In the News

A Tough Job Deserves Compensation

Kiplinger Retirement Report, October 2000

Two years ago, Gilbert Fazzio waived his right to an executor’s fee for settling his brother-in-law’s $1-million-plus estate. He figured it was just one of those family obligations, and at the time he felt awkward about earning money from a relative’s death. But he soon learned what he’d gotten himself into.

“This was just not a job for an ordinary person,” says Fazzio, noting that his brother-in-law owed federal income taxes from 1993 until his death in 1998, and had a pile of unpaid bills and a stack of uncashed dividend and interest checks.

The 79-year-old retiree from Oakland, CA, wound up petitioning the court for the $11,000 fee he had initially waived – and getting it. And he’s only now making the final settlements on the estate. “It was an overwhelming task at some points,” says Fazzio. You just feel like it’s completely hopeless and you’ll never get it resolved.”

It’s a Big Assignment

Most estates are not that tough to settle, but this is a good time to take a fresh look at what your will says about compensating the family member you’ve named as executor. Executors have a right to be paid (professionals you hire always are), but many families simply assume that it’s somehow not “right” to pay a family member, particularly a close one, to do the job.

Being an executor is a big responsibility, especially for someone who is working full time. The person responsible for settling your estate must locate your will, appear before the probate court, notify all your beneficiaries and creditors, settle outstanding debts and taxes and gather and distribute your assets according to your instructions. In addition, he or she must file your estate tax return and final federal and state income tax returns on time.

With all that at stake, it’s probably a good idea to provide some compensation. “You’re better off letting people get paid for it and having them treat it as a real responsibility,:” says Martin Shenkman, an estate attorney in New York City. Remember that your executor can always waive the fee.

Estimating a Fair Payment

Estimate how much time and effort will be required to settle your affairs. Then discuss it with your family and advisors, and let your family know about your wishes.

State guidelines. Most states set maximum fees for executors. For example, Pennsylvania and several other states use a decreasing scale, with the rule of thumb being that a reasonable fee could be as high as 5% for the first $100,000, 4% for the next $100,000-$200,000, 3% on the next $200,000 to $1 million, and so on.

The amount of work. Size along doesn’t determine how difficult or time consuming the job will be for your executor. If you own probate property in more than one state, for instance, it will cost more to settle the estate.

Say you leave an estate of $1 million that consists of a $325,000 IRA and a $676,000 brokerage account. Your spouse is the designated beneficiary of the IRA and the brokerage account goes into a credit shelter trust that enables your to take advantage of the $675,000 you can pass free of estate taxes in 2000.* Your spouse will receive income from the trust as long as he or she lives and then the assets pass to your children. Your estate won’t require much work beyond filing the required tax returns.

But suppose your estate consists primarily of a small business, your surviving spouse is your second wife and you have adult children from a former marriage. Your executor may have to supervise the business until it can be sold and the assets spit among the beneficiaries. And he or she may have to negotiate conflicts that arise between your spouse and your children.

Tax considerations. Reasonable fees your estate pays to its executor reduce your estate for federal estate tax purposes. They also reduce the amount to be distributed to heirs. Your executor must report the fee as income and pay income taxes on it. If he or she is the sole beneficiary, it may make more financial sense to waive the fee and take a larger distribution from your estate.

*Note: This federal life-time deductible amount has increased since this article was written.