One of the most common questions about serving as the executor of a will is whether an executor gets paid for administering a decedent's estate—and the logical follow-up to that question is, “If so, how much?"
The simple answer is that, either through specific will provisions or applicable state law, an executor is usually entitled to receive compensation. The amount varies depending on the situation, but the executor is always paid out of the probate estate.
Typical executor fees are meant to compensate for the time and energy involved in finalizing someone else's affairs. They are calculated as a percentage of the estate, a flat fee, or an hourly rate, according to state law.
Last will vs. state law
Some states allow for a last will and testament to provide instruction as to how an executor should be compensated; this may be a flat fee stated in the document or the will may specifically leave the determination up to state law.
If there is no will, or no provision addressing the executor fee in a valid will, state law governs how an executor will be paid.
Determining executor fees by state
Each state has its own laws concerning executor fees. Washington state, for example, provides that executors are entitled to “reasonable" compensation. In this determination, a court may consider factors such as the complexity of the estate and issues involved, and the time the executor spent carrying out the duties, among others. Each state has its own guidelines for determining what is “reasonable."
California has one of the most detailed schemes, which provides that the executor fee is four percent of the first $100,000 of the estate, three percent of the next $100,000, two percent of the next $800,000, one percent on the next $9 million, one-half of one percent on the next $15 million, and a “reasonable amount" for estates above $25 million.
In states that mandate a specific percentage of the estate, there is also the possibility that the executor may collect an “extraordinary" fee if the duties of administering the estate have gone above and beyond the usual—situations such as being involved in litigation or tax disputes on behalf of the estate.
Texas law falls somewhere in between these two positions by providing a flat percentage unless the calculated amount is unreasonably low or the executor manages a business for the estate, in which case the probate court may adjust the fees. Under normal circumstances, executor fees in Texas are set at five percent of the amount paid out of the estate but may not exceed more than five percent of the total fair market value of the estate.
An executor is also usually entitled to be reimbursed for any out-of-pocket expenses incurred, for example, those that arise before the estate is opened for probate, such as the payment of utility or medical bills.
Executor fees and taxes
A final question you might be wondering is, “Are estate executor fees taxable income?" The answer is yes, they are, and this is one big reason an executor may choose to waive payment.
An executor may always decline to accept a fee—some people simply find taking money for serving as an executor of a loved one's estate to be awkward. But refusing executor fees makes particular sense when the executor is also set to inherit from the estate. This is because executor fees are considered taxable income for state and federal taxes, whereas inheritances are generally not.
While the above gives a general overview of executor fees, you may find it beneficial to consult with an estate planning attorney who is knowledgeable about your state's laws as you navigate the probate system.