The risks of being an executor – commissions and personal liability

Are you an executor of a Will? Before administering the estate, you should understand that this role involves risks such as personal liability for the expenses of administering the estate.

You also should be aware that you may be entitled to commission for your ‘handy work’ in administering the deceased’s estate. It is important to understand the methods in which commission is determined to ensure you are paid a correct and fair amount.

Can an executor of a Will receive commission?

An executor of a Will is entitled to charge a reasonable commission for administering the assets of the deceased’s estate. However, executors are not automatically entitled to commission for their work and will need to make an application to the Supreme Court for commission. Alternatively, if all residual beneficiaries of the Will are adults, they can reach a unanimous agreement on the amount of commission to be paid. This agreement should be in writing and signed by all beneficiaries.

How is commission determined?

The amount of commission paid to an executor ranges from 1 – 3% of all assets less all liabilities, which is referred to as the ‘corpus’. For example, an estate is worth $1.5 million. After the sale of the property, payment of outstanding mortgage, funeral and other estate administration expenses, $1 million remains as part of the estate. This amount is referred to as the ‘corpus’.  In this scenario, the executor would be entitled to a commission of approximately $10,000 to $30,000. Additionally, an executor may earn up to 6% of income earned during the administration.

The Supreme Court may also determine the amount of commission paid to an executor by considering the following factors:

• size of the deceased’s estate;
• type of care and responsibilities required of the executor;
• the amount of time an executor has invested into performing their duties;
• the care and diligence shown by the executor in performing their duties.

If an executor is a beneficiary under a Will, this does not mean they cannot also make a claim for commission. The Court will look at how much has been left to the executor as a beneficiary and will adjust any commission accordingly, if granted.

To ensure you receive the correct and fair amount of commission for acting as executor, we recommend you speak to one of our experienced lawyers.

Personal liability

Executors of a Will must ensure they comply with the terms of the Will and relevant legislation when administering the estate.

An executor’s duty to finalise the deceased’s tax affairs is possibly one of the most underestimated tasks. If an executor does not properly carry out their duties in this regard, they run the risk of becoming personally liable for the payment of the deceased’s tax liabilities. Therefore we strongly recommend executors obtain legal and accounting advice at an early stage.

What is usually involved in finalising a deceased’s individual tax affairs?

The executor is expected to notify the Australian Taxation Office (ATO) of the deceased’s death and arrange for any outstanding tax returns to be prepared and lodged. They must also arrange a final tax return for the deceased to be prepared and lodged and arrange payment of any tax liabilities.

An executor’s tax obligations under a Will may become more onerous if the deceased had any involvement with companies or trusts, operated a business or was the trustee or member of a self-managed superannuation fund.

Executors should also understand that the estate’s tax affairs are different from the deceased’s individual tax affairs. Estates are treated as trusts for tax purposes, so an executor should:

• obtain a tax file number for the estate;
• arrange and ensure that tax returns are prepared and lodged with the ATO; and
• ensure payment of any tax liabilities.

The above can involve a substantial amount of time as the executor would need to gather information and documents in order to finalise the deceased’s individual tax affairs. This could become an onerous task especially if the deceased had a number of outstanding tax returns, did not use an accountant, or leave sufficient records and paperwork.

Therefore it is imperative for an executor to obtain appropriate accounting and legal advice either before or at an early stage of the estate administration. It will also help to reduce the risk of personal tax liabilities.

Conclusion

It is clear from the above discussion that it is imperative for an executor of a Will to seek legal and accounting advice to prevent becoming personally liable for the deceased’s outstanding tax debts. It will also assist the executor is administering the Will properly and efficiently.

This information is for general purposes, and you should obtain professional advice relevant to your circumstances. A lawyer who is experienced in this area will also be able to advise as to the amount of commission an executor is entitled to for their effort in administering a Will.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.