CSA Journal The Ins and Outs of Being an Executor Journal 69 Vol. 2 2017 Link: www.csa.us/resource/resmgr/docs/journals/journal_69/executor.pdf This document is authorized for use only by David Cox (DCOX@PROFTESTING.COM). Copying or posting is an infringement of copyright. Please contact communications@csa.us or 800.653.1785 for additional copies. Certified Senior Advisor (CSA) TM
[ legal ] The Ins and Outs of Being an Executor Few people know what serving as an executor truly entails. Before agreeing to such a vital role, learn the steps in the probate process and the responsibilities of being an executor. BY KIRSTEN WALDRIP, JD, LLM Financial and legal advisors working with older adults often receive requests from clients for guidance on their estate plans, such as who should be appointed as executor, whether or not that person should be an advisor, or what it means for them to be named as an executor in a third party s will. A strong understanding of the ins and outs of being an executor is essential to provide the best answers to those questions. When drafting a last will and testament, one of the primary considerations is who to select as the personal representative or executor (hereinafter executor ) of the estate. Often this question is very difficult to answer because the testator does not want to make any family members feel left out if not chosen as executor. Being appointed as executor can be a major commitment! However, executors can be paid for their hard work. The amount they are paid varies by state law and by their professional experience in the tasks at hand. Some individuals also automatically assume that their spouse is the best choice for this position. While this might be true in some circumstances, marriage alone does not qualify a person to act as the executor. The executor, whether an individual or professional institution, should be someone who is financially savvy, organized, and able to file court paperwork in a timely manner (American Bar Association, 2001). If the spouse or child doesn t fit in this criteria, the testator may want to consider naming an alternate family member, friend, or corporation like a bank or financial institution that provides these services as the executor. Once the person is chosen and the will executed, it is important for the testator to give an official copy of the will to the executor or store the will in an easily accessible location. A safe deposit box, for example, can be challenging for a third party to gain access to until legally appointed as executor which requires the original will. What exactly does the executor do and why must one be appointed? The law requires an executor because someone must be responsible for collecting the assets of the estate, protecting the estate property, preparing an inventory of the property, paying valid claims against the estate (including taxes), representing the estate in claims against others, and, finally, distributing the estate property to the beneficiaries (American Bar Association, 2001). When a person dies, they leave behind assets, debts, pets, and legal obligations that must be addressed and finalized. The executor is also subject to a fiduciary duty, which includes the following: 1. To act impartial in regards to all parties to the estate. 2. To administer the estate with care and prudence. 3. To put the interests of the estate in front of the [executor s] own interests. 4. To be loyal and treat each party the same (Colorado Bar Association, 2011). CSA JOURNAL 69 / VOL. 2, 2017 / SOCIETY OF CERTIFIED SENIOR ADVISORS / WWW.CSA.US PAGE 41
Document the Assets of the Estate First, an executor must collect and document the assets of an estate to create an inventory of assets. The first step of this process entails opening a bank account on behalf of the estate and obtaining an employer identification number (EIN) for the estate to manage estate assets throughout the probate process (Internal Revenue Service, 2017). If a decedent owns real property (such as a house or land lot), collectibles, artwork, jewelry, a business, or similar hard-to-value assets, a professional appraisal may be required (Internal Revenue Service, 2017). It is the executor s responsibility to hire an appraiser on behalf of the estate, if required. Such an appraisal will also be important if the estate qualifies for estate tax valuation discounts, such as a minority interest discount, blockage discount, or fractional interest discount. The executor will continue to invest assets, manage assets, pay any necessary bills (such as the utilities and mortgage on real property pending a sale), and preserve the assets for the estate beneficiaries. The executor should be aware that accounts accessed digitally may pose some obstacles while collecting assets and paying bills. If an executor logs into a decedent s computer or online account without specific authorizations, the executor may be violating federal computer hacking laws. If the decedent s state of residence has adopted the Revised Uniform Fiduciary Access to Digital Assets Act, the executor should review the will or language about the executor s powers to access digital accounts. If such language is not in the will, the executor may be subject to the terms of service agreements of each online provider. These terms of service agreements may severely restrict or prohibit the collection or use of the digital account. Protect Estate Property Second, the executor is responsible for protecting the estate property. It is the fiduciary s responsibility to take control of (marshal) all assets comprising an estate or trust (American Bar Association, n.d.). The executor must preserve the assets of the estate to pay legitimate debts incurred by the decedent during their lifetime and to distribute the maximum amount of assets to the beneficiaries of the estate. For example, if there is real property included in the estate, the executor should visit the property regularly to ensure that the property has not been vandalized, remains locked up, and the appropriate utilities are maintained for eventual sale or transfer to a beneficiary. When a notice to creditors is published, it is possible for illintentioned people to locate the real property owned by a decedent and commit crimes against that property. Additionally, appropriate insurance should be HELPFUL TERMS Beneficiary: A person who inherits assets from the estate of a deceased person, usually through a will or life insurance policy. Decedent: A person who has died. Executor: The representative chosen to manage the probate process for the estate and assets of a deceased person. Fiduciary: An entity or person who acts on the behalf of another. Examples include individuals, trust companies, and banks serving as executor, trustee, or personal representative of a deceased person. Heir: A person entitled to assets or property from the estate of a deceased person when no will exists. Entitlements vary according to applicable state laws. Testator: A person who creates a valid will. Will: Legal document that names an executor and provides instructions for the handling of a person s estate and assets upon their death. A will may also be referred to as a last will and testament. (American Bar Association, n.d.) maintained throughout the fiduciary s tenure (American Bar Association, n.d.). Submit Inventory and Valuation of Assets Third, the executor must prepare an inventory of the estate assets. The inventory will include the value of all estate assets, such as investment accounts, vehicles, real estate, retirement accounts, and bank accounts. Inventorying the estate includes applicable titling and date-of-death values, managing the estate assets until the court approves the closing of the estate, keeping accurate records of the estate s transactions, and making distributions to creditors, devisees, and/ or heirs (Colorado Bar Association, 2011). An executor may keep track of the estate inventory with programs such as an Excel spreadsheet or QuickBooks. After completion of the initial inventory, the executor PAGE 42
can evaluate whether there are sufficient assets to pay the creditors of the estate, in addition to the bequests specified in the last will and testament. The executor must also record the inventory on the state-specific inventory form and submit it to the probate court. Filing a copy of the inventory with the probate court adds a layer of judicial oversight, which provides beneficiaries with the peace of mind that their inheritance is preserved. Settle Estate Debts Fourth, the executor must pay valid claims of the estate. When a person dies, the executor must notify creditors to enable them to make a claim against the estate. For example, Colorado requires that a personal representative notify (by publication in a local newspaper or by mail) any possible and known creditors of the decedent, and to pay legitimate claims After the creditors period is over, the personal representative may make distributions to creditors, heirs, and/or beneficiaries (Colorado Bar Association, 2011). Because creditors have a right to be paid out of estate assets, the executor should avoid making any distributions to beneficiaries before the creditors period expires. If the executor makes distributions to the estate beneficiaries and exhausts the estate assets before paying creditors claims, the executor can be personally liable to pay those creditors for improperly spending estate or trust assets or for failing to protect the estate assets properly (American Bar Association, n.d.). The executor must identify the decedent s unpaid debts, keep a record of estate administration expenses, and determine a timeline for payment of all debts and expenses (American Bar Association, n.d.). If an estate s assets are insufficient to pay all of the debts and expenses, then the executor must notify creditors and arrange to pay as much of the debts and expenses as possible, in order of priority as delineated by the state. Beneficiaries often assume they are entitled to receive an inheritance from the estate of a parent, spouse, or loved one. However, receiving an inheritance is a privilege, not a right. If an estate has assets remaining after settlement of all legitimate debts, then a beneficiary may receive an inheritance. Life insurance is a common financial planning option used to ensure that funds are available for inheritance. The most basic use of life insurance is to provide surviving family members with an immediate source of capital upon the death of a breadwinner (Best, 2016). However, if the life insurance policy names a beneficiary other than the estate, the named beneficiary will receive the policy proceeds as a will substitute meaning that the policy will pass to the beneficiary named and is not subject EXECUTOR NOTIFICATION IS VITAL! Being an executor is a major commitment. It is vital that a testator discuss this role with the person or institution they select. Finding out upon a person s death that one is the designated executor in the will forces them into a challenging role they may be ill-prepared for or unwilling to fulfill. to the terms of the will. If a testator does not properly plan and does not have sufficient assets in the estate to cover all outstanding debts, the beneficiaries may receive very little or no inheritance. Resolve Claims against the Estate Fifth, the executor represents the estate against any claims brought against the estate. There are two situations in which the executor must represent the estate: (1) claims made by creditors; and (2) will contests made by potential heirs of the estate. When a creditor makes a claim against the estate, that claim may need to be litigated by the probate court to ensure the claim is valid (Vercammen, 2008). For example, if the creditor makes a claim after the expiration of the notice to creditors period, that claim may be forever barred. An executor may also have to defend the estate against will disputes from beneficiaries or other heirs who are either unsatisfied with the distributions provided for in the will or are omitted from the will. Including a no contest provision, which states a person who opposes any portion of the will is automatically disinherited, may prevent potential beneficiaries from filing claims against the estate. However, a will that is well-drafted provides clarity and assists the executor in defending the estate, by defining terms included in the will and providing for contingent distributions. Distribute Assets to Beneficiaries Lastly, the executor must distribute any remaining estate assets to the beneficiaries of the estate. The assets of an estate may be distributed outright to the beneficiary, or the will may establish testamentary trusts (trusts created within the will and during the probate process, which differ from revocable living trusts that hold assets during a person s lifetime and avoid probate), or custodial accounts to maintain and distribute assets at a later time. For trusts and custodial accounts, the executor will transfer the estate property to the trustee or custodian before closing the probate estate. After distribution of assets to a trustee, the trustee CSA JOURNAL 69 / VOL. 2, 2017 / SOCIETY OF CERTIFIED SENIOR ADVISORS / WWW.CSA.US PAGE 43
takes responsibility for managing and distributing the assets based on the terms of the trust. Real property, in particular, must be handled with care. A common misconception is that the real property in the estate is easily transferable to the beneficiary with a quitclaim deed. If real property solely owned by the decedent doesn t have a beneficiary deed or transfer-on-death deed in place, the executor must include the real property in the probate process with the rest of the estate assets. The executor then must record a specific personal representative s deed or executor s deed, along with a death certificate, to legally transfer the property (Deeds.com, 2015). Not following this proper procedure, the chain of title will not be clear, and the transfer of property will not be legal. When determining the distributions to beneficiaries, the executor must be sure to bequeath estate assets to the correct beneficiaries. For example, if the decedent made a bequest to a child, but that child preceded them in death, the executor must determine whether that child s share goes to an alternate beneficiary or is considered to lapse altogether under the terms of the will. Similarly, if the will leaves a specific piece of personal property to a beneficiary, but the decedent didn t own that property any longer at death, the executor must determine whether the will requires the substitution of that piece of property with another item, or whether that beneficiary is simply out of luck. In some cases, executors believe that they can ignore or change certain provisions of the decedent s will, such as to provide a share of the estate to an individual not named in the will or to divide a share of the estate between a beneficiary and a third party. Executors are prohibited from such actions except when permitted by a family settlement agreement. A family settlement agreement refers to an agreement reached by all of the heirs as to how an estate should be distributed. The probate court does not have authority to approve or disapprove a family settlement agreement (USLegal.com, n.d.). Without such an agreement, the executor may be held liable for violating their fiduciary duty. Also, the beneficiary may be subject to gift tax if the executor distributed the beneficiary s inheritance to a third party without making a qualified disclaimer. Once all of the estate creditors and debts have been paid, and any remaining assets distributed to the beneficiaries, the executor will close the probate estate, and their responsibilities will end. The average probate estate is processed and closed within nine to 12 months. However, the probate process may continue for several years if the estate is contested or includes hard-to-value assets. When appointing an estate executor, it s important to ensure the individual has the proper skills to complete all of the required tasks throughout every step of the probate process. CSA Kirsten Waldrip, JD, LLM, is an estate planning and administration attorney and owner of Waldrip Law, LLC located in Denver, Colorado. She earned her Juris Doctorate from Syracuse University College of Law, and her Master of Laws in Taxation from the University of Denver. Kirsten can be reached at Kirsten@waldriplaw.com. REFERENCES American Bar Association. (2001). Chapter 10: Choosing the Executor or Trustee. American Bar Association Guide to Wills and Estates. Retrieved from www.americanbar.org/content/dam/ aba/migrated/publiced/practical/books/wills/chapter_10. authcheckdam.pdf American Bar Association. (n.d.). Guidelines for Individual Executors & Trustees. Retrieved from www.americanbar.org/groups/real_ property_trust_estate/resources/estate_planning/guidelines_ for_individual_executors_trustees.html Best, R. (2016, September 16). How Life Insurance Can Help With Liquidity. [Blog]. Retrieved from www.investopedia.com/ articles/fa-profession/091616/how-life-insurance-can-helpliquidity.asp Colorado Bar Association. (2011). Probate in Colorado. Retrieved from www.cba.cobar.org/index.cfm/id/20881 Deeds.com. (2015). What Type of Real Estate Deed is Used to Transfer the Interest of a Deceased Property Owner? Retrieved from www.deeds.com/information/what-type-of-real-estate-deedis-used-to-transfer-the-interest-of-a-decease-1439514629.html Internal Revenue Service. (2017, February 7). Deceased Taxpayers Understanding the General Duties as an Estate Administrator. Retrieved from www.irs.gov/businesses/small-businesses-selfemployed/deceased-taxpayers-understanding-the-general-dutiesas-an-estate-administrator USLegal.com. (n.d.). Partial Family Settlement Agreement Law and Legal Definition. Retrieved from https://definitions.uslegal. com/p/partial-family-settlement-agreement/ Vercammen, K. A. (2008, March). Administrator of a Probate Estate: Duties and Responsibilities. Law Trends & News Practice Area Newsletter. Retrieved from www.americanbar.org/content/ newsletter/publications/law_trends_news_practice_area_e_ newsletter_home/08_winter_estate_vercammen.html PAGE 44