If you've named a family member as executor of your estate, you should take a look at what your will says about compensating him or her — even if you think your estate will be easy to settle.
Although executors have a right to be paid, many families think that it's somehow not "right" to compensate a family member, particularly a close one, to do the job.
But being an executor is a big responsibility, especially for someone who works full-time. The person responsible for settling your estate must locate your will, appear before the probate court, notify all your beneficiaries and creditors, settle outstanding debts and taxes, and gather and distribute your assets according to your instructions.
In addition, he or she must file your estate-tax return and final federal and state income-tax returns.
With all that at stake, it's probably a good idea to provide some compensation. Remember that your executor can always waive the fee. The following are criteria to consider when coming up with a fair amount.
— State guidelines. Most states set maximum fees for executors. For example, Pennsylvania and several other states use a decreasing scale, with the rule of thumb being that a reasonable fee could be as high as 5 percent for the first $100,000, 4 percent for the next $100,000 to $200,000, 3 percent on the next $200,000 to $1 million, and so on.
— The amount of work. Size alone doesn't determine how difficult or time-consuming the job will be for your executor. If you own probate property in more than one state, for instance, it will cost more to settle the estate.
Or suppose your estate consists primarily of a small business, your surviving spouse is your second wife, and you have adult children from a former marriage. Your executor may have to supervise the business until it can be sold and the assets split among the beneficiaries. And he or she may have to negotiate conflicts that arise between your spouse and your children.
— Tax considerations. Reasonable fees your estate pays to its executor reduce your estate for federal estate-tax purposes. They also reduce the amount to be distributed to heirs. Your executor must report the fee as income and pay income taxes on it. If he or she is the sole beneficiary, it may make more financial sense to waive the fee and take a larger distribution from your estate.