Executor and Trustee Compensation in Texas

I have often been asked: Do I have to pay my executor? If I create a trust for my children, does the trustee have to be paid?

In Texas, the answer is both simple and complicated, as most things usually are. In Texas, there is no requirement that an executor or trustee has to be paid a commission or be compensated for their work, but if you are not going to pay them, you have to say so in the instrument that appoints them (i.e., the Will or the trust agreement). If you do not make any reference to compensation, the Texas Probate Code (for executors) or Texas Property Code (for trustees) provides for compensation.

Section 241 of the Texas Probate Code provides that Executors are entitled to a commission of five per cent (5%) on all sums that actually receive in cash, and five per cent (5%) on all sums they pay out in cash. This seems simple enough, but on further examination of Section 241, you will find that “sums received” does not include cash received that was on deposit in a financial institution, life insurance proceeds, certificates of deposit and similar items. In addition, “sums paid out” does not include distributions to beneficiaries of the estate.

If the executor conducts a sale of property of the estate, the five per cent (5%) will apply unless a broker was used who is also being paid a commission. Thus, on the sale of a home where a broker was used and was paid a commission, the executor is not entitled to a commission as well. Where publicly-traded stock is sold in a brokerage account, and the broker receives a commission on the transaction, the executor receives no compensation.

The general rule of thumb is that the compensation will equal 5% of the income and 5% of the expenses of the estate. Sometimes this is adequate compensation, and sometimes it is not. If the executor feels the compensation is too low, he can always petition the probate court to consider additional compensation to be paid under Section 241.

For trustees, compensation is provided under Section 114.061 of the Texas Property Code (also known as the Texas Trust Code); however, the compensation provided there is very nebulous. It provides that the trustee is entitled to “reasonable compensation” from the trust for acting as a trustee. “Reasonable” can have all sorts of meanings, depending on the circumstances surrounding the trust and its assets, but typically it is taken to mean the amount that would normally be charged for like services by a corporate trustee in the area where the trust is administered. This can be anywhere from 1 to 1 ½ per cent (1% to 1.5%) of the market value of the assets on an annualized basis. Depending on the size of the trust, this could be a significant (or insignificant amount).

Of course, you can state very clearly that you want the executor or trustee to be paid and the terms of compensation, whether it is a percentage of the overall estate (for estate administration), a lump sum, or an annualized percentage of the market value of the assets (for trustees), or a set amount each year. Consider the size of your assets, the amount of income and expenses you might be expecting for your estate, and whether there are any unusual assets that the executor might be dealing with. Then consider whether the resulting compensation would be adequately compensating the person handling these matters.

In some cases, it is not necessary to compensate the executor or trustee. For example, it does not make much sense to compensate a spouse or child who is serving as the executor and who is receiving all the assets of the estate. Where there are multiple beneficiaries, however, and a difficult administration of the estate or trust is faced, it is perfectly fine to pay the compensation.

Finally, those persons serving as executors or trustees should remember that any compensation actually received is income that is taxable to them. Accordingly, the person serving may consider declining compensation. However, they should not do so without first consulting with their accountant or attorney to determine the resulting tax ramifications of accepting or declining the compensation.