There may come a point in time when a loved one asks you if they may name you as the executor or other fiduciary role in their Estate Plan. Here, you should be asking the right questions before you give your consent. Acting as the personal representative of an estate is no small feat, so you’ll want to make sure you are willing and have what it takes. You will also have the option to accept compensation for taking on this role. Here, you should also be asking, “are personal representative fees taxable?” This guide will provide an overview of your potential duties as well as your personal representative taxable income so that you can sign on to the job from an informed place.
Personal representative duties
The exact duties of a personal representative are outlined by state probate code. While there may be some variation from state to state, in general, a personal representative is responsible for:
Filing a petition to open probate
Collecting, managing, and protecting estate assets
Paying creditors and satisfying outstanding liabilities of the decedent
Filing and paying the decedent’s and the estate’s final income taxes
Distributing remaining assets to heirs of the decedent
Carrying out the wishes outlined in the decedent’s Will (if available)
Here are some examples of tasks and activities carried out by a personal representative in relation to their appointed duties:
1. Taking possession: As a personal representative, your first duty is to take possession of all the estate's property to the extent possible. It's important to note that certain assets like joint tenancy property, life insurance proceeds, and retirement plan benefits (unless payable to the estate) may not fall under the jurisdiction of the probate court.
2. Collecting income: You should collect all dividends, interest, and other income generated by the estate's assets. Make sure to deposit these funds into an interest-earning estate bank account (or accounts) in your name as the personal representative of the decedent's estate. This account will serve as a central repository for estate income until the estate is closed.
3. Maintaining detailed records: Keep a meticulous account of all the money you receive and spend on behalf of the estate. Create a record that includes the date, payor, and amount for each receipt, as well as the date, payee, nature, and amount for each disbursement made from the estate's funds.
4. Filing tax returns and paying taxes: Fulfill your responsibility to file all necessary tax returns on behalf of the estate. We will provide guidance on the specific tax returns required and the deadlines for filing. It's crucial to pay all taxes owed by the estate in a timely manner, ensuring compliance with applicable tax laws and regulations.
5. Maintaining insurance coverage: It is essential to keep estate property adequately insured. This includes reviewing and maintaining appropriate insurance coverage on properties and other valuable assets held within the estate. Adequate insurance will help protect the estate's assets from potential risks or losses.
Personal representatives are expected to use care and carry out their duties diligently. Further, their actions should always be in the best interest of the estate and its beneficiaries. There are serious legal, financial, and even criminal consequences if a personal representative is found guilty of misappropriation or other crimes and offenses.
Always follow guidelines provided by state law and instructions provided to you by the probate court.
What is the compensation for personal representatives?
To be frank, most individuals would review the above duties and tasks of a personal representative and balk. No matter how much you may love the individual in question, this is no small job. Further, there may be serious consequences if you somehow muck up the job even if it's unintentional.
Who would sign up voluntarily?
It starts to make more sense after understanding that personal representatives can be compensated for their time and effort. It’s not uncommon for a beneficiary of the estate to also serve as a personal representative. That way, their incentives are properly aligned with the tasks at hand.
The Will may outline the specific compensation schedule, otherwise the state's probate laws will outline guidelines for calculating the compensation. Some states will provide a calculation, others will just require that the fee be deemed "reasonable.” Here is an example of executor fees from the California Probate Code:
Estate Value -------- Executor Fee
First $100,000 ------- 4 percent
Next $100,000 ------- 3 percent
Next $800,000 -------2 percent
Next $9 million ------- 1 percent
Next $15 million ------ 0.05 percent
If the total estate value exceeds $15 million, the probate court will determine the personal representative’s compensation.
Further, there may be exceptions when a personal representative may be able to claim additional income, such as when the circumstances of the estate require “extraordinary services.” However, these rules vary from state to state and thus you should refer to your state’s probate code regarding compensation rules.
Are personal representative fees taxable?
The fees you are paid as a personal representative, executor, or Administrator of an estate are treated as taxable income. This means that when you receive compensation, you must report these fees as a part of your gross income when filing your personal income taxes for the year.
If you are a person in the business of being an executor, then you must report these fees on your Internal Revenue Service (IRS) Schedule C “Profit or Loss From Business” form.
How to avoid taxes on executor fees
It's important to note that executor fees are considered taxable income. However, if the executor is also a beneficiary of the estate, they might choose to waive their right to receive executor fees in order to avoid paying taxes on them.
Additionally, if the testator and the named executor have a discussion about fees before the testator's passing, the testator can designate the individual as a Beneficiary and gift them the amount that they would have been compensated for settling as the estate. Treating the would-be personal representative or executor fee as a gift or inheritance is a legally valid way of bypassing income treatment for tax purposes. In some states, gifts and inheritances are not subject to taxation, making the strategy even more favorable.
The Bottom Line
Managing and settling an estate is no easy job. It’s a heavy job that is often emotionally charged as well, meaning that it takes a good amount of time and effort. For this reason, personal representatives of estate are legally entitled to charge a fee for completing their duties.
Your compensation for carrying out your duties as an executor or Administrator or other type of personal representative is treated as income for tax purposes. This means that you must report this income on your personal taxes. However, you can avoid these taxes in a legal manner if you plan in advance.
Suggested in this guide, you can waive the fee if avoiding taxation is more important to you. Further, if you have an opportunity to speak with the testator before their passing, you may consider asking them to include your would-be executor fee as a gift or as a part of your inheritance. Note that some states assess a gift tax or inheritance tax; consulting a tax professional is always advised.
“Are personal representative fees taxable?” If you were seeking the answer to this question, you likely have many other questions relating to the Probate process. At Trust & Will, we understand that navigating the probate process can be overwhelming– but we're here to help. Our plans provide clear, county-specific guidance and support from probate experts so you can stay on top of the process. Learn more about our probate offerings.
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