Wealth Strategies: Executor compensation - What you may not realize
Milestone Wealth Management Ltd. - May 17, 2016
Many of us will likely be asked to be an executor for a friend or family member at some point in our lives; yet most aren’t aware of a) the amount of time, effort and responsibility involved or b) the compensation you could potentially receive.
Executor Compensation - What you may not realize
Many of us will likely be asked to be an executor for a friend or family member at some point in our lives; yet most aren’t aware of a) the amount of time, effort and responsibility involved or b) the compensation you could potentially receive. Although the rules surrounding compensation certainly aren’t cut and dry, but there are some initial items to factor in before accepting this role as to whether: (Excerpt - Blades, Elaine: Understand Executor Compensation Rules: [article])
- there’s a compensation agreement in place;
- any co-trustees are involved;
- any agents were retained to assist with the administration; and
- beneficiary or court approval is required
It is possible for the testator (person making the will) and executor to agree on the level of compensation (or no compensation) at the time the will is made. This can be done via a clause in the will, or by a separate compensation agreement that is “incorporated by reference” into the will. The latter approach is generally preferred by trust companies, as it promotes transparency and typically eliminates the need to seek court approval. But exercise caution if the will leaves a legacy to the executor- beneficiaries could argue that the legacy was intended to be in lieu of compensation.
In the absence of a compensation agreement executors shouldn’t assume they’re automatically entitled to 5% of the value of the estate, for instance. Any fee taken prior to approval is known as “pre-taking” and is generally not permitted. Instead, executors should obtain approval for any proposed compensation before charging a fee to the estate. Executors can obtain approval in one of two ways: from the beneficiaries, or via court review. So how do courts determine appropriate compensation? While the Trustee Acts of several provinces establish maximums, no further legislative guidance is provided. In the absence of a set statutory fee, a percentage-based approach has evolved. Courts generally start with what are now termed the “usual percentages,” then access the result against a set of criteria established through case law. The usual percentages are up to 5% on the value of capital assets, and up to 5% on the value of income collected in the estate. The court considers five factors in making this decision:
1. size of the estate;
2. care and responsibility involved in administering the estate;
3. time spent by the executor;
4. the skill and ability displayed by the executor;
5. the success of the administration.
It might seem rather attractive, initially, to sign up for being an executor and in turn receive compensation, but there are a final few items to consider before taking on this role:
1. The court will not become involved in dividing the fee among co-executors.
2. Fees paid to an agent (lawyer, accountant, trust company) retained to perform duties on behalf of the executor must be deducted from any fees otherwise payable to the executor.
3. The amount received by a lay executor is treated as taxable income in his hands.
Bearing all of the above in mind, the majority of estates are administered by lay executors without being subject to court review. For those that don’t fall into this category, however, it’s worth noting that the executor is entitled to seek court approval of beneficiary accounts and compensation under most provinces’ legislation, subject of course to any compensation agreement. In addition, the beneficiaries have the right to require that executors present their accounts and proposed compensation to court for approval.