Understanding executor fees is crucial whether you are drafting a will or appointed as an executor. Executor fees are the compensation an executor receives for executing a will, but these fees aren't guaranteed and vary significantly between states, with some states having maximum fee limits.
Several states have laws in place that set maximum limits on executor fees, while others leave it to the discretion of the court or the terms laid out in the will. This divergence in regulations creates a diverse landscape of executor fees across the U.S.
In this article, we'll focus on California, where executor fees are set by statute. Our aim is to provide clarity on the often complicated subject of executor fees in California, helping you navigate the process with confidence.
Executor Fees in California
In California, executor fees are explicitly defined by law. The California Probate Code sets a statutory fee for executors based on the "gross value" of the probate estate. The gross value includes all the decedent's real and personal property located in California, excluding joint tenancy properties, and life insurance or retirement accounts that pass directly to named beneficiaries.
The statutory fees are as follows: 4% of the first $100,000 of the gross value of the probate estate, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9 million, and 0.5% of the next $15 million. For estates valued over $25 million, the court will determine the fee for the amount that exceeds $25 million.
This fee schedule provides a clear, albeit rigid, system for determining executor compensation in California. This statutory fee is the same whether you have a professional executor or a family member or friend serving as the executor.
In terms of payment, executor fees are typically paid out of the estate's assets. This means the executor is compensated before the remainder of the estate is distributed to the heirs.
Additional Fees
In addition to the statutory fee, the executor may request and the court may allow additional compensation for "extraordinary" services performed by the executor. Extraordinary services could include selling real estate, litigating a lawsuit, running a business of the decedent, or dealing with tax issues of the estate. These fees are determined on a case-by-case basis, depending on the complexity of the tasks and the time spent.
Tax Implications of Executor Fees
One important factor to consider when dealing with executor fees in California is their tax implications. Executor fees are considered taxable income and must be reported on the executor's personal income tax return. They are reported as income, not self-employment, so executors do not have to pay self-employment tax on them.
On the other hand, reimbursed expenses are typically not taxable as long as they are necessary costs incurred while administering the estate and are reimbursed directly by the estate. These expenses should be kept separate from fees for tax purposes.
The executor will receive a Form 1099-MISC from the estate reporting the amount of compensation received during the tax year. This form should be included when filing personal taxes.
When Do Executors Get Paid?
The process of settling an estate can be lengthy, and executors may wonder when they will receive compensation for their work. In California, executors are typically paid after the court approves the final distribution of estate assets and the executor files a petition for their fee.
Generally, executors receive their fees once they have completed most of their duties, which often includes tasks like settling debts, paying taxes, maintaining properties, and distributing assets to beneficiaries.
However, before the executor's fee is paid, it must be approved by the probate court. This involves the executor submitting a detailed account of their time and expenses, which the court reviews to determine if the requested fee is reasonable. Once the court approves the fee, the executor can then pay themselves from the estate's assets.
Remember, the probate process can take several months to over a year, depending on the complexity of the estate. Therefore, executors should be prepared for the possibility that their compensation may not be immediate. Consulting with an estate planning attorney will help understand the specific timeline and processes involved in your situation.
