How much should an Estate Trustee (Executor) be paid?
This article on executor compensation is written by John Allen and Pearson Allen.
The Estate Trustee (formerly “Executor”) is required to assemble the deceased’s assets, pay the debts, taxes and administration costs, and then distribute the remainder to the beneficiaries, or transfer assets to an ongoing “testamentary trust” for a beneficiary. The Estate Trustee must:
Most wills do not say how much the Estate Trustee should be paid. It can be difficult to know at the time of signing your will what assets will need to be administered and how complicated the job will be after you die. Someone in their fifties may have illiquid assets, such as ownership of a timeshare in Florida, a cottage, an operating business, intellectual property, options and shares, that, by the time the person dies, will have been converted to a liquid portfolio of investments. Some estates involve litigation (for example, from disappointed beneficiaries who allege undue influence, from spouses or children who claim dependent support, from creditors who claim questionable debts, and complex tax litigation). The amount of work and the expertise required may be difficult to predict.
Section 61(1) of the Ontario Trustee Act states that a “personal representative [i.e. Estate Trustee] is entitled to such fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.”
Case law has developed a “rule of thumb” for total compensation to administer an estate, being 2.5% of receipts, 2.5% of disbursements (i.e. 5% of the gross value of the estate), plus an annual “care and management fee” of 2/5 of 1% of the average value of assets invested and managed for an ongoing testamentary trust. But some estates require more work than others, and this “rule of thumb” may be inappropriate. For example, if the estate consists of one asset – an investment account of $10 million – and there is no litigation or difficulty in determining the beneficiaries, then 5% or $500,000 compensation would be excessive.
Therefore, in determining whether the tariff calculation is “fair and reasonable,” courts will generally have regard to these five factors:
Estate Trustees are entitled to reimbursement for necessary legal fees, tax filing fees, and out-of-pocket expenses. However, fees paid to an accountant or other professional to review and/or report on the estate accounts should be deducted from the Estate Trustee’s compensation; otherwise, the beneficiaries are paying twice for the same administrative work.
The Estate Trustee’s compensation is taxable, so if the Estate Trustee is the main beneficiary, it may be better to waive compensation because there is no income tax in Canada for the recipient of an inheritance. Note: the Estate Trustee cannot disguise compensation by bartering with the other beneficiaries to transfer a portion of their inheritance in lieu of the Estate Trustee’s compensation.
The Estate Trustee must either obtain the approval of all the beneficiaries before taking compensation, or obtain the approval of the court on “a passing of accounts.” A beneficiary who is a minor or incapable of understanding the accounts will normally be represented by the government’s “Children’s Lawyer” or “Public Guardian and Trustee.” Good practice is to keep the beneficiaries advised of all developments in the administration of the estate, to obtain their approval to an interim distribution, and to reserve a sufficient amount until a tax clearance certificate is obtained from the Canada Revenue Agency confirming that all taxes have been paid.
Careful planning is recommended before drafting your will and before taking on the responsibility of acting as Estate Trustee.