Compensation of Personal Representatives

Can I be Paid for Serving as Executor of an Estate?

Many people feel both honored, but also burdened by being named and appointed as the personal representative[1] of someone else’s estate. The job can be difficult and full of surprises. A personal representative’s compensation acts as a tool to incentivize a person to accept the important responsibility of winding up the affairs of another person on that other person’s death. Unfortunately, a personal representative’s compensation is also a frequent source of disagreement and friction in an estate administration. Disgruntled beneficiaries or heirs may view the personal representative’s compensation as unreasonable or, in some cases, undeserving.

Consequently, it is important for the personal representative of an estate to understand both the law and best practices when it comes to compensation, including understanding when the personal representative is entitled to compensation, how much compensation he or she may be entitled, and how to properly disclose compensation to the estate’s beneficiaries or heirs. The timing of paying compensation can also be important.

1. The Terms of the Will Generally Govern Compensation

A person who makes a will may state in the will whether the personal representative of the estate is entitled to compensation. The personal representative is bound by the terms of the will. A personal representative who acts under a will providing a set amount or no amount as compensation enters into an express contract when he or she agreed to become the personal representative and cannot ask the court for a greater amount of compensation.[2]

If the will does not address the payment of fiduciary compensation, the fiduciary is entitled to compensation based on a statutory formula.[3] Thus, the statutory fee only applies when a will is silent as to what compensation the personal representative is entitled to. If the will says the personal representative shall be allowed “reasonable compensation,” Section 352.052 does not apply.[4]

This leads to the question of what is “reasonable” compensation? Although Texas Estates Code Section 352.052 may not technically apply where a will allows for “reasonable compensation,” many practitioners view Section 352.052 as a safe-harbor approach. Thus, a working knowledge of Section 352.052 is helpful – particularly using it as a tool to compare the relative reasonableness of a non-statutory approach, like hourly compensation. A personal representative who is entitled to receive “reasonable compensation” based on the terms of a will and who desires to be paid under some alternative method should strive to keep excellent records of the time expended and tasks achieved. In addition, it is helpful for the personal representative to disclose his or her intentions with respect to compensation at the beginning of the administration and before the compensation is paid. Ideally, the personal representative should attempt to secure the approval or consent of the beneficiaries or at least give them an opportunity to object.

Where a will specifies the amount, rate, or methodology for compensating an executor, the provision in the will controls, and the executor will not be entitled to additional compensation.[5]

2. The Statutory Scheme

If the will does not provide for compensation of the personal representative, his or her right to compensation arises from, and is controlled by, statute.[6]

A. Texas Estates Code Section 352.002

Texas Estates Code Section 352.002 states:

(a) An executor, administrator, or temporary administrator a court finds to have taken care of and managed an estate in compliance with the standards of this title is entitled to receive a five percent commission on all amounts that the executor or administrator actually receives or pays out in cash in the administration of the estate.

(b) The commission described by Subsection (a):

(1) may not exceed, in the aggregate, more than five percent of the gross fair market value of the estate subject to administration; and

(2) is not allowed for:

(A) receiving funds belonging to the testator or intestate that were, at the time of the testator’s or intestate’s death, either on hand or held for the testator or intestate in a financial institution or a brokerage firm, including cash or a cash equivalent held in a checking account, savings account, certificate of deposit, or money market account;

(B) collecting the proceeds of a life insurance policy; or

(C) paying out cash to an heir or legatee in that person’s capacity as an heir or legatee.

The statutory formula in Texas for computing the compensation of a personal representative of an estate is essentially based upon a cash flow analysis of the estate during its administration.[7] Section 352.002 uses the term “cash” rather than “gross income,” and no ordinary commissions are allowed under the statute for either the receipt or payout of non-cash assets in kind by the personal representative regardless of their size or amount, or their difficulty in administration.[8]  The terms “cash,” “actually received in cash,” and “actually paid out in cash,” as used in Section 352.002 are not defined or clarified in the statute, and their use can result in confusion and disputes in determining the ordinary commissions due to a personal representative under the statute.[9]

(1). Purpose

The intent of the formula is to provide a fair and reasonable compensation to the personal representative.[10] In many cases, however, the statutory formula results in compensation that is not commensurate with the time and toil the personal representative spends administering the estate.

(2). Important Preconditions to Being Entitled to Compensation

There are as many as three important and potential preconditions that must be satisfied before a personal representative may be entitled to receive compensation: (1) if there is a will, the will must not prohibit compensation; (2) the personal representative must actually be appointed and render services in order to be paid;[11] and (3) in the case of a temporary or dependent administration, the court finds the personal representative has taken care of and managed the estate in compliance with the standards of the Texas Estates Code (for independent administration, there is no required finding).

(3). Cap

The Texas Estates sets a cap on the compensation a personal representative may earn. Texas Estates Code Section 352.002(b)(1) states that a commission may not exceed, in the aggregate, more than five percent of the gross fair market value of the estate subject to administration.

B. Method of Calculating Statutory Commission

Generally, the personal representative calculates a statutory commission annually by identifying all of the “qualifying receipts” and all of the “qualifying disbursements” and then applying the statutory 5% to each category total. As explained below, there are many categories or items for which no commission is allowed.

In some cases, calculating the statutory commission can result in what appears to be an “unearned” amount. However, the services the personal representative performed do not have to be directly or indirectly connected with the specific receipts of cash during the administration for the personal representative to receive a commission under Section 352.002.[12]  There is no statutory requirement that the personal representative actually “earn” its commissions on the receipts and/or payouts of cash on which the commission is based.[13]

(1). Major Statutory Exceptions

Texas Estates Code Section 352.002 contains three major exceptions to the general rule that a personal representative will be entitled to a percentage commission on the receipt and payout of “cash” and expressly provides that:

• No commission is allowed for receiving funds belonging to a testator or intestate which were on hand or were held for the benefit of the testator at the time of death in a financial institution or a brokerage firm, including cash or a cash equivalent held in a checking account or a savings account, certificate of deposit or money market account;
• No commission is allowed on collecting the proceeds of a life insurance policy; and
• No commission is allowed for paying out cash to the heirs or legatee in that person’s capacity as an heir or legatee.

From the statutory exceptions listed above, it is clear that most cash funds that the personal representative will administer and distribute over the course of an administration will be excluded from the computation of the statutory commission.

(2). Examples Where a Statutory Commission Has Been Allowed

The following is a list of example cases in which the ordinary statutory commission has been allowed by Texas Courts:[14]

• Payments of fiduciary income taxes by the estate.[15]
• Payment of ad valorem taxes on real property belonging to the estate.[16]
• Receipts of cash rental payments from tenant houses and a farm where such receipts found to essentially constitute investment income and not receipts from a business operation of the decedent or estate.[17]
• Receipts of oil and gas royalties.[18]
• Payments for repairs and improvements on property of the estate.[19]
• Payment of federal estate taxes and state inheritance taxes.[20]
• Casualty insurance premiums paid out on property (apparently even on business assets) where the receipts used to make such payments were not derived directly from business operations and were not made necessary primarily by such business operations.[21]
• Receipts collected in a foreign jurisdiction (apparently not cash on hand at death of decedent).[22]
• Money borrowed by estate where personal representative was expressly authorized to borrow to pay debts of estate.[23]
• Cash actually received or constructively received by personal representative upon sale of estate assets, including foreclosure or other sale of mortgaged property to the mortgagee.[24]

(3). Examples Where a Statutory Commission Has Not Been Allowed

The following is a list of example cases in which the ordinary statutory commission has not been allowed by Texas Courts:[25]

• Payment of a debt owed by the estate to the personal representative itself as a creditor.[26]
• Payment of the statutory commission itself.[27]
• Payment of funds received by an ancillary foreign personal representative delivered for immediate distribution to the heirs who are entitled to receive the funds.[28]
• Situations where the court finds the personal representative has not taken care of the estate.[29]
• Payments made by third parties on behalf of the estate and which the personal representative did not actually receive.[30]
• Payments made by a personal representative which pertain primarily to the operation of a business.[31]

(4). Sale of Assets

A personal representative will generally be entitled to an ordinary commission upon the actual receipt or the constructive receipt of the cash proceeds of the sale of assets of the estate which are sold for a valid purpose pertaining to the administration of the decedent’s estate.[32] For example, such sales may be required or authorized by the testator’s will in order to facilitate the distribution of the property to the beneficiaries or heirs of the estate.[33] Likewise, an ordinary commission should be allowed where assets of the estate are sold for the purpose of paying debts and expenses of the estate.[34]

The sale of estate assets might be completed by third parties. There is no necessity that the actual sale of estate assets be personally made by the personal representative if such personal representative otherwise actually or constructively receives the proceeds of such sale in cash during its administration.[35]

C. Alternate Statutory Compensation

An alternative compensation scheme is found in Texas Estates Code Section 352.003 if the statutory 5% compensation calculated under TEC § 352.002 is unreasonably low. In that scenario, the Court may allow an administrator reasonable compensation for administrator’s services, including “unusual efforts” to collect funds.  This sometimes arises when an estate consists of a significant amount of cash funds – the mere collection and administration of which is not normally compensable as “cash receipts.”

D. Conclusion

This article outlines some of the basic concepts concerning the compensation of personal representatives. Every estate administration is unique.  Calculating the compensation which a personal representative of an estate may be entitled can be complicated. Failing to carefully approach this issue may result in liability for the personal representative. Thus, it is prudent for a personal representative to seek legal guidance from an attorney before paying himself or herself.

[1] The term personal representative, as used in this article, refers to dependent administrators, temporary administrators, and independent and dependent executors.

[2] Henderson v. Stanley, 150 S.W.2d 152 (Tex. Civ. App.—Waco 1941), judgment rev’d on other grounds, 139 Tex. 160, 162 S.W.2d 95 (Comm’n App. 1942).

[3] See Tex. Estates Code § 352.002; see also In re Rosenfield’s Estate, 371 S.W.2d 95 (Tex. Civ. App.—Dallas 1962, no writ).

[4] Lee v. Lee 47 S.W. 3d 767 (Tex. App.-Houston [14^th Dist.], 2001, rehearing denied).

[5] Allen v. Berrey, 645 S.W.2d 550, 551 (Tex. App.—San Antonio 1982, writ ref’d n.r.e.)(will directing that executor shall be paid the sum of $20,000.00 for his services as executor controlled compensation; executor was not entitled to be compensated by the statutory formula or under other equitable legal theories, like unjust enrichment or quantum meruit).

[6] Lipstreu v. Hagan, 571 S.W.2d 36, 38 (Tex. Civ. App.—San Antonio 1978, writ ref’d n.r.e.).

[7] See Georgia Akers, Show Me the Money: Fiduciary Compensation How to Get the PR Paid, How Much Do They Get Paid, and How Do I Get Paid? Page 2, State Bar of Texas 27 Annual Advanced Estate Planning and Probate Course (2003).

[8] Id.

[9] Id.

[10] In re Roots’ Estate, 596 S.W.2d 240, 243 (Tex. Civ. App.—Amarillo 1980, no writ).

[11] Matter of Estate of Hodges, 725 S.W.2d 265, 268 (Tex. App.—Amarillo 1986, writ ref’d n.r.e.)

[12] Akers at 3.

[13] See Walling v. Hubbard, 389 S.W. 2d 581, 586 through 588 (Tex. Civ. App.—Houston 1965, writ ref’d n.r.e.).

[14] Akers at 7.

[15] Oldham v. Keaton, 597 S.W.2d 938, 945 (Tex. Civ. App.—Texarkana 1980, writ ref’d n.r.e); Walling v. Hubbard, 389 S.W.2d 581, 586-588 (Tex. Civ. App. – Houston 1965, writ ref’d n.r.e).

[16] Oldham v. Keaton, 597 S.W.2d 938, 945 (Tex. Civ. App.—Texarkana 1980, writ ref’d n.r.e).

[17] Id.

[18] Id.; Walling v. Hubbard, 389 S.W.2d 581, 586-588 (Tex. Civ. App.—Houston 1965, writ ref’d n.r.e).

[19] Walling v. Hubbard, 389 S.W.2d 581 (Tex. Civ. App. —Houston 1965, writ ref’d n.r.e).

[20] Id.

[21] Id.

[22] Simpson v. Goggin, 5 S.W.2d 610 (Tex. Civ. App. —San Antonio 1928, writ ref’d).

[23] Loewenstein v. Watts, 119 S.W.2d 176 (Tex. Civ. App.—El Paso 1938), aff’d. 137 S.W.2d 2 (Tex. 1940); Von Koenneritz v. Ziller, 112 Tex. 126, 245 S.W. 423, 424 (1922). But see Downs v. Goodwin, 271 S.W. 414, 417 (Tex. Civ. App.—Beaumont 1925), rev’d. on other grounds, 280 S.W. 512 (Tex. Com. App. 1926).

[24] Huddleston v. Kempner, 87 Tex. 372, 28 S.W. 936, 937 (1894); Walling v. Hubbard, 389 S.W.2d 581, 586-588 (Tex. Civ. App.—Houston, 1965, writ ref’d n.r.e); Cooper v. Schwalbe, 238 S.W.2d 581 (Tex. Civ. App.— Waco 1951, writ ref’d); Nations v, Ulmer, 139 S.W.2d 352 (Tex. Civ. App.—El Paso 1940, writ dism’d, judg. corrected); Simpson v. Goggin, 5 S.W.2d 610 (Tex. Civ. App.—San Antonio 1928, writ ref’d).

[25] Akers at 7.

[26]Brown v. Walker’s Heirs, 38 Tex. 109, 110 (1873).

[27] Trammel v. Philleo, 33 Tex. 395 (1870).

[28] Spofford v. Minor, 36 S.W. 771 (1896, writ ref’d).

[29] In re Estate of Miller, 243 S.W.3d 831, 842 (Tex. App.—Dallas 2008, no pet.); Geeslin v. McElhenneny, 788 S.W.2d 683 at 687 (Tex. App.—Austin 1990, no pet.) (“In addition to removing Geeslin from his position as independent executor, the probate court denied him a portion of his commissions and … requir[ed] him to refund $132,989.23 in commissions previously paid. The court acted within its authority.”).

[30] Walling v. Hubbard, 389 S.W.2d 581, 587 (Tex. Civ. App.—Houston 1965, writ ref’d n.r.e.), writ dismissed w.o.j. (Nov. 3, 1965), writ refused NRE (Nov. 3, 1965)(holding the trial court improperly allowed commissions to executor on tax payment made by producer where executor did not have the right to demand that the purchaser pay him for the gross value of the oil received without deduction of the tax and executor did not ‘actually’ receive the money from producer used to pay the tax).

[31] Walling v. Hubbard, 389 S.W.2d 581, 588 (Tex. Civ. App.—Houston 1965, writ ref’d n.r.e.), writ dismissed w.o.j. (Nov. 3, 1965), writ refused NRE (Nov. 3, 1965).

[32] Akers, at 8-9; Walling v. Hubbard, 389 S.W.2d 581, 586-588 (Tex. Civ. App.—Houston 1965, writ ref’d n.r.e.)

[33] Simpson v. Goggin, 5 S.W.2d 610 (Tex. Civ. App.—San Antonio 1928, writ ref’d.)

[34] Akers, at 8-9.

[35] Akers, at 8-9; Thompson v. Thompson, 230 S.W.2d 376 (Tex. Civ. App.—Galveston 1950), rev’d on other grounds 149 Tex. 632, 236 S.W.2d 779 (Tex. 1951); Huddleston v. Kempner, 87 Tex. 372, 28 S.W. 936, 937 (1894); Walling v. Hubbard, 389 S.W.2d 581, 586-588 (Tex. Civ. App.—Houston, 1965, writ ref’d n.r.e); Simpson v. Goggin, 5 S.W.2d 610 (Tex. Civ. App.—San Antonio 1928, writ ref’d.).