Generally speaking, an executor of an Estate will be entitled to some amount of compensation for their time and effort. Unfortunately, the specific amount of compensation has the potential to become a contentious issue. The beneficiaries may feel that the amount of compensation claimed is excessive and refuse to agree to it. This article, which is the first in a series of articles on executor compensation, looks at the most obvious issue in this area of the law: what is an appropriate level of compensation for an executor?
Does the Will say anything about compensation?
The first place to look is the Will itself. The Will may directly state the terms of executor compensation, or it may refer to an external agreement regarding compensation. The latter method is more common when a professional trust company is appointed as executor. Either way, so long as the Will provides a specific amount of executor compensation, or a specific method of calculating executor compensation, then this will usually be definitive in setting the executor’s compensation.
Customary 5% rule
If the Will is silent regarding executor compensation, then by default, an executor is entitled to “reasonable” compensation. This is set out in section 61 of the Trustee Act. Over many years, the courts have developed a customary rule that an executor is entitled to 2.5% of all money coming into the Estate, as well as 2.5% of all money flowing out of the Estate. The ultimate effect of this rule is that an executor receives 5% of the total value of the Estate as compensation.
However, this 5% rule is only a custom; it is not guaranteed, and it is not presumed. Rather, if a court is called upon to determine a “reasonable” level of compensation, it analyzes five factors:
- the magnitude of the trust (in other words, how large the Estate is);
- the care, responsibility, and risks assumed by the fiduciary;
- the time spent in performing the duties of Estate Trustee;
- the skill and ability shown by the Estate Trustee; and
- the success resulting from the administration of the Estate.
Based on these factors, a court may decide to order more or less than the customary 5% compensation. For example, if the Estate is relatively small and not particularly complex, then the court may decide to order less than 5%. On the other hand, for an exceptionally complex Estate requiring an excessive amount of work, and where the executor has performed their role exceptionally well, it may be possible for the executor to be awarded more than 5%.
It is also important to point out that, if an executor hires a lawyer or another professional to undertake the tasks that are properly the responsibility of the executor, the executor should not also receive compensation for these tasks. That would amount to Estate double-paying for the same work. In such a situation, the executor’s compensation should be reduced appropriately.
However, this does not mean that executor compensation should always be reduced by any professional fees incurred by the executor. A prudent executor is generally expected to obtain legal and accounting assistance with the administration of the Estate. So long as these professionals are properly acting in their capacity as professional advisors to the Estate, then their fees will properly be paid from the Estate, separately from any executor compensation. It is only when a lawyer, accountant, etc. takes on tasks that are properly the job of the executor that compensation should be reduced. For example, if the executor is hiring a lawyer to do things such as sort through the deceased’s home, pay the utility bills, deal with a junk removal company, etc., then these legal fees should be deducted from the executor’s compensation.
If you have further questions or require legal assistance regarding executor compensation, contact Miller Thomson’s estate litigation team.