What commissions and estate/inheritance tax deductions are available to an executor or administrator of an estate when real estate is an included asset in a decedent's estate? This may seem like a straightforward question; however, New Jersey’s separate inheritance tax and estate tax, and different rules and regulations governing each tax, may cause an executor or administrator to miss certain opportunities regarding commissions.
In general, pursuant to N.J.S.A. 3B:18-14 an executor or administrator may take a commission on the principal value of an estate, including real estate (the commission is calculated as follows: 5% on the first $200,000 of all corpus received by the executor; 3.5% on the excess over $200,000 up to $1,000,000; 2% on the excess over $1,000,000).
The inheritance tax imposes a tax based on who receives property from a decedent’s estate, while the estate tax imposes a tax based on the overall value of a decedent’s estate in conjunction with allowable state death tax credit under the federal estate tax as of December 31, 2001. The inheritance tax and estate tax are computed independently from each other and provide their own exemptions and deductions.
Pursuant to N.J.A.C. 18:26-7.10 governing deductions allowed under the New Jersey inheritance tax, “[e]xecutor’s or administrator’s commissions are allowed on real estate that is actually sold by the executor or administrator or which is expressly directed to be sold by the terms of the decedent’s will. The real estate must be sold by the representative and not the beneficiary(s) in order to qualify.” This regulation deals specifically with allowed deductions in connection with the inheritance tax and not whether an executor’s or administrator’s commission is allowed. There is no statute or regulation that prevents taking the full deduction on a New Jersey estate tax return. In fact, the New Jersey Tax Court recently highlighted this fact, reinforced the separate nature of the two tax regimes, and refused to extend the above regulation to the estate tax. See Estate of Booth v. Director, Division of Taxation, 2014 WL 1509837. As a result, executors and administrators may earn commissions as to the value of unsold real estate; however, they may not deduct such commissions on the inheritance tax return unless the real estate is actually sold or directed to be sold in the decedent's will.
In sum, an executor or administrator may take full commissions on the gross value of assets that make up a decedent’s estate, including real estate. For estate tax purposes, the amount of such commission is fully deductible. For inheritance tax purposes, any portion of principal commissions related to real property not sold (or not directed to be sold) by the executor or administrator is not deductible.
