Being an estate trustee is hard work, and is a position of responsibility and trust. It requires considerable effort, careful attention to detail, tenacity, and a wide variety of tasks. Many people find these tasks challenging and difficult. Being an estate trustee is never simple and it can be very demanding and stressful.
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As compensation for all the work and responsibility, executors (editorial note: we use the more informal ‘executor’ but the formal term in Ontario after probate with or without a will is ‘estate trustee’) are generally entitled to compensation.
In rough terms, the executor(s) of an estate will be entitled to compensation equal to five percent (5%) of the total value of the estate. This is an approximation, and subject to adjustment (up or down) based on a number of factors by a Court, and may be reduced by any fees paid by the executor(s) to third parties for services that the executor is normally expected to perform.
Calculate the approximate compensation payable to an executor for an estate.
One fee no matter how many executors
Executor compensation is ‘one fee for the job’, regardless of how many executors there are. If there are more than one executors, they should share the fair compensation for the work, not double (or triple) the amount just because there are more than one of them.
The sharing should be in accordance with the contributions made. An executor who does nothing is not entitled to a share of the total compensation equal to that of an executor who did all the work, simply because they were named on the Certificate of Appointment. The sharing of the aggregate fee among executors should be ‘fair’, and absent agreement between executors, a Court can impose it.[That said, recall that one executor is not entitled to assume unilateral control over the estate to the exclusion of co-executor(s), and an executor who does so should not expect to receive all the compensation. An executor who is wrongfully excluded from the administration is entitled to a share of the compensation.]
Determining proper executor compensation
The relevant factors to be considered in fixing executor compensation include:
- Whether the Will says anything about compensation. Some Wills deal with this issue expressly.
- The time and effort expended by the executor. It is a good idea to keep detailed time logs of work done.
- The care and responsibility involved; the complexity of the estate. Some estates are simple, and some are complex.
- The skill and ability of the executor
- The results achieved
- The size of the estate. Generally, larger estates warrant more compensation, but keep in mind that large estates are not necessarily complex.
The 5% number is a very rough approximation. The proper % calculation is:
- 2.5% of capital receipts
- 2.5% of capital disbursements
- 2.5% of income receipts
- 2.5% of income disbursements
- 0.4% per annum for ‘care and maintenance’ (often expressed as 2/5 of 1%).
A proper set of estate accounts should show all transactions, broken into the four receipts and disbursement categories noted above.
Even this ‘proper’ % calculation is still an approximation. A common approach that the Courts use is to assess this properly calculated % figure with the subjective factors listed above.
Editorial note: with the rapid rise in real estate prices, we are seeing many ‘larger’ but ‘simple’ estates. Compensation based just on percentages is a very blunt way to assess compensation, and it is possible that the Courts will be increasingly open to reducing executor compensation from the % baseline. For instance, a simple estate that has an easy to sell home worth $2M may very well not warrant $100,000 in executor compensation. Then again, a complex estate worth $250,000 might very well warrant more than $12,500 in compensation.
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Common executor compensation issues
Generally, executors should be compensated for the net value of real estate, not the gross value. The value of a house with a mortgage to the estate is the sale value of the house after payment of the mortgage and all fees, not, the gross selling price.
If, for instance, the estate includes a home, and the executor hires a realtor and a real estate lawyer, and then as part of the sale all mortgages, debts or liens are discharged by the lawyer from the gross proceeds, and the net proceeds are turned over to the estate, then executor compensation should be claimed only on the net. In this scenario, the capital receipt of the estate is the net amount released to the estate by the real estate lawyer, not the gross value of the property at death. Put another way, the executor should not be claiming compensation for things the executor did not do – such as pay the realtor or discharge the mortgage or pay the lawyer, if these were done by the lawyer who (presumably) has been paid separately by the estate for doing this.
Estate trustees have a duty to maximize the recovery of the estate. Therefore, estate trustees should keep good evidence to support the decisions they made selling estate assets, especially the price of real estate. The gold standard is a properly-listed, properly-marketed sale to an arms-length third party for fair market value. Any departure from this gold standard, and especially any sale to someone who is not at arms length to the estate and to the estate trustee, should be supported by strong documentary evidence. A sale by the estate trustee to a relative will always attract suspicion so and estate trustee who sells property to a relative or friend should be well prepared to justify the price and payment terms of the deal.
Sometimes a spouse or dependent of the deceased may have a right to remain in a property for a period of time after the death of the owner. However, these rights are not indefinite. Similarly, it is very seldom that an individual has a right to live in a house after the death of the owner rent-free for an extended time. Most occupants of property of a deceased owe reasonable occupancy rent to the estate, and the estate trustee should be vigilant about collecting occupancy rent (or, where the occupant is a beneficiary, deducting it from their share of the estate). An estate trustee should not casually acquiesce to extended free occupancy of a home.
Annual care and maintenance fees
The care and maintenance fee should not be paid to reward a slow executor. It should be a fee for legitimate on-going services, such as investing. This fee should only be paid when a) the estate properly involved several years, and b) the executor did something to preserve, maintain, and invest the principal of the estate.
Power of attorney compensation
A power of attorney for property is often entitled to compensation, subject of course to the attorney providing proper accounts. The estate executor has the authority to scrutinize and contest the attorney’s compensation.
Where the attorney and the executor are the same person, compensation should not be double-claimed for the value of the estate disbursed by the attorney and received by the executor.
Estate trustees make many discretionary decisions. The Courts do not relish micro-managing these decisions, or reviewing them with 20-20 hindsight. Accordingly, a) estate trustees should keep good records that support the decisions that they made, and b) the mere fact that a beneficiary disagrees with a decision made by the estate trustee does not mean that it was wrong. Conversely, however, if the executor makes decisions that are clearly wrong, self-interested, or unreasonable, then it may be very appropriate to reduce the executor’s compensation and/or require the executor to reimburse the estate for the value lost.
Executor compensation is taxable income in the year it is received.
If the estate trustee is a professional, then unless they have a small practice the estate trustee should charge HST on their fees.
If the estate trustee is not a professional, the compensation paid by the estate is normally taxable personal income of the estate trustee. The estate trustee should declare the compensation on their tax return in the year received and pay income taxes on it accordingly. (As a result, some Wills expressly make a bequest to the estate trustee, rather than paying compensation).
CRA’s position is that the estate should secure an employer number, issue a T4, deduct taxes from the compensation and remit them directly to CRA, and to pay the employer’s portion of CPP. The cost of this – both in terms of the payments, and the complexity of filling in the right forms – is real, and thus best done by someone with regular experience with the process.
Delegation and double-charging
An estate trustee is not obliged to do everything themselves. They are entitled to outsource some or all of the tasks. Indeed, it is expected (and encouraged) that they will hire professionals and other advisors. An issue can arise, however, if the estate trustee hires someone to perform ‘normal executor’s work’, and then claims compensation for this work. Whether the estate trustee hires a law firm to do the accounts, or a cleaning company to clean a house, it is always important to ask whether this work was part of the executor’s normal duties. If it was a) the executor should not claim a fee on the ‘disbursement’ related to paying the invoice of the person they hired, and b) the cost should be deducted from the amount of executor’s compensation calculated using the % method (see above). For example, if an executor with a normal property hires folks to handle every aspect of preparing the property for sale before listing it, it is likely that the realtors fees would not be deducted from the executor’s compensation, but the cleaning company costs might.
Timing of payment of compensation
Estate trustees should be paid “at the end” and generally estate trustees are not entitled to “pre-take” their compensation. In practice, this means that estate trustee should not be receiving any compensation before the residual beneficiaries have received the bulk of their entitlement from the estate and after approval of an interim but ‘near final’ set of accounts. For instance, it is common for the estate trustee to receive no compensation until the beneficiaries approve (or a Court passes) a set of accounts which include only a modest holdback while the estate trustee waits for a clearance certificate from CRA. Only in very rare circumstances should estate trustees receive any compensation well prior to any distributions to beneficiaries. Note that this often results in the estate trustee receiving one large lump sum payment which is taxable income in only one year.