Being named in someone’s will as the executor – the person to handle and settle up estate matters – sounds like a great honor. And it is, because the person believes that you have the abilities to collect assets, settle debts, file estate tax returns where necessary, distribute assets and close the estate. However, a person named as an executor isn’t required to accept the appointment.
Before you agree to act as an executor, understand some of the hazards that can result. And know how you can address some of these potential hazards so that being an executor can run smoothly.
1. Disputes with Co-executors
Often when a parent has more than one adult child, all children are named as co-executors so as not to show favoritism. For those who are named, however, this arrangement may not work smoothly. Some children may be out-of-state, or even out-of-country, making it difficult to handle the hands-on activities, such as securing assets and selling a home. Some lack the financial ability to deal with creditors, understand estate tax matters and do an accounting to satisfy beneficiaries that things have been properly handled. Also, having multiple executors adds greatly to the amount of paperwork. For example, forms that need to be signed by all executors must be sent around to all (in some cases, scanned documents that have been signed are acceptable, but in others only originals are acceptable).
Better way: See if co-executors can agree to allow only one to serve; the others simply waive their appointment. This waiver works well when co-executors trust the person who will serve as the sole executor. Another alternative is for all of the children to decline and instead let a bank’s trust department handle the job (the will may name the bank as a successor executor). This costs money and is best suited for large estates. However, using an entity rather than an individual as executor can alleviate conflicts among the children and relieves them from what could be an onerous job.
2. Disputes with Heirs
An executor’s job is to secure the assets of the estate and then distribute them according to the deceased person’s wishes. In some families, heirs descend on a decedent’s home even before the funeral, cherry-picking heirlooms and other valuables. Also, the will may give latitude to an executor in making disbursements to heirs (e.g., distributing property or selling property and distributing cash). An executor may create family disharmony for simply doing his/her job.
Better way: Secure the home and other assets as quickly as possible. Inform heirs that this is the law. Also share information about the decedent’s wishes, which may be described in a will (see What Is a Will and Why Do I Need One?) or listed in a separate document (the separate document isn’t binding on the executor but can be a good roadmap for asset disbursements).
3. Time Drain
One of the biggest drawbacks to being an executor is the great amount of time it takes to properly handle responsibilities. For example, think of the time involved in contacting various government agencies (e.g., Social Security Administration to stop Social Security benefits and, in the case of a surviving spouse, claim the $255 death benefit; IRS and state tax authorities for income tax and death tax matters; state’s unclaimed property departments to recoup utility deposits and other outstanding amounts that belonged to the decedent).
Better way: An executor can allow an estate attorney to handle many of these matters. However, the attorney will bill for his/her time and cost the estate money. Even if an attorney uses a paralegal for various actions, it can still be expensive. Also, a CPA or other tax preparers can work on the decedent’s final income tax return as well as income tax returns for the estate. Where estates are modest, these fees can mean little or no inheritances for some heirs. An executor in this situation should use the services of professionals sparingly and understand the time commitment he or she will need to make instead. Being organized (e.g., using a checklist like this one from Jonathan Pond) can help an executor use time most efficiently.
4. Personal Liability Exposure
As an executor, you must pay taxes owed before disbursing inheritances to heirs. If you pay heirs first and do not have sufficient funds in the estate’s checking account to pay taxes, you are personally liable for the taxes.
While many estates no longer are concerned about federal income taxes because of the high exemption amount ($5.45 million in 2016), many states continue to impose death taxes on smaller estates. The value of the estate for death tax purposes is greater than the probate estate (the assets that do not pass automatically to named beneficiaries); it includes all assets in which the decedent had an interest (e.g., IRAs, annuities, life insurance owned by the decedent).
Better way: Explain to heirs who are eager to receive their inheritances that you are not permitted to give them their share until you have settled with creditors, the IRS and others with a claim against the estate. (Creditors cannot go after the proceeds of a life insurance policy that has a specific beneficiary, however.) Make sure to understand the extent of the funds needed to pay what’s owed.
5. Out-of-pocket Costs
An executor is allowed to receive a commission for handling his/her duties. Usually, the amount of commission is determined by the size of the estate (e.g., a percentage of assets). However, in many cases, particularly smaller estates, an executor is asked to waive any commission.
Better way: Pay the expenses of the estate from an estate checking account. Keep track of out-of-pocket expenses (e.g. postal fees). Some of these expenses may be reimbursable by the estate.
The Bottom Line
Being an executor is challenging, but someone has to do it. If that person is you, be sure to understand what you’re getting into before you agree to act as an executor. Guidelines from the American Bar Association are helpful in understanding the scope of an executor’s duties. Find tax responsibilities in IRS Publication 559.