Q&A: Taking an executor's fee for a relative's will

Q: I recently lost a relative and was appointed executor of her will. My attorney advised me that I am entitled to take an executor's fee and that this is deductible by the estate. Does it make sense to take an executor's fee?

A: Unless prohibited by the will, you can take an executor's fee. However, the fee is considered earned income for services provided, which means you will pay income tax on the fee, just like any other earned income. Except on the largest estates, the "tax cost" of paying income tax on the fee far outweighs the benefit of it being deductible by the estate. Therefore, if you are the sole beneficiary of the estate, it generally makes no sense to take an executor's fee, since you would have received the balance of the estate anyway. In this situation, taking the fee would convert a no-tax or low-tax receipt of money into a fully taxable event. However, if you are not the primary beneficiary, it makes good sense to take the fee for your services rendered.