The Biggest Mistakes Executors Make
If you are named as the Executor of an Estate, you might feel honoured by the appointment and see it as a sign of the esteem in which you are held by a family member or friend. However, the role can be extremely challenging and carries significant and, potentially, a very costly personal legal liability.
Being the Executor of an Estate sounds a lot easier than it really is. The Executor is responsible for numerous duties which they are required to carry out in a timely and proper manner.
It involves more than just organising the deceased’s funeral and ascertaining the identity of the beneficiaries. An Executor has to take steps to ascertain the assets and liabilities of the Estate, determine whether an application for a grant of probate is required, pay Estate debts and then distribute the balance of the Estate in accordance with the terms of the Will. While that sounds simple enough, the procedure is full of potential pitfalls.
Asset-holding structures are becoming more complex in our modern financial world – companies, family and unit trusts, self managed superannuation funds and other corporate entities make the administration of Estates more complex. Obtaining proper legal, accounting and financial advice from the outset is essential if an Executor wants to minimise his/her potential liability.
Unless a specific gift or the right to charge a commission is contained in the Will and there is consent from the beneficiaries, an Executor must apply to the Court for an order that commission be paid. This is not always granted and the amount can be quite modest, depending on the size of the estate and what actual work is carried out by the executor. If commission is granted it is usually treated as income received in that tax year and must be disclosed in the executors tax return.
Most of us accept the role as Executor without fully understanding the tasks that we must perform. The following is not an exhaustive list but outlines some of the duties as Executor that you might have to perform throughout the administration of the Estate:
- Taking steps to ensure the Will is the deceased person’s final Will;
- Making sure the last will is a valid testamentary document: if the Will-maker makes his or her own Will without legal assistance or advice, there can be problems such as failure to comply with signing and witnessing requirements or the stapling or clipping of the Will to other documents so you will need to seek legal advice regarding the Will itself and its validity;
- Steps may also need to be taken including obtaining a Barrister’s advice or an application to the Court as to the interpretation of the terms of the Will, particularly where the terms of the will are uncertain or poorly drafted;
- You may need to identify a person named in the Will if the deceased has used a “nickname” rather than his/her correct name;
- There may be two family members with the same name and the Will is not clear which person is the intended beneficiary;
- You may need to determine the nature and intent of a gift such as whether it is an absolute gift or it is a life interest only;
- You will need to ascertain all the assets and liabilities of the Estate;
- Determine whether Estate assets are or ought to be insured and maintain them;
- If the deceased operated a business, ascertain what steps need to be taken to ensure it continues to operate;
- If the deceased was a shareholder or office-holder in a family company, ascertain what happens to the share or vacated office upon their death;
- Ascertain whether any superannuation the deceased had forms part of his/her Estate;
- Notify all the beneficiaries in the Will and keep them informed;
- Determining if you need to apply for Probate of the Will (or another type of grant);
- Lodging Tax returns for the deceased and or the Estate;
- Obtaining advice regarding any tax liabilities (other than payment of income tax) of the Estate e.g. Capital Gains Tax
- Ensure all the debts of the Estate are paid
- Distributing the Estate in accordance with the terms of the Will;
- If minors, or persons with a disability, are beneficiaries and will not be entitled to receive their share until they reach a certain age (or in the case of beneficiaries with disabilities, will only have a life interest) obtain financial advice regarding investing the beneficiary’s share;
- Searching for lost relatives or their children if they have predeceased the testator;
- Defend any proceedings brought against the Estate such as:
- Family Provision Claims
- Unpaid creditors
- Civil actions brought against the deceased that continue after his/her death
So, acting as an Executor is a big job and one that comes with a lot of responsibility. Perhaps not surprisingly then, there is a lot of room for error and mistakes are sometimes made.
Here are what we consider to be some of the biggest mistakes made by executors:
Keeping Poor Records
This is possibly the biggest mistake that we see Executors making. It is absolutely essential for an executor to keep detailed records of everything that they do on behalf of the estate from paying the deceased’s bills to cancelling electricity to making notes about a conversation with a beneficiary.
Bottom line, an Executor must be prepared to provide an accurate accounting of all money received by, and paid out of, the estate. The estate accounting is also the basis for determining Executor commission. Good record-keeping also benefits the Executor in the long run. In some cases the estate accounting report must be submitted to the Court for approval (called “passing your accounts”) and having detailed, accurate records is an absolute requirement.
We also advise our clients who are acting as Executors to keep a journal of everything they do including the date, amount of time spent, who they met with, what was done/discussed, travel records, disbursements, etc. This will be very helpful if a beneficiary objects to you being reimbursed for your own expenses as an Executor that you have paid personally or questions any of your actions as Executor.
Using Estate funds for your own purposes
This is a no-no. An Executor should not mix their own funds with estate assets and never use estate funds for personal liabilities. This is a breach of an executor’s fiduciary duty.
If there are bills to be paid before the Executor has access to the deceased’s bank account, the bank will usually issue a bank cheque on the deceased’s account to pay for a bill in the name of the deceased. However, if the Executor is concerned that there may not be enough funds in the estate to cover all of the deceased’s debts, he or she should proceed with caution. In the event of a shortfall, there are certain debts that must be paid first. Making a mistake can lead to personal liability for the Executor.
Executors and beneficiaries are often surprised to find out just how long it can take to administer an estate. Generally speaking, it can take a year to a year and a half to administer even a simple estate … longer if the estate is complex or if there are problems. And no matter how big or complex the estate, there is lots to be done. And some of the steps take a fair bit of time.
An Executor is in a special position of trust. Being in control of someone else’s property means the Executor is a fiduciary. This means that the Executor must always act in the best interests of those with an interest in the estate and must act with honesty and loyalty.
Executors must carry out their duties with care and attention and in a timely manner. Procrastinating can be a breach of an Executor’s fiduciary duty.
They don’t follow the will
Executors often choose to “rewrite” parts of the will they don’t think are fair. For example, if three children are beneficiaries and one is getting more than the other two, an executor might decide that it is not fair. Or they will give personal belongings to grandchildren even if they were not named in the will. Not surprisingly, Executors will be challenged by other beneficiaries for not following the will.
They don’t keep beneficiaries updated
There are many family fights and court proceedings that could have been prevented if the Executors had just said what they’re doing. That’s because when the beneficiaries aren’t being given real information, “they start speculating.” They say things like, “I don’t know what’s going on. I’m pretty sure [the Executors] are taking the money.”
Executors should create an email distribution list of beneficiaries and update them regularly.
They don’t get valuations
Executors have to make sure that if they are selling a property or asset, they get qualified appraisals and opinions as to the value. Any time an Executor has to exercise discretion, it’s a possible point of challenge.
They don’t keep arms-length relationships
If Executors sell property or assets from the estate to themselves, or to someone who is related to them, that could create conflict with the beneficiaries.
Not seeking Professional Help
Perhaps the biggest mistake an Executor can make is failing to recognise their own shortcomings and calling in outside help when necessary. It is important to know your limits – that means that if there is something you are not sure about, you check out a legal issue with a lawyer specialised in the area of Wills and Estate administration so you are not personally liable or sued or a financial issue with an accountant so you don’t end up paying more tax than you should, or not enough.
So if you have complicated business assets or an extended family, I would advise not to appoint a friend or family member because it requires a certain level of expertise to divide these assets up. It is also highly more likely there will be contentious issues or the will is contested. In these circumstances, the Executor could be left with a major headache so the most appropriate person to appoint in these circumstances is a professional such as your Lawyer and/or your accountant as they can be objective and neutral.
If you have been appointed or are acting as the Executor of the estate of a loved one or friend, make an appointment today to meet with a specialised Wills and Estate Lawyer at Attwood Marshall Lawyers. We will advise you of your duties and responsibilities and help you avoid these and other mistakes commonly made by Executors.
For enquiries please contact Wills & Estates Department Manager, Donna Tolley on direct line 07 5506 8241, email [email protected] or freecall 1800 621 071.