How to Avoid Taxes on Executor Fees

Settling an estate involves a good deal of paperwork, time, and patience.

Posted on October 10, 2021 by Alex Gauthier
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After a loved one has passed away, you may have found yourself named their estate executor. This role gives you the responsibility of settling the estate of the recently deceased.

Estate settlement can be a grueling process, especially if you're already stressed out and in the process of grieving - settling an estate involves a good deal of paperwork, time, and patience.

In the state of California, you have the right to reject the responsibility of becoming an estate executor. Should you, however, choose to take on this responsibility, you will be compensated for your efforts through the estate, based on the estate’s value. This compensation is known as an executor fee.

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What are the Executor Fees for California?

According to California's probate law, the executor compensation schedule in the state is as follows:

  • 4 percent of the first $100,000 of estate's value
  • 3 percent of the next $100,000 of estate's value
  • 2 percent of the next $800,0000 of estate's value
  • 1 percent of the next $9 million of estate's value
  • 0.05 percent of the next $15 million of estate's value

In addition, if the total value of the estate exceeds US$15 million, the court will decide on an appropriate compensation fee. Exceptionally difficult estate settlement situations may allow the estate executor to claim additional income.

Are Executor Fees Taxable?

Yes, like virtually any type of income, executor fees are considered taxable income.

How to Avoid Taxes on Executor Fees

Executor fees are considered as taxable income in California. If the executor is themselves a beneficiary of the estate, they may prefer to forego the rights to the executor fees to avoid the tax.

Furthermore, if the would-be executor and testator discuss a fee beforehand, the testator may put the name of the individual as a beneficiary and include the fee for settling their estate as a gift, which would not be taxable.

This can be a legally sound way of avoiding the tax on executor fees, as gifts and inheritance do not tax in the state of California.

The Bottom Line

Estate settlement can be an administration heavy job that requires time and effort like any other occupation. That's why estate executors are entitled by law to receive compensation for their effort.

Estate executors can expect to pay tax on this compensation, since it’s considered income. However, if planned in advance, there are ways to avoid these taxes.