Most people know that they should have a will, but few individuals understand how important it is to select the right executor to help manage their affairs and distribute their assets to heirs upon their death. The fact is that picking the "right" executor will mean that loved ones will receive their inheritance on a timely basis. Picking the wrong one could lead to lengthy delays, tax problems and possibly even a "will contest".

TUTORIAL: Estate Planning Basics

In order to provide a better understanding of why it is so important to select a capable executor, we'll explore in this article what happens to your estate (and the executor's involvement) after you pass away. (To find out more about making a will, see Why You Should Draft A Will and Three Documents You Shouldn't Do Without.)

Your Estate Is Opened
In order to officially "open" your estate in the U.S. and begin the process of probating your will, the executor will file paperwork with the county where he is stating that he is the executor and will be representing the estate. The executor must also then notify creditors and/or other interested parties of your death and their right to make a claim against your estate. (To keep reading about estate planning, see The Importance Of Estate And Contingency Planning and Getting Started On Your Estate Plan.)

Some probate courts will require that certified letters are sent to potential creditors. Others simply require that a notice be published in a local newspaper. But in any case, it is up to the executor (with some help from the court) to identify those creditors and to properly notify them. To be clear, notification errors could lead to lawsuits from beneficiaries, heirs and/or creditors. Therefore, the task definitely warrants a mature individual. (Find out how to choose your beneficiaries in Update Your Beneficiaries, Problematic Beneficiary Designations - Part 1 and Part 2.)

So what is probate? For those unaware, probate is a process conducted by a court (typically referred to as a probate court) that determines the validity of the deceased's will. The court also helps to identify and locate beneficiaries and supervises the distribution of assets. (Find out how to avoid probate costs in Skipping-Out On Probate Costs.)

Collecting Assets
It is the executor's job to take an accurate inventory of the deceased's assets. This includes making a list of all bank, brokerage and retirement accounts, as well as any property the deceased owned. Additionally, an inventory of personal effects, such as collections, antiques or other valuables must be tabulated and presented to the probate court for review.

Obviously, this can be an extremely time consuming task. It may mean going through the deceased's personal paperwork for information, interviewing heirs or perusing ownership documents at the local town hall. And again, the information is expected to be accurate and complete so that the heirs receive their inheritance(s) on a timely basis.

Managing the Estate
The executor is charged with using the estate's funds to pay any bills that the deceased had outstanding (such as utility or credit card invoices) at the time of his or her death. The executor must also collect any money that is owed to the deceased. This is extremely important because the money must then be passed on to the beneficiaries according to the provisions of the will.

If a business is involved, the executor may have to buy or sell certain assets, make payroll distributions and otherwise temporarily run the enterprise (or at the very least, find someone to do it) until it is passed on to heirs (again as per the provisions of the will).

In short, this means that having a business-savvy executor is also a must.

Dealing with Taxes
It is up to the executor to find an attorney or an accountant to calculate any estate taxes that are due (or do it themselves), and then to file the appropriate tax return to make the payment. In addition, the executor is responsible for filing a final income tax return (form 1040) for the deceased. The purpose of this is to pay any taxes that are due on income that was earned in the last year of the deceased's life, and/or to receive any refunds (that would ultimately be passed to the beneficiaries). Again, these tasks require an intelligent, disciplined individual who is able to appreciate the implications of his or her duties. (To read more about estate taxes, see Get Ready For The Estate Tax Phase-Out.)

Closing the Estate
This is a process where the executor must prove to the probate court that he or she has adequately notified all potential creditors of the deceased's death. The executor must also prove to the court that he or she has paid all bills and taxes that were due. As part of the process, the executor may also have to show releases from the state that all liabilities have been settled, and provide a thorough accounting of any income earned or disbursements made by the estate after the death of the deceased.

Distributing Assets
After all debts have been settled, it is up to the executor to distribute the assets to heirs as per the provisions of the deceased's will. This may mean paying funds to heirs directly, or, if the will provides for it, funding a trust for minors.

While this may sound like an easy task, it isn't. After all, the executor may have to deal with jealous family members or others that feel cheated that they didn't get their due. Therefore, it's up to the executor to meet with and explain the distributions to heirs. In other words, to be a "people person". Incidentally, the goal here is to prevent will contests (where an entity files suit trying to obtain funds not bequeathed to them in the will) which could drag the distribution process out even longer.

Choosing the Right Person
Most individuals tend to choose family members or other close friends or relatives to act as an executor and to administrate their wills upon their death. But because of the intricacies that go part and parcel with the job, people must realize that the most competent individual (not the closest in relation) should be chosen. As mentioned before, this does not mean that the chosen individual must do everything themselves. Executors are allowed to hire others to help with various aspects of the process (such as an accountant to help with the taxation portion).

With that in mind, if you don't have a friend or a relative that you think can complete these duties in a satisfactory manner, don't worry - attorneys, accountants and other professionals can act as an executor for a fee, usually derived from the deceased's estate. And while that fee may be in the hundreds or even thousands of dollars (depending upon the size of the estate and difficulties involved) it may be worthwhile, especially if it means that your family will receive their inheritance intact and on a timely basis.

The bottom line is that most people assume that being an executor is an easy task that can accomplished by anyone, but because the probate process is so involved and may entail interaction with tax and legal professionals, only an intelligent, dependable person should be named as executor.

Related Articles
  1. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  2. Personal Finance

    How the Social Security Reboot May Affect You

    While there’s still potential for some “tweaking” around your Social Security retirement benefits, I’d like to share some insight on what we know now.
  3. Investing Basics

    Do You Need More Than One Financial Advisor?

    Using more than one financial advisor for money management has its pros and cons.
  4. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  5. Insurance

    What's The Difference Between Medicare And Medicaid?

    One program is for the poor; the other is for the elderly. Learn which is which.
  6. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  7. FA

    Paying for College: Utilize These Top Hacks

    Saving money for college is difficult for many families, but it doesn't have to be. Here are some overlooked hacks to save money on college costs.
  8. Savings

    How To Set Up A Trust Fund If You're Not Rich

    You don't need to be worth millions to create your own trust fund. Learn how your money can be handled in the event of your death.
  9. Financial Advisors

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
  10. Financial Advisors

    Bull vs. Bear Markets: How to Be Prepared for Both

    Bull and Bear Markets are a reality that every investor must be prepared for. Here are a few tips.
  1. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  2. Do financial advisors charge VATs?

    The Personal Finance Society (PFS) and with Her Majesty's Revenue and Customs (HMRC) have outlined when a value-added tax ... Read Full Answer >>
  3. How much money does Texas make from unclaimed property each year?

    In 2014, the office of the Texas Comptroller of Public Accounts reported $234 million in unclaimed property claimant liabilities, ... Read Full Answer >>
  4. How much money does Michigan make from unclaimed property each year?

    According to the 2013-2014 Annual Report of the State Treasurer, the state of Michigan earned only $82,875 in abandoned and ... Read Full Answer >>
  5. Who decides if a financial security should be escheated?

    There is no one entity who "decides" to escheat assets. Rather, financial institutions are required to report inactive accounts ... Read Full Answer >>
  6. Do Sallie Mae loans go directly to your school?

    Sallie Mae is the biggest provider of financial aid and student loans in the United States. The company operates as a private ... Read Full Answer >>

You May Also Like

Trading Center