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Monday, March 21, 2011

What if the executor and beneficiaries can't agree on an executor's fee?

In some places in Canada, the amount of fees that an executor can expect to receive from an estate is decided by a formula based on the value of assets. In other parts of the country, there is no formula in place, simply a direction that the pay be "fair and reasonable". Both of these approaches are valid, but both sometimes result in a dispute over the amount to be paid.

The "fair and reasonable" scenario seems to be based on the type of estate where everyone is getting along, the executor has done a fair, efficient, honest job, and the beneficiaries appreciate the amount of work the executor has put in. In other words, an estate unlike the ones most of us run into.

When an executor is paid, the funds come out of the residue of the estate. Residuary beneficiaries of the estate realize it's coming out of their pockets. They become quite possessive of the money, even though up until now it belonged to someone else. They forget that a year's worth of work adds up, usually to thousands of dollars. The number seems large and they feel they are personally losing that amount of money. So they don't find the number proposed by the executor to be "fair and reasonable".

Not that executors are blameless in all of this. Most executors have never done the job before and end up learning as they go. Even the honest ones make the occasional mistake or cause the occasional delay. And the dishonest ones, well that's another story.

Even the formulaic approach to deciding on compensation has its drawbacks. As soon as something as material as a fee is to be based on the value of an asset, that value becomes debateable. The one receiving the fee always thinks it's higher than the one paying the fee.

So, we've established that agreeing on a fee is tough. Now what is to be done about it? It's up to the executor to have the fee set, so if the beneficiaries don't agree, the executor must ask a judge of the superior court of the province to set the fee. The executor will take all of his or her records and paperwork along to describe his work and efforts to the judge, who will decide on a fair fee.

The part that the beneficiaries sometimes forget about is that the cost of the executor's lawyer to do this application is paid by the estate. So not only are the beneficiaries not going to get the amount paid in executor's fees, their shares are further reduced by the amount of the legal fees.

If you're thinking that there simply must be a better way, you're right. The best way to head off all of these arguments is to state in your will what you want your executor to be paid. You can state a dollar amount, but most people choose to use a percentage. If the beneficiaries or the executor wanted to dispute the amount, they would have a tough time of it in court, as judges will try to uphold the directions given in the will.

Including an executor's compensation clause in your will can save thousands of dollars and months of time by short-circuiting disputes.

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