Does an Executor Get a Percentage of Life Insurance Policies & Annuities?
Executors of estates inherit a time-consuming, often difficult, and sometimes thankless job. They're responsible for guiding your estate through the probate process, paying off creditors, filing tax returns and sometimes selling assets to achieve all this. In exchange, they're entitled to compensation in most states, usually a percentage of the value of some of your assets. To a limited extent, you can control how much your executor receives by controlling which assets go through probate.
The Probate Estate
Executors are usually paid on a commission basis; they receive a percentage of the value of your probate estate. These are assets that must pass through the probate process to legally transfer ownership to beneficiaries. Life insurance policies and annuities typically bypass probate because they pass to named beneficiaries directly, by contract. Therefore, the executor usually doesn't receive a percentage of these proceeds. In some cases, however, insurance death benefits might pass through probate -- for example if you named the estate as the beneficiary of the policy. In this event, the executor might receive a percentage based on the contribution of the proceeds to the estate's overall value, but some states, such as Texas, specifically prohibit executors from sharing in life insurance benefits.
Although an executor loses out on a share of your non-probate assets, those that are part of the probate estate sometimes generate income. Rents might be received from real estate, and sometimes cash assets are invested during probate to maximize the estate. In some states, executors receive a portion of this income as well, in addition to a percentage of the estate's value.
State laws determine exactly how much of a percentage the executor is entitled to. Executors in two separate states can do an identical job, dealing with identical assets, and one may get paid more than the other. For example, an executor in New York would receive 5 percent of the first $100,000 of an estate, whereas the same executor in California would receive only 4 percent. In some states, such as Texas, your will overrides state law. The state's legislative code for compensation kicks in only if your will is silent regarding compensation – it doesn't mention it at all. If your will simply says that the executor is entitled to "reasonable compensation," it falls to the court to determine how much of a percentage the executor should receive. However, even in this case, the commission is usually based on probate assets only.
An executor's compensation is income to her – paid in exchange for services rendered – and she must report it as such on her personal tax return. If the same individual is named as a beneficiary in the will, however, her inheritance is usually not taxable. Commissions – but not bequests – are deductible from the estate's value for estate tax purposes.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.