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Does the executor of an estate deserve to be compensated for that service? Absolutely. As last week's article pointed out, serving as an executor is often a time-consuming, emotionally draining task.
Yet the issue of payment for an executor, especially one who is a family member, is a common source of conflict among heirs.
Almost every state allows for the compensation of executors, even if the will does not provide for payment. For example, South Dakota law says the compensation must be "reasonable" based on the time, effort, difficulty, and skills required. The laws limit reasonable compensation to 5% on the first $1,000 of the estate’s value, 4% on the next $4,000, and 2.5% on any value above that. So an estate of $500,000 could pay up to $12,585 in executor fees.
Estateexec.com (a company that sells estate management software) finds that average compensation is $18,000, which based on their average of 570 hours of work comes to $31.58 an hour. In addition to the executor fee, the average estate spends $12,400 on legal and accounting fees.
Here is a curious twist when it comes to paying the executor for their time. Rarely, if ever, does a person asked to be an executor ask the maker of the will about compensation. If someone did have the courage to ask, it could gravely jeopardize the will maker's perception of them as a trustworthy person of integrity. Failing to discuss the executor's pay scale isn’t only because being named is viewed as an honor. Everyone involved, especially other beneficiaries of the will, often simply assumes that the executor will serve without compensation.
According to Estateexec, 44% of wills experience family conflict, with 19% of beneficiaries perceiving misconduct by the executor. There are thousands of stories by beneficiaries alleging the executor ripped off the estate. One such story appeared August 4, 2016, in Quentin Fottrell's MarketWatch blog, "My brother blindsided us with a $20,000 fee to be the executor of our mother’s estate." While Fottrell concluded that the fee was reasonable, he found it would have been helpful if everyone had been aware that the executor would be paid.
Still, money discussions can be emotional minefields in the best of times. They are even harder to have when family members are grieving the loss of a loved one. One way to reduce the potential for conflict is for the testator to include a clause in the will specifying that the executor will be compensated. It may be helpful to add that if any beneficiary objects to paying the executor, their portion of the inheritance will be reduced by a designated amount or percentage.
Another way to defuse conflict around paying the executor is to point out that their services can save the estate money. Tasks like gathering financial information, compiling an inventory, and managing payments are time-consuming. An executor's statutory fee for this work is likely to be less than the estate attorney's hourly rate.
I suspect one reason for the common assumption that executors are not paid is that, in many probates, the payment is waived. If the executor is also a surviving spouse or other primary heir, it often makes sense to waive the fee. They will inherit most or all of an equivalent amount, which is not taxed. The executor fee, however, is taxable income.
Ultimately, the most important way for an executor to manage family tensions is to be transparent and accountable. Keeping clear records, freely sharing information, and acting in good faith are essential to fulfill the fiduciary responsibility that the testator entrusted to them.
Rick Kahler, MS, CFP®, CFT-I™, ChFC, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
Read more articles by Rick Kahler
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
