Being named as an Executor of someone’s estate is an honor, but it is also not a task to take lightly. It can be a difficult, complex job. An Executor is responsible for finalizing the affairs of someone who has died. Once appointed, an Executor has full authority and control of the probate assets. He or she must protect the property of the deceased person, make sure the estate pays any debts or taxes owed, and carry out the person’s wishes regarding distribution of whatever assets are remaining. What an Executor can and cannot do may be specified in the decedent’s Will. The time and effort involved in administering an estate varies with the size and complexity of the estate. However, even an Executor of a small estate has important duties that must be performed correctly otherwise he or she may be personally liable to the estate or its beneficiaries.
Following are some of the duties and liabilities of an Executor (these duties and liabilities also apply to an Administrator):
ASSET COLLECTION AND VALUATION
Executors must gather and compile a list of all of the assets and liabilities of the decedent. An appraiser should be hired to determine the value of assets as of the date of death and six months thereafter (if an estate tax may be payable) or upon sale if such sale takes place between these dates. The Executor takes custody of and manages the Probate Estate assets during the period of administration. The Executor must also protect the property from loss and assure that the property is kept safe. The period of administration can be lengthy, depending on the assets held in the estate and the disposition of those assets.
Existing bank accounts held in the sole name of the decedent or in joint name for convenience must be closed and the funds should be deposited into the estate account. The Executor must procure from the IRS an Employer Identification Number (EIN) for the estate. The value of the accounts and any interest accrued and payable at date of death must be determined.
All stocks and bonds held in the sole name of the decedent must be transferred into the name of the estate. The valuation of publicly traded stock is the mean between the highest and lowest selling price on the date of death (if that date occurs on a trading date) or a weighted average if the date of death does not occur on a trading date. Accrued interest and dividends (as well as the value of the securities) are usually includible on the estate tax return and probate inventory. Closely held stock and partnership interests, if any, must be valued and transferred in accordance with the terms of any documents governing their transfer.
If there is real property (real estate), it should be appraised. If it is specifically devised (given to a person or entity under the will), the property should be transferred to the specific devisee as soon as the Executor or estate attorney has determined that the property is not liable for any contribution toward estate taxes or administration expenses. Insurance on the real estate must be reviewed and perhaps updated to reflect the current ownership. Arrangements for securing and safeguarding the property must be made – possibly changing the locks or adding a security system, depending on the ownership and disposition of the property.
The tangible personal property (property that can be touched and moved such as jewelry, furniture, automobiles, etc.) should be appraised and, if necessary, arrangements should be made for securing and safeguarding the property, including proper storage and insurance, until those assets are either sold or distributed to the beneficiaries as the deceased directed.
If the decedent owned life insurance policies, the claims should be processed by the beneficiary of the insurance. If the life insurance proceeds are payable to the decedent’s estate, the proceeds should be deposited into the estate account. A Form 712 must be requested from each insurance company for all life insurance owned by the decedent or payable to the decedent’s estate or trust. This form provides the value to be used on an estate tax return and becomes an attachment to the return.
If the decedent had any retirement, pension or profit plans, 401(k) plans, and/or individual retirement accounts, the benefits to which the decedent and his/her beneficiaries may be entitled should be ascertained, and the most beneficial payout should be determined. The value to include on any estate tax return must be determined as well.
Executors, once appointed, must pay bills such as legally enforceable debts of the decedent incurred before death, but not yet paid, such as utility expenses, outstanding real estate taxes, outstanding credit card bills, medical expenses to the extent not covered by insurance, and unpaid personal income taxes; funeral expenses, including the funeral home bill, costs of any reception after the funeral, sympathy cards, stamps for sympathy cards, long distance telephone calls, and the like (either directly or through reimbursement of family members); expenses of administration, including legal fees, accountant’s fees, charges for death certificates, charges for certificates of court appointment, court filing fees, appraisal costs, and the like, incurred while the estate is ongoing.
ESTATE TAX RETURNS
Executors must have Federal and Massachusetts estate tax returns prepared if the estate assets reach a certain threshold. It is important to note that for estate tax purposes, the decedent’s estate includes probate and non-probate assets such as joint tenancy assets, life insurance, 401K and IRA plans and assets held in trust. Federal and state estate tax returns (Forms 706, M-706, etc.) are due nine months after date of death. The returns can be put on extension for six more months, but any taxes are due and payable at nine months.
The estate tax returns reflect deductions allowable by the taxing entities to reduce the “taxable estate”. Deductions are allowed for funeral expenses, debts, expenses of administration, items passing to a surviving spouse (if any) or to charities (if any). The Executor should consult with a tax attorney or accountant to discuss ways to minimize taxes, such as using disclaimers, timing distributions, reviewing for specific terms and possible flexibility, etc. This is often referred to as “post-mortem planning”.
Once the returns are filed, the Executor waits for the taxing authorities to review the returns and issue “closing letters”. Closing letters are the taxing authorities’ agreement that any tax due has been paid. The authorities have up to three years from the date the return is filed to review the return, but typically they proceed with the review sooner – often within one year of receiving the return. Generally, until the closing letters are received, the estate remains open.
INCOME TAX RETURNS
The estate is a separate taxable entity and the Executor must get a separate tax identification number from the IRS by completing Form SS-4. This number is also needed to open estate bank accounts as well as to transfer securities into the name of the estate if they are to be held for any length of time.
If estate assets generate income during the administration of the estate, an Executor must file fiduciary income tax returns (Federal Form 1041 and Massachusetts Form 2) if the estate has any taxable income or has gross income of $600 or more in any taxable year. Estate income tax returns must be filed on or before the 15th day of the fourth month following the close of the taxable year (April 15th if you use the calendar year). The entire tax due must be paid. After the second year, the Executor must file income tax estimates and make quarterly estimated tax payments.
An executor is also required to have the decedent’s final income tax return (Federal Form 1040 and Massachusetts Form 1) prepared, even if the decedent paid no income taxes in recent years.
When a person dies, his taxable year ends on the date of his or her death, and his or her income and deductions are reported through that date. If the decedent was married when he or she died, the estate can join with the surviving spouse in filing a joint income tax return for the year in which the decedent died. Certain deductions may be taken on the decedent’s final income tax return or claimed as an expense of administration on the federal estate tax return. An Executor should talk to a tax attorney or accountant about these elections.
GIFT TAX RETURNS
If the decedent gave gifts over the annual exclusion amount (currently $13,000 in 2011) to any person (except, perhaps a spouse) in any year and did not file a gift tax return, the Executor is obligated to have a gift tax return prepared and filed.
An Executor is entitled to compensation for the work the Executor performs, subject to approval by the Probate Court. The amount of the fee is subject to a “reasonableness test.” If an Executor chooses to be compensated for his or her duties, he or she must keep a detailed record of the tasks performed and the amount of time spent.
Any fee paid to an Executor is counted as income to that Executor and must be included in the Executor’s income tax return. Executor fees can be deducted on the estate tax return, thus potentially lowering the tax due, if applicable.
The assets of the estate belong ultimately to the beneficiaries and not to the Executor. If there are specific pecuniary bequests (cash legacies) under the will, arrangements must be made to pay them from Probate Estate assets (unless the will specifies that they are payable from a trust). Cash payments under the will must be made within one year from date of death or interest will begin to accrue and be payable. Cash payments under a trust that terminates on the decedent’s death must be paid within six months from date of death or interest will begin to accrue and be payable.
The rest of the Probate Estate must pass in accordance with the will – to individuals, charities or to a trust. The Executor is responsible for distributing that property, after paying administration expenses, funeral costs, debts and taxes under Federal law, amounts expended by Massachusetts under MassHealth, expenses of last illness, debts and taxes under state law, creditor claims and specific gifts under the will.
The Executor may make distributions to the beneficiaries as soon as they can be done safely. Distribution does not have to wait until the estate is closed. However, the Probate Estate should not be fully distributed before one year from date of death because creditors may file claims against the estate up to one year. An Executor is responsible if he or she distributes assts and then later finds out that he or she needs the assets to pay legitimate claims. Distribution to the beneficiaries of the residue of the estate typically occurs after both the Internal Revenue Service and the Commonwealth of Massachusetts (or other state) have issued estate tax closing letters accepting the estate tax returns. Depending on the situation, this can be anywhere from one to three years after the estate tax returns have been filed.
When carrying out these specific duties, the law expects an Executor to be impartial. The Executor owes fiduciary duties to anyone who has an interest in the estate and must act in the best interests of the estate. This means that an Executor cannot favor one person or himself or herself over others involved in the estate.
The administration of the estate generally needs to be commenced and concluded within a reasonable period of time. If an Executor fails to do this and, as a result, the beneficiaries under the will are exposed to any form of financial or pecuniary loss, he or she could be held liable for the loss.
An Executor is expected to administer the estate with care and prudence. An Executor is personally liable to ensure that payment of all valid creditor claims, including any taxation liabilities, are made. If an executor acts without due care and prudence, such as in the case of buying speculative securities or disposing of valuable assets substantially below market value, he or she could be held accountable.
An Executor is liable to the beneficiaries for any loss to the estate and for any gain the estate should have realized but did not, or if an Executor was negligent or intentionally did something he or she shouldn’t have (or failed to do something he or she should have). For example, if the Executor mismanages the estate assets, even unintentionally, he or she can be held personally liable and may have to repay the estate for any losses. If the Executor fails to secure and protect the assets of the estate and it results in the assets being damaged, lost or stolen then (in the absence of having adequate insurance over the assets covering the loss) he or she could be held personally liable for the loss or, as the case may be, the reduction in the value of the assets in question. Similarly, if the Executor fails to properly manage, insure or repair real property (whether commercial or residential) he or she could be held liable for any losses including loss of rental income.
While Executors can take professional advice before making investment decisions, the ability to make these decisions is personal to the Executor and cannot be delegated. Therefore any improper delegation of Executor duties, such as giving investment advisors complete scope to make decisions in respect of and deal with the estate’s investments without the Executor’s supervision, could result in liability being imposed on the Executor. The same principle applies to allowing someone to freely manage the deceased’s business or property portfolio, etc. If an Executor engages a professional to manage some aspect of the estate, the Executor must closely supervise the carrying out of those management functions.
An Executor is responsible for ensuring that the correct people benefit from the estate. If an Executor accidently make payments or distributions to the wrong people, he or she could be held personally liable to make good the damage caused by securing the return of the misplaced assets or compensating the beneficiaries accordingly.
Taking actions without the proper approval can also expose Executors to liability. Depending on the proposed action in question, an Executor may require the prior consent of beneficiaries, co-fiduciaries or even the Probate Court.
An Executor’s liability is not limited to the extent of the deceased’s estate; if the claim is more than the value of the assets still held in the estate, he or she will be personally liability for the shortfall.
This article is only a synopsis of the basic responsibilities and liabilities of an Executor. If you have any questions, you should consult with a qualified attorney before making any decisions.