Money Talks News may earn commission or revenue through links in the content below. Our editorial team independently selects all products. Compensation does not influence our recommendations.
Paris Jackson wants a judge to trim what an executor of her father’s estate is paid.
She asked a Los Angeles County Superior Court judge to cut executor John Branca’s compensation from 15% to 10% of the gross income the estate earns from entertainment, TMZ reported Oct. 28 (1). She says he’s shown “persistent incompetence” when it comes to filing financial statements on time (1).
The estate fired back. “It is an understatement to say that this motion is completely without merit, nor is it argued on facts,” it said, adding that the executors “have never taken any executor compensation” (1).
The estate says the executors are instead “paid a separate, court-ordered management fee for operating the hugely successful Michael Jackson business” (1).
I’m not picking a side in somebody else’s family fight. But I’ve been a CPA since 1981, and I served as executor of my parents’ estate. So this is a subject I’ve lived.
Few families will ever argue over a fortune like Michael Jackson’s. But executor and attorney fees can take a real bite out of an ordinary estate, too.
In California, where this case is being heard, the law sets an executor’s standard pay for ordinary work on a sliding scale tied to the estate’s value, unless the will sets other terms (2, 6). The estate’s attorney is paid on the same scale for ordinary work (3).
And the IRS treats the fee as taxable income. “All personal representatives must include fees paid to them from an estate in their gross income,” IRS Publication 559 says (4).
Here are 5 things every family should know about executor fees.
1. In California, the fee ignores your mortgage
California’s formula pays the executor 4% on the first $100,000 of the estate, 3% on the next $100,000 and 2% on the next $800,000, with lower rates above that (2).
Here’s the catch: The estate’s value is figured “without reference to encumbrances or other obligations on estate property” (2). In other words, the mortgage doesn’t count.
By my math, an estate whose only asset is a $500,000 house with a $300,000 mortgage still produces a $13,000 statutory executor fee. The attorney’s fee on the same scale is another $13,000 (3). That’s $26,000 on a house with $200,000 of equity.
One way families sidestep that bill is with a living trust. An online service like Trust & Will can walk you through creating a will, a trust or both.
2. A living trust only works if you fund it
A revocable trust “avoids probate for the assets held in the trust, because trust assets are ‘non-probate’ property,” according to a guide from the Maryland Register of Wills (5).
But there’s a big if. “As long as you transfer your assets into the trust before your death, the assets do not go through probate,” the guide says (5). Property left outside the trust may still go through probate (5).
So if you set up a trust, make sure the house, the brokerage account and anything else you want covered is actually retitled into it. A trust that holds nothing protects nothing.
3. The fee is taxable income
An executor who isn’t in the business of handling estates reports the fees on Schedule 1 of Form 1040, according to IRS Publication 559 (4). Professionals report them as self-employment income (4).
So if you’re named executor and you’re also an heir, don’t automatically take the fee. Run the numbers with a tax pro first.
This is a good time for a broader checkup. If you stand to inherit a substantial sum, your first stop should be with an investment advisor. Find one by using a free matching service, like the one offered by SmartAsset. They’ll pair you with up to three fiduciary financial advisors, all legally required to put your interests first.
A fiduciary advisor can help with tax savings, investment advice, Social Security strategies, and planning gaps you’d never see alone.
To use the service, expect a questionnaire of about 10 minutes. You’ll be asked for a phone number near the end: provide it, but you control whether and when you respond.
SmartAsset provides the match, not the advice, and it’s built for people with $100,000 or more in investments. Get matched with a fiduciary advisor free.
Quick aside — most internet financial advice comes from people who weren’t alive during the last recession. I’ve been writing about money for more than 35 years. Want rock-solid advice? Sign up for the free Money Talks Newsletter. Takes 10 seconds. No fluff. No spam.
4. Records keep the peace
Look at the heart of Paris Jackson’s complaint: She says financial statements weren’t filed on time (1). Whoever’s right, late paperwork is how suspicion starts.
If you’re an executor, keep the estate’s money in its own account, save every receipt and give the family regular updates. Transparency costs you nothing and can save a lawsuit.
5. Pick your executor, and talk about pay, now
Choose someone organized, honest and willing to do the work. Then name a backup.
While you’re at it, talk openly about whether they’ll take a fee. A conversation at the kitchen table today beats a court fight later.
My honest take
I don’t know who’s right in the Jackson case, and I won’t pretend to. But the lesson for the rest of us is simple.
Executor fees aren’t a scandal. Executors do real work. The problem is fees nobody planned for and paperwork nobody can see.
Make a plan, fund it and pick someone you trust to run it in the open. Your family will thank you for it.
Sources: 1. TMZ; 2. California Probate Code § 10800; 3. California Probate Code § 10810; 4. IRS; 5. Maryland Register of Wills; 6. California Probate Code § 10802
Add a Comment