you establish a trust, you can specify how you’d like your successor trustee to be compensated for their services.
Many family members who are both a trustee and a trust beneficiary will agree to waive any compensation rights because they feel they are “honored” to serve in that role for their parent or other loved one who passed away.
What is considered reasonable compensation for a trustee?
If compensation instructions aren’t included in the trust documents, most states require that trustees are paid a “reasonable” amount for their services. But what exactly is considered reasonable? Generally, it depends on the type and complexity of the trust. For example:
- The amount of time it will take to administer the trust
- How many beneficiaries there are
- The type of assets that need to be managed
If you hire a professional trust company to administer your trust, you will likely be charged 1-2% of the value of your estate. However, for smaller estates, you might be charged a higher amount of about 3-4%.
Is executor and trustee compensation taxable?
You might be wondering if the money paid to an executor or trustee for their services is considered taxable income for them. The answer is yes, it is. For this reason, some people may refuse payment for acting as an executor or trustee.
The bottom line
If paying the person who settles your estate is important to you, you should include language for executor and trustee compensation in your will or trust documents. That way, there is no confusion when it comes time to distribute your legacy to your heirs.