As Executor of Her Mother’s Estate, She Can Be Compensated — But the Fee Could Turn Tax-Free Inheritance Into Taxable Income

Quick Read

• Under IRS rules, executor fees are taxable income, while inheritances are generally excluded from gross income under 26 U.S.C. § 102(a).

• A $30,000 executor fee in the 24% bracket would create $7,200 in federal tax, leaving $22,800 after tax.

• According to Rev. Rul. 66-167, a fee waiver must be made before services begin, or the IRS may treat the amount as taxable income passed on to other heirs.

When a parent dies, the executor is responsible for handling the estate paperwork, and family members sometimes question whether that person should be paid for the work. In many cases, the answer is yes. State law generally allows executors to receive reasonable compensation from the estate. Some states, including California, use a statutory percentage formula under California Probate Code Section 10800, while others rely on a general “reasonable” standard that a probate court may review.

Executor compensation and inheritances are treated differently for tax purposes. A fee is taxable income, but the inheritance from which it is paid usually is not. For an executor who is also an heir, accepting the fee can convert money that would have been received tax-free into taxable income.

How Tax-Free Inheritance Money Becomes Taxable Pay

Federal tax law excludes inherited property from income. Under 26 U.S.C. § 102(a), gross income “does not include the value of property acquired by gift, bequest, devise, or inheritance.” Executor fees work the opposite way. IRS Publication 17 states that all personal representatives must include fees paid from an estate in gross income.

A relative who serves only once reports the fee on Schedule 1 (Form 1040), line 8z. Only someone who is in the business of serving as an executor reports it as self-employment income on Schedule C. The same publication adds that the fee is not included in income if it is waived.

A Fee Versus No Fee, Side by Side

Consider an example based on a few assumptions. She files as single, and her other income already places her in the 24% federal bracket, which begins at $105,700 in 2026. The estate offers a $30,000 fee. State income tax is not included.

• If she is the only heir, that same money would have reached her tax-free as an inheritance. Taken as a fee, it generates $7,200 in federal tax and leaves her with $22,800.

• If she is one of three equal heirs, the fee reduces each share by $10,000. She keeps $22,800 after tax, which is $12,800 more than she would receive if she waived the fee.

When the Estate’s Deduction Changes the Math

The estate may deduct administration expenses that are allowed under state law, under 26 U.S.C. § 2053(a)(2). Executor fees fit that category, though the deduction only matters if the estate owes estate tax. For people who die in 2026, the basic exclusion amount is $15,000,000. IRS data show that 7,195 estate tax returns were filed in 2024, and 2,663 of them reported net estate tax due.

If the estate earns income after death, such as interest or rent, the fee may instead be deducted on the estate’s income tax return. Section 642(g), however, prevents the same expense from being deducted on both returns. Using it against income requires a statement giving up the estate tax deduction.

Cases Where Taking the Fee Makes Sense

There are three common situations where taking the fee may be the better choice. One is when she does much more work than siblings who inherit equally, making compensation a way to balance that effort. Another is when the estate owes estate tax or has income that the deduction can offset. The third is when she is not an heir, since the fee is then the only money she receives from the estate.

How to Waive the Fee Before It Counts as Income

Timing is the key issue in a waiver. Under Rev. Rul. 66-167, waived fees can still be included in the executor’s gross income unless the waiver is made in time. A University of Michigan Law School analysis notes that no gift arises when a fiduciary waives commissions before starting service. The usual process is straightforward:

1. The decision is typically made early, preferably before any work begins.

2. The waiver should be in writing and signed, with copies provided to the heirs and, if required, the probate court.

3. An executor who plans to decline the fee should avoid actions that suggest payment is expected, such as accepting partial payments or listing the fee on an estate accounting.

A late waiver can create a tax problem. The IRS may view the fee as income she received and then gave to the other heirs as a gift.

Reimbursements and the Conversation to Have Before Anyone Gets Paid

Reimbursement for out-of-pocket estate expenses, such as filing fees, appraisals, or travel, is treated separately from executor compensation. Keeping receipts helps show the difference. The estate may repay those costs without creating income. Before the estate makes any payments, siblings often discuss whether she will take a fee, how much it should be, or whether she will waive it in writing.

An estate attorney handling probate in the relevant state can draft the waiver and confirm local fee rules.