Articles of Interest: Estate Administration

What type of compensation is an executor entitled to?

EXECUTOR’S COMMISSION: JUST DUES

Being the executor of a Will is a job. It involves a significant amount of work. The executor has to probate the decedent’s Will, sell the decedent’s assets, open up an estate bank account, pay any outstanding debts of the decedent, file the appropriate tax returns, account to the court and the beneficiaries, and make distributions to the beneficiaries.

Assuming that all of those tasks go smoothly, the person serving as the executor still must take significant amounts of time out of her life to ensure that the tasks are accomplished. And, of course, there’s the overhanging possibility that a beneficiary might sue the executor for failing to perform her duties in the best manner possible. Oh, the joys of being an executor.

Given the amount of work—and risk—involved in being an executor, it’s no wonder that an executor is entitled to compensation for her work. The executor’s compensation comes in the form of a "commission," and in New Jersey, a statute establishes the amount of the commission.

An executor is entitled to a 6% commission on any income that the estate earns. So, for instance, assume that the entire estate is worth $400,000. The executor has probated the Will, sold the assets of the estate (for example, sold the house, liquidated the brokerage account, etc.), set up an estate bank account, and deposited the $400,000 into the estate bank account. Assume that before making the distributions to the estate’s beneficiaries, the estate has earned $6,000 in interest income; any income that the estate’s assets earn after the decedent’s death and before distribution to the beneficiaries is income of the estate.

The executor is entitled to 6% of the $6,000 of income. In other words, the executor’s "income commission" is $360 ($6,000 * 6% = $360).

In addition to the income commission, the executor is entitled to a "corpus commission." Corpus is a Latin word. For those of you who don’t speak Latin—few as they may be—the corpus of the estate is the principal of the estate. In my example, the principal of the estate is the $400,000.

The corpus commission is graduated. The executor is entitled to 5% of the first $200,000 of corpus; 3.5% of the excess over $200,000 up to $1,000,000; and 2% of the excess of the corpus over $1,000,000.

From a practical standpoint, using my example of a $400,000 estate, my hypothetical executor would be entitled to a commission of $17,000. She would be entitled to $10,000 on the first $200,000 of the estate ($200,000 * 5% = $10,000), and $7,000 on the remaining $200,000 ($200,000 * 3.5% = $7,000).

All in all, our executor is entitled to a commission of $17,360. Of that, $17,000 is a corpus or principal commission and $360 is an income commission.

Now, that commission may or may not be a bad deal. In large part, that would depend on how much actual work you must perform as the executor and that varies from estate to estate. The only thing that is constant with the administration of estates is that each one is different.

Another reason that the commission may or may not be a bad deal is due to the taxability of the commission and the fact that many inheritances are not subject to tax. For example, assume that the beneficiaries of the $400,000 estate used as a hypothetical are the two children of the decedent and that one of those children is the executor.

If the executor didn’t take her commission, she would receive a $200,000 inheritance, or one-half of the $400,000 estate. That inheritance would not be subject to any "death tax": federal or state; however, the commission is taxable income.

A commission is earned income. Being an executor is a job, and the compensation that the executor receives is earned income, subject to income tax. The executor must claim the commission on her personal income tax return (form 1040) as "earned income."

So, in this example, the executor would probably receive more money if she didn’t take the commission, given the fact that the commission only reduces her tax-free inheritance and the fact that she must pay tax on the commission.