Understanding executor fees is crucial whether you are drafting a will or appointed as an executor. Executor fees are the compensation an executor receives for executing a will, but these fees aren't guaranteed and vary significantly between states, with some states having maximum fee limits.
Several states have laws in place that set maximum limits on executor fees, while others leave it to the discretion of the court or the terms laid out in the will. This divergence in regulations creates a diverse landscape of executor fees across the U.S.
In this article, we'll focus on Maryland, where executor fees are regulated more strictly than in many other states. Our aim is to provide clarity on the often complicated subject of executor fees in Maryland, helping you navigate the process with confidence.
Executor Fees in Maryland
In Maryland, unlike some other states, executor fees are explicitly stipulated by law. The state has a specific fee schedule that is used to determine the compensation an executor should receive. This provides a clear guideline, which can be beneficial for both the executor and the beneficiaries of the estate.
According to Maryland law, executor fees are calculated based on a sliding scale. This scale ranges from 9% of the first $20,000 of the gross estate, down to 0.5% of the excess over $5,000,000. This means the larger the estate, the lower the percentage the executor will receive. However, it's important to note that this is the maximum fee allowed by law. The actual fee can be less, depending on the terms of the will or agreement among the parties involved.
If the will specifies a fee or a method for determining the compensation, that provision usually governs. However, if the will is silent on this aspect, the probate court will use the state's fee schedule to determine the executor's fee.
In terms of payment, executor fees are typically paid from the estate's assets. This means the executor is compensated before the remainder of the estate is distributed to the heirs. As the executor's fee is pre-determined by law in Maryland, disputes over compensation are less likely to arise compared to states where fees are determined on a case-by-case basis.
Claiming Reasonable Expenses as an Executor
In addition to the executor fee, Maryland law allows executors to claim "reasonable expenses" incurred during the administration of the estate. These are costs that the executor has paid out-of-pocket while fulfilling their duties.
Reasonable expenses can include a wide variety of costs. For example, they can cover administrative expenses such as postage for mailing documents, travel costs for meetings or court appearances, and fees paid to professionals like attorneys, accountants, or appraisers. If the executor has to maintain a property as part of the estate - for example, by paying for necessary repairs, utilities, or insurance - these costs can also be considered reasonable expenses.
For an expense to be considered 'reasonable', it must be necessary for the administration of the estate. Extravagant or unnecessary costs may not be approved by the court and could be challenged by beneficiaries. The process for claiming these expenses typically involves the executor keeping detailed records and receipts, which are then submitted to the probate court for approval. In some cases, the executor may need to justify the expenses, particularly if a beneficiary disputes them.
Tax Implications of Executor Fees
An important aspect to consider when dealing with executor fees and reasonable expenses is their taxability. Generally, executor fees are considered taxable income. This means they must be reported on the executor's personal income tax return. The fees are reported as income, not self-employment, so executors do not have to pay self-employment tax on them.
On the other hand, reimbursed expenses are typically not taxable as long as they are necessary costs incurred while administering the estate and are reimbursed directly by the estate. These expenses should be kept separate from fees for tax purposes.
The executor will receive a Form 1099-MISC from the estate reporting the amount of compensation received during the tax year. This form should be included when filing personal taxes.
When Do Executors Get Paid?
The process of settling an estate can be time-consuming, and executors may wonder when they will receive compensation for their work. In Maryland, executors are typically paid before beneficiaries receive their inheritances, but the timing can vary.
Generally, executors receive their fees once they have completed most of their duties. This often includes tasks like settling debts, paying taxes, maintaining properties, and distributing assets to beneficiaries.
However, before the executor's fee is paid, it must be approved by the probate court. This involves the executor submitting a detailed account of their time and expenses, which the court will review to determine if the requested fee is in line with state law. Once the court approves the fee, the executor can then pay themselves from the estate's assets.
Remember, the probate process can take several months to over a year, depending on the complexity of the estate. Therefore, executors should be prepared for the possibility that their compensation may not be immediate. It's always a good idea to consult with an estate planning attorney to understand the specific timeline and processes involved in your situation.