How are executors paid for their work?

To continue our discussion of executors from last week, let’s talk about how executors are paid for what they do.

But, first, let’s review the executor’s job, as described by the New York City Bar (see tinyurl.com/2p8vhe6n): • Locating and making an inventory of all your property and transferring it to the estate; • Paying your bills and taxes;

• Collecting debts owed to the estate;

• Investing and managing your assets during the probate proceeding;

• Distributing your property to those who you chose to receive it at the end of the probate proceeding.

The executor continues until the job is done and the estate is officially closed by the probate court. “Estates may be closed when the executor has paid all debts, expenses and taxes ... and has distributed all assets on hand,” according to the American Bar Association’s “Guidelines for Individual Executors & Trustees” (tinyurl.com/4tmfw4n2).

That can be a time-consuming process, depending on the size and complexity of the estate, and executors do get paid for their time and effort.

Some states set executor fees by statute. For example, New York’s “executor’s commission” is calculated based on the size of the probate estate using this formula, which is tied to “receiving and paying out” sums of money:

• First $100,000 is 5%;

• Next $200,000 is 4%;

• Next $700,000 is 3%;

• Next $4,000,000 is 2.5%;

• The remaining amount greater than $5,000,000 is 2%.

The formula is found in Section 2307 of the New York Surrogate’s Court Procedure (see tinyurl.com/2au2k5je).

The “value of the estate” excludes assets passing outside of the estate, such as IRAs or joint and survivor accounts or trusts.

For example, take a $10 million estate, of which $6 million is an IRA whose beneficiary is the daughter of the decedent. The IRA is a non-probate asset. The commissionable probate estate would be $4 million, not $10 million. The commission would be $109,000. If the entire $10 million were commissionable, the executor’s fee would be $234,000. That’s a big difference.

There is a handy calculator that you can use to estimate the New York executor commission at tinyurl.com/2mmwvc96. The calculator is provided by EstateExec.com.

If the estate is a Connecticut estate, there is no statutory formula. Instead, a “reasonableness” standard applies based on case law.

Nine factors come into play, based on a 1923 case called Hayward v. Plant ( tinyurl.com/52s2nn3a). The factors are:

1. Size of the estate;

2. Responsibilities involved;

3. Character of the work required;

4. Special problems and difficulties met in doing the work;

5. Results achieved;

6. Knowledge, skill and judgment required;

7. Manner and promptness in which the matter was handled;

8. Time required;

9. Other relevant and material circumstances.

While these factors are unique to each situation, EstateExec.com provides this guidance: “A rule of thumb used by many Connecticut probate judges is that a fiduciary’s fee of less than 4% of the gross estate is presumed reasonable, and many people believe that anything on the order of 3-5% is okay” ( tinyurl.com/4fkzvwzh).

Time spent will be an important element.

If you live in another state, Executor.org provides an interactive map that shows the executor fees per state ( tinyurl.com/3n27xt7r). (Be sure to double-check with your local lawyer.)

What can one expect in terms of time to settle an estate? While there really is no such thing as an average estate, based on research EstateExec conducted in 2018, think in terms of 16 months ( tinyurl.com/3hmk62kk). Larger estates take longer — $5 million-plus estates take an average of 42 months, according to EstateExec, while estates in the range of $50,000 to $250,000 take about 14 months.

Next week, we’ll talk about additional resources. We’ll also address two subjects that you might want to consider:

1. The conflicts of interest that might arise when asking your attorney to serve as your executor;

2. Why it’s important to understand executor and trustee fees early in the estate planning process.

Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.