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Friday, March 7, 2014

Calculating NJ Executor Commissions

From time to time, people ask me about executor's commissions and trustee's commissions in New Jersey.  Because it is a bit complex, I have broken it down into two posts and I will focus on commissions for executors and administrators today.

To start, a Will can specifically provide for an executor's commission.  In that absence of expressly authorizing a commission an executor will be entitled to take an executor's fee as provided in New Jersey Statutes 3B:18-12 through 3B:18-17. These same statutes also provide that if a person dies intestate (dies without a Will), the administrator of the estate may also take a fee.  Since the fees for an executor and administrator are the same, I will use the term interchangeably for purposes of this post.

New Jersey statutes are very difficult to interpret because they use the term fiduciary to apply to executors, administrators, trustees, guardians and conservators.  This would not be a problem if the fees were calculated the same, but they are not. 

So how is the executor's fee actually calculated?

First, an executor is entitled to annual income commissions of 6% without prior court approval. (N.J.S.A. 3B:18-13)

Second is the calculation of the corpus (or principal) commission.  This is a bit more of a complicated formula. Normally an executor will take a one time commission as follows:
  1. 5% on the first $200,000 of all corpus received by the executor;
  2. 3.5% on the excess over $200,000 up to $1,000,000;
  3. 2% on the excess over $1,000,000;
  4. and 1% of all corpus for each additional executor provided that no one executor shall be entitled to any greater commission than that which would be allowed if there were but one executor involved.   (N.J.S.A. 3B:18-14)
Sometimes an estate administration goes on for a lengthy period of time.  Under such circumstances, an executor can also receive an annual commission equal to 1/5 of 1% (or 0.2%) of the corpus.  However, this commission is not that frequently taken and a court may disallow it if it is in excess of  N.J.S.A. 3B:18-14.

What assets are part of the corpus when determining the executor's commission?
The corpus of an estate is generally defined to mean any asset that has come into the hands of the executor.

Examples of assets that come into the hands of the executor are:  Bank accounts, automobiles, tax refunds, business interests, an interest in a lawsuit or litigation, life insurance payable to the estate, retirement accounts with no beneficiary and real estate that were owned by the decedent. 

Examples of assets that do not come into the hands of the executor and are not subject to the commission include: Life insurance (if there is a beneficiary other than the estate), retirement accounts where a beneficiary other than the estate is named, property that is held as joint tenancy by the entirety or joint tenants with rights of survivorship.

What about mortgaged property - do I use the net value or the gross value?

While it may be unfair if the estate is heavily leveraged, the commission is taken on the gross estate, not the net.  If the result is too onerous, a beneficiary may wish to seek judicial relief.

An illustration of how to calculate the executor commission
Let's presume the following facts:  Decedent owned a vacation house worth $500,000 and a mortgage of $100,000, a primary residence owned with his wife as tenancy by the entirety worth $1,000,000 and a mortgage of $300,000, a $400,000 IRA payable to his wife, $200,000 in stocks and bonds, a $200,000 life insurance policy payable to his children, and $100,000 worth of insurance with no beneficiary. 

Let's also presume that there is only one executor and during the administration, the $200,000 of stocks and bonds gave off $5000 of income. 

Included for purposes of calculating the commission are:  the $500,000 house, the $200,000 in stocks and bonds and the $100,000 life insurance policy with no beneficiary (for a total of $800,000).  There is no deduction for the the $100,000 mortgage.  The primary residence, the IRA and the $200,000 life insurance policy are excluded.

5% on the first $200,000 would be $10,000
3.5% on the next $600,000 would be $21,000
6% on the $5000 of income would be $300
So the executor would be entitled to a total commission of $31,300.


Final thoughts about executors commissions

Any commission that an executor takes will be subject to an income tax.  As a result, if the executor is also a beneficiary, he or she may not want to take a commission.  Additionally, many times relatives do not appreciate the amount of work involved and will become upset at an executor if he or she takes a commission. You should think about the dynamics of your family before taking one.

An executor that does extraordinary work can apply to the court for a commission in excess of the statutory fee.  An executor that behaves badly can be removed by the court.  If an executor or administrator is removed from office, he or she may be required by a judge to forfeit his commissions.  This is not automatic though.

Finally, as discussed in back in May of 2013, an attorney who is serving as an executor may be entitled to a fee for legal services AND a commission.

28 comments:

Louise said...

Just what I need to understand estate planning better. It's good that you discussed executor's commission because for sure, a lot of people will be interested to know and understand it.

Anonymous said...

Since my mothers estate atty is not an estate atty, but did draft my parents will, when can I exactly pay myself the commission. I took over the responsibility as Administrix in Nov 2013. My brother was the original executor for my mother since he lived in NJ. My brother passed away Nov 2, 2013. My accountant says that I may pay his portion of the estate to his girls 3%. Since I did most of the bulk of paper work, cleaning and all that was involved for the sale and closing in June. There is also a Surety bond in place. Which will have to be renewed as of Oct 3rd, 2014. I am almost done with the estates taxes for 2014. When can I start paying out the portions to the parties? Please help me, There really needs to be an instruction book on this! jeanoeser@yahoo.com

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 9/15/14,

I'm sorry to hear about your mother and your brother.

Typically the commission is paid at the end, but it can also be paid out in pieces.

Normally I do not recommend making any distributions until you have received a tax waiver from NJ and releases from the next of kin.

There are plenty of books out there on the topic, but it is still not easy. Please call us if you would like to engage our services.

Anonymous said...

I'm the executor of my brother's estate who recently passed away. He was a resident of NJ and I'm a resident of Illinois. Are the executor's commissions taxable in NJ? If so, are they taxed at a special rate because I don't live in NJ?

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 11/25/14,

This is a really good question that I don't think I've ever had to address before. I'm not certain at all, so you are definitely going to want to get a second opinion.

However, I think that NJ is going to have the right to tax your income earned on the estate, especially if you need to come here a few times to administer the estate. If you are not coming to NJ at all for any reason, you might be able to make the argument that NJ doesn't have the right to tax the income, only Illinois.

Most likely, the act of cleaning out the house, selling it, dealing with your brother's affairs in NJ will be enough for NJ to tax it. Illinois should offer an offset against this tax though.

Anonymous said...

my uncle passed away and had his brother as executor,my brother and I as beneficiaries.He had a bank account in which had his executors name on in case he was very ill or when he passed to cover expenses of his estate then to be distributed to the heirs with the rest of the estate.the executor also a 50% beneficiary took this money never disclosed the account or amount and claimed all estate costs as out of his pocket.Also there was a letter written by the deceased which is a clause in the will that he would change options of the will and these writings would stand.this letter was to be opened in front of witnesses he took the letter and never disclosed the contents.Can the taking of the account money and does the none disclosure hold up legally in court.Thanks L.L

Mike said...

Is out of state property included in the "corpus" for the purpose of calculating executor commissions?

What if the out of state property was out-right passed to the executor in the will?

If so, it seems unfair that the executor would collect a significant commission for administering this property which will essentially pass title to their name anyway.

Can you please provide me with some guidance?

Mike

Kevin A. Pollock, J.D., LL.M. said...

Dear L.L.,

If your brother and your uncle had a joint account, unless it can be proved it was a convenience account, then your brother would be entitled to it. With respect to the letter, that is probably an even tougher argument unless someone else knows the contents of it. Unless there is a lot of money at stake it might not be worth the legal fees to find out the "truth".

Kevin A. Pollock, J.D., LL.M. said...

Dear Mike,

Yes, out of state property is included in the corpus for calculating executor commissions, regardless of who that property passes to. When a person makes a Will and gives someone the role of an executor, they are giving the Executor a job, and there's a lot of work. They are responsible for everything relating to that property and potentially liable for things that go wrong, and the law says they should be compensated accordingly. If the person drafting the Will wants a different executor commission, they can always specifically say what the commission should be.

Sally Blank said...

What if a will states that my said executor to serve without commission?

Kevin A. Pollock, J.D., LL.M. said...

Dear Sally,

If a Will states that an executor shall serve without commission, that language trumps the statute. Keep in mind that an executor may not be willing to serve if there is no commission though. It can be a big job.

Anonymous said...

what if an executor/executrix of the estate failed to disclose source documents for accounting purposes and had her attorney handle all aspects of the estate. Is she still eligible to collect a commission as and executrix?

HRWORKZ said...

Is an executor commission to be paid as a part of an expense of the estate? Meaning can the commission be paid prior to final distribution

Anonymous said...

is record keeping part of the duties to collect corpus commission or can the estate be charged additional money by the Trustee?

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 8/10,

Record keeping is absolutely a part of a Trustee's fiduciary duty. However, it is common practice for some attorneys to delegate this duty and Trustees are allowed to pay for many things such as legal fees, accountants and administrative services from the trust income and principal.

Kevin A. Pollock, J.D., LL.M. said...

Dear HRWorkz,

The executor commission should absolutely be paid as an expense of the estate. It doesn't really matter if the commission is paid before or after final distributions. My personal preference is to get all the beneficiaries to agree to the commission and the overall accounting and then have the executor pay himself/herself.

Anonymous said...

Is the executor entitled to a fee if all of the assets are non-probate assets? The estate has approximately $1,500,000 in assets all of which have named beneficiaries. Thank you.

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 11/2,

That sort of begs the question of why do you need an executor? If there are no assets, then there should be no need for an executor, therefore no commission.

Paul said...

Could you better explain the annual income commission. Is the executor entitled to six percent of the probate assets every year the estate is not settled? If so, does the first year begin at the date of death or when the executor received their certificate from the Surrogate? (My wife received here certificate over a year after her Mother's death due to her sister filing a caveat.) Thanks, Paul

Kevin A. Pollock, J.D., LL.M. said...

Dear Paul,

Yes, the six percent income commission would be for each year the estate is open. The commission is earned from the moment a person qualifies, although in unusual situations, there may be a little leeway on that from time to time. For example, if it takes a long time for a person to qualify, but they are acting as executor and taking care of things, it could be argued that the person is entitled to an additional commission for that time. However, it would have to court approved. The statute is just delineating what can be taken without court approval.

Anonymous said...

Are certificates of deposit, Payable on Death (POD) corpus assets subject to Executor Commission? Thank You

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 4/21,

No, POD accounts should not be factored in when calculating the Executor Commission.

Anonymous said...

Is it common/allowed to charge hourly fees for work on the estate and an executor commission in addition?

Kevin A. Pollock, J.D., LL.M. said...

Dear Anonymous of 5/21,

It is highly irregular to charge both an hourly fee and also take a commission and I strongly recommend not doing it unless you get permission from the beneficiaries or the Court. The only time it is even acceptable is if you are doing work for an estate that is above and beyond normal work for an executor. For example, if you are an attorney acting as executor, you are frequently doing both legal work and work an executor does. The same is true for an accountant and certain agents, such as literary agents, etc.

Teresa Ausmus said...

Question:
My MIL passed away three years ago. She left her youngest son as executor. Her Will stipulated that my boys could use their respective inheritance for school and medical expenses. So, we have been sending receipts to my BIL for the past year.
Is this the only procedure available? Or is there a path where money can be added to an account from which we can withdraw when needed and provide receipts?
Secondly, my BIL recently told my husband that he wants to deal only with him with regard to my boys' affairs. Meaning he will only accept invoices and emails from my husband?
Thoughts?
Thanks,
Phyllis

Kevin A. Pollock, J.D., LL.M. said...

Dear Teresa/Phyllis,

I often encourage beneficiaries and trustees to get together to figure out a budget for how expenses should be paid. I am unclear as to how old the children are, but if they are adults, then technically your brother-in-law is within his right to only speak to the beneficiaries and not you.

Best of luck.

Niece #1 said...

Our aunt passed away nearly 4 years ago leaving her estate to 13 nieces and nephews, two of which are the executors. They took their commissions early on then did very little work for next few years, including never paying the inheritance tax. Can they be forced to pay the $33,000 in interest now owed due to their neglect?

Kevin A. Pollock, J.D., LL.M. said...

Dear Niece #1,

The short answer is that it is very likely you can have them surcharged for failing to pay the tax on time. A major caveat to this is if the reason that they couldn't pay timely was through no fault of their own. An example of this would be if they did not have the liquidity to pay the tax because they were waiting for illiquid assets (such as real estate) to sell.