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Being an executor involves lots of responsibility, pressure and risk. It’s not a job you’d expect someone to do for free. So how do you place a dollar figure on the work involved, and upon which criteria should you base compensation?

A complex job

Some people are surprised when an executor brings up compensation, says Tom Junkin, senior vice-president, Personal Trust Services, at Fiduciary Trust Canada in Calgary. But even if executors are family members or beneficiaries (or both), he or she has a legal right to be paid. “It’s a difficult, complex job. It can take a year or longer,” he says. “And somebody deserves to be compensated for doing that.”

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How much? While executors are entitled to be paid in all provinces, most only require that compensation be “fair and reasonable.” Others outline a range of 3% to 5% of an estate’s assets, based on five factors courts have historically considered (see “Five factors,” below).

However, “The percentages are guidelines,” Junkin says. He suggests thinking about estates on a complexity curve, with such guidelines aimed at estates in the middle. An executor who has to deal with foreign real estate or an operating business may warrant more compensation; an executor handling assets at a single institution may require less.

If there are multiple executors, compensation doesn’t increase; it must be divided. That can lead to problems if one person did more work. “The court will generally refuse to adjudicate such disputes,” Junkin says. “[Executors] have to work it out themselves. [That] can potentially hold up distribution.” Whoever it goes to, compensation is typically paid before distributions are made to heirs. If the estate lacks funds, executor compensation ranks ahead of those distributions.

Read: Clients think advisors are overpaid

Warning

Executor compensation is considered taxable income. So, the testator could assign the executor a gift from the estate (generally not taxable) instead.

No hard-and-fast rules

Barry Wilson, partner with Warren Sinclair LLP in Red Deer, Alta., says some testators stipulate exact amounts in their wills. But he doesn’t advise that. “You’re guessing at what might have to be done,” he says. “People write their wills, then live for another 10 to 15 years. [Assets] go up in value. Things become more complex. And if they [specify] amounts, they’re often not applicable by the time people pass away.”

By law, testators are entitled to fair and reasonable compensation, to be determined after duties have been fulfilled. At that time, the executor would provide beneficiaries with a full account of costs incurred, assets managed, taxes paid and compensation owing, which beneficiaries must approve before receiving their portions.

Won’t an open-ended approach lead to disputes? “It usually only becomes a problem if beneficiaries are feuding,” Wilson says. That said, in his experience, such disputes are usually easy to resolve because executors have the law on their side.

“The executor is entitled to be paid,” Wilson points out. And since the vast majority of disputes happen when the executor is ready to make final distributions, beneficiaries have a built-in incentive to resolve problems quickly. That said, a beneficiary could apply for a court order directing disposition of the estate, and determining the amount payable to the executor.

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5 factors

  1. Estate size

    Usually, the larger the estate, the more compensation the executor gets.

  2. Responsibility

    Disbursements with complicated instructions, or assets which if disposed expose the executor to personal liability, entitle him to more.

  3. Time spent

    The more time the executor spends performing duties, the more compensation he gets.

  4. Skill and ability

    If the estate requires the executor to draw upon special skills or abilities, he gets more compensation. Conversely, if the estate is so simple that anyone could administer it, he gets less.

  5. Results

    Executors who add value to an estate or make savvy asset management decisions are generally entitled to more compensation.

Liked this article? You may also like the client-friendly version. Read it here.

Client friendly

James Dolan is a Vancouver-based financial writer.

Originally published in Advisor's Edge

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