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Should You Cap the Fee Your Executor Charges?

WillsA legal battle in New York shows an aspect of estate planning that often doesn't see much discussion: the fees for the executors.

I must disclose that I have been an avid follower of Leona Helmsley’s estate ever since she left her dog, Trouble, $12,000,000. Once again, her estate is back in the news, providing us with yet another example that enormous wealth doesn't necessarily guarantee a good estate plan. In this case, her attorney’s failed to define how much is too much for executors' fees despite including a provisions that the law governing the amount an executor could charge under New York state law was waived. 

Now, the New York attorney general has challenged the proposed fee on the estate of Leona Helmsley. The attorney general states that the $100 million sought by the executors, including two of Helmsley's grandchildren, is "astronomical" and should be reduced by 90%. That is still a whopping $10 million. While I have long agreed that probate can be an administrative nightmare, even I would accept this engagement!

Few wills specifically mention executor fees but the likely reason is tha,tin many states, these fees are determined by state law. Most states base the fee (also called a "commission" in some states) on a sliding percentage of the assets of the estate. In New York, the commission starts at 5% of the first $100,000 and declines to 2% on amounts above $5 million. So in New York, the total fee on a $1 million estate would be $34,000, or 3.4%. There are variations in every state, but the average on an estate of that size is typically about $30,000, or 3%.

In Virginia, it is the Commissioner of Accounts that approves the probate process and ensures that the fees set by law are adhered to. As in many states, the Commissioner allows additional fees to be charged for engagements “outside the scope of the typical probate estate”. In states without a fee scale, it would be wise for individuals to cap the fee in their wills nor must this cap be limited just to those states without a defined fee.

Compensation for executors who are friends or family usually isn't a big deal—particularly when the executors are also beneficiaries. Typically, the executors will waive a fee because paying tax on the fee at ordinary-income rates wouldn't be as beneficial as  receiving the money as a bequest tax-free.

Nonetheless, in some situations, people who are asked to be executors may want to inquire about fees. An executor's job can be time-consuming and complicated, even if the estate is not that large. The executor will be responsible for collecting and valuing assets, paying debts and taxes, and speaking with potentially fighting or stressed out beneficiaries.

Reference: The Wall Street Journal (January 29, 2016) "Battle Involving Leona Helmsley Estate Spotlights Issue of Executor Pay"

 

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