The amount of the commission usually starts at about 5% on the first $100k of the probate estate, and then decreases from there on a sliding scale (i.e., 4% on the second $100k of the probate estate). This scale is governed by state law, and it is designed to provide a reasonable amount of compensation for the duties an executor faces without it being a windfall.
In the case of Michael Jackson's executors, however, the probate court granted an increased commission of 10%. And who are Jackson's executors? One is an well-known entertainment attorney (who was also the attorney who drafted Jackson's will--more on this later) and the other is a well-known music industry executive.
The court likely granted the increased commission because of the executors' experience in the entertainment world and their ability to broker lucrative deals that will benefit the estate. After all, as mentioned in my last post, they have brokered deals in the four years since Jackson's death that are estimated to be worth more than $600 million--which is a huge amount of money that will, potentially, get into the hands of Jackson's heirs eventually. However, that also means that they've earned about $60 million for their efforts.
Does that seem legal? Does it seem ethical?
There isn't much question about it being legal, because a judge approved it. Note that California's statute governing executor commissions allows the amount of the commission to be increased for "extraordinary" services and for the percentage on all amounts above $25 million to be set by the court. I would certainly agree that executors should get extra for extraordinary services, and that Jackson's executors are in fact performing such services. Very few people could broker the kinds of deals the executors have been brokering on behalf of Jackson's estate, which has dramatically increased the value of the estate, which in turn will result in more money for Jackson's heirs.
But are the commissions ethical? After all, $60 million is a lot of money, even divided by two people and spread across four years. Opinion is split. Some argue correctly that, once an executor accepts the job, it is his or her legal duty to bring in as much money for the estate as possible. So why should Jackson's executors get 10% to do what they're legally required to do, when other executors performing the same fiduciary function make far, far less, even on a percentage basis?
Other the other hand, as I said above, these particular executors are particularly well-suited to maximize the estate's value, and it is only because of their expertise and reputations that they are able to do so. Plus, the amount of their time and energy required--four years and counting--is also extraordinary.
Another point often raised by those who feel the commission in the Jackson case is unethical is the fact that one of the executors is the same attorney who prepared the will. At a minimum, it was someone else at the executor's firm who actually prepared the documents, but the end result doesn't change much. This isn't necessarily an ethical problem (attorneys help settle the estates of their deceased estate planning clients all the time), but consider this: not only did Jackson have a will, he also had a trust. The attorney in question was named co-executor and co-trustee. Problem is, the trust wasn't funded properly and so it "failed". When a trust fails, and there is also a will, the will must be used instead of the trust.
I don't know the exact nature of the trust Jackson created, but in my last post I touched briefly on revocable living trusts, which are a commonly used estate planning tool that accomplishes the same tasks as a will, but with certain benefits in certain situations. One such benefit of a living trust is that it allows an estate to be passed along to the beneficiaries outside of the court-supervised probate process. In short, trusts are private documents whereas a will becomes a public document once it is submitted to the probate court--and a will must be submitted to a probate court in order to have any legal effect. Once a will is admitted to the public probate process, certain people, such as family members and other potentially interested parties, must be notified of the proceeding and given the opportunity to come forward and challenge the will if, for example, they feel they've been improperly omitted from it. Theoretically, with a living trust no such notice is required. However, if the trust isn't set up and fully funded properly, then any assets that don't make it into the trust become probate assets and then the court needs to get involved and then those certain interested parties need to be given notice of the proceeding and the opportunity to come forward with any grievances.
In Jackson's case, the trust wasn't funded properly (very arguably, but not definitively, the attorney's fault) and as a result Jackson's will had to be used to settle the estate. And because the will and not the trust had to be used, the whole matter became a public process where otherwise it would have remained private because no court would need to have been involved. And as a result of the process now being public, there are all these legal challenges to the estate, which is costing the estate a lot of money.
Also, it is possible (but not publicly known) that the trust specified the amount of commission allowed to the executors (although they would have been called trustees). The trust has not be made public, so we don't know for sure, but had the commission amount been specified, and had the trust been properly funded, then the trustees (now executors) would have had to abide by those terms and would not have been able to petition the court for an increase in their commission. However, because the trust "failed", and the will was used instead, it opened the door to the executors asking for an increased commission.
At base, because the attorney (or a colleague within the same firm) didn't properly fund the trust, that same attorney now serving as co-executor is making tens of millions of dollars he otherwise might not have made.
So what do you think? Assume the attorney didn't do anything legally wrong by not funding the trust. After all, some lawyers leave that responsibility to the client; in other cases clients just won't cooperate in helping with the legwork needed to fund the trust. In neither scenario will the attorney usually be held responsible if the trust fails.
That said, do you think the amount being earned is fair and/or ethical? Why or why not? The "Comment" link is just a few inches down your screen...
Finally, there has been a lot of fighting among the Jackson family members that I didn't really go into in either this post or my last post. But it inspired me to write my next post about how to avoid nasty estate battles and to dispose of certain items of personal property in a way that minimizes the potential for family strife. Stay tuned. I'll be publishing that post on 10/16/13.
In the meantime, be well.