Direct estate administration questions lead to simple answers in some states, but require thoughtful analysis and create uncertainty in others. Klenk Law provides clarity on three frequently asked questions in Pennsylvania estate administration: Executor, Administrator and Personal Representative compensation.
1) Executor Compensation, How Much is Too Much?
Many states publish an official schedule limiting the amount of an Executor’s fees. Pennsylvania does not have a fee schedule for estate Executors and Administrators. Instead, the Pennsylvania Probate, Estates and Fiduciaries Code, or PEF Code, only requires that compensation to a Personal Representative be reasonable and just under the circumstances. To clarify some terminology, an Executor is an individual designated under a Will to administer a probate estate. Another term that you may come across is an Administrator, whom is an individual or company appointed by the Register of Wills to administer an estate if, for one of many reasons, no executor exists. A generalized term that includes both Administrators and Executors is Personal Representative.
Back to the question at hand, what is an appropriate Executor fee? In Pennsylvania, judges have resisted the ease of applying a standardized fee schedule. Reasonable and just fees are determined by the facts and circumstances of administering each particular estate. Examples of factors judges consider are the size of the estate and duties actually performed by the Personal Representative. Executor compensation is within the discretion of the Orphans’ Court and will not be disturbed unless clearly abused.
Thankfully, some clearer guidance was issued in Johnson’s Estate, a Delaware County Orphans’ Court opinion issued in 1983. To help frustrated Personal Representatives and beneficiaries seeking to establish and challenge fee amounts, the judge in Johnson attached his unofficial fee schedule used when determining whether an Executor’s fee is reasonable and just. (See below)
|Per Col.||Per Total|
|1%||Joint Accounts||1%||P.O.D. Bonds||1%||Trust Funds|
|3%||Real Estate Converted with Aid of Broker||5%||Real Estate: Non-Converted||1%||Real Estate: Specific Devise|
The Johnson fee schedule is a benchmark used by judges and attorneys for the past thirty years. In Pennsylvania, this schedule should be consulted at the outset, as a matter of course, when assessing whether a fee is appropriate. However, what is critical to note is that the schedule is merely unofficial guidance. The reasonable and just Executor’s fee determination remains at the discretion of the Orphans’ Court judge.
The table establishes marginal rates for appropriate fees, similar to the federal income tax. Here is a simple example of how the table in Johnson is used:
|1) Estate of $50,000……||$50,000||@ 5% = $2,500 acceptable Johnson fee.|
|2) Estate of $100,000…||$100,000||@ 5% = $5,000 acceptable Johnson fee.|
|3) Estate of $150,000…||$100,000||@ 5% = $5,000|
|$50,000||@ 4% = $2,000|
|@ 4% = $7,000 acceptable Johnson fee.|
Applying the schedule will give a Personal Representative one measure of an appropriate fee. Though widely accepted, Johnson is not law. Pennsylvania Orphans’ Court judges are bound by their discretion and experience not the Johnson fee schedule. For now, Executors, Administrators and Personal Representatives must adhere to the “reasonable and just under the circumstances” standard, decided on a case-by-case basis.
2) I Was Named Executor, How Do I Calculate and Defend My Fees?
If you did not read question one, go back and start there. It serves as important background for answering this question. As stated above, the PEF Code does not include a schedule for fees for Administrator, Executor or Personal Representatives. Instead, fees are judged against what is reasonable and just under the circumstances. Common wisdom for a benchmark is to apply the Johnson fee schedule included above. This does not always apply. Unique and challenging issues can be raised during administration requiring an adjustment.
When proposing a fee that varies from Johnson it is imperative that the Personal Representative keep accurate records of their time and expenses to defend their fees. Without records, many judges will be weary to stray from Johnson and will not hesitate to reduce the Personal Representatives proposed fees.
3) What is the Tax Consequence of Accepting an Executor’s Fee?
When an individual is named beneficiary and executor under a will, a tax planning opportunity exists due to the difference in the Federal Income and the Inheritance and Estate Tax rates. Executors are not required to accept a fee under the Will but can elect to assess a just and reasonable one.
In Pennsylvania, an Executor fee qualifies as taxable income to the executor at the state and federal levels. The tax on receiving that fee has the potential to be greater than the tax (if any exists) for receiving the same amount under the Will. When determining whether or not to accept an Executor fee, the tax consequences should be analyzed based on individual circumstances with the help of knowledgeable counsel to understand the case specific impact.
If you need assistance with estate administration, probate or with developing your Estate Plan, please call one of our Probate Lawyers or Estate Planning Attorneys for a free consultation. We have Estate Planning Attorneys in New Jersey, Pennsylvania, New York, Minnesota and Florida.
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