Many clients will become executors for parents, family members or close friends. But the job’s responsibilities may expose them to significant liability.
It starts with the will
The biggest financial risk to an executor is the will itself, says Lynne Butler, senior will and estate planner at Scotia Private Client Group in St. John’s, Nfld. When the document is unclear, it can put the executor in a dangerous position.
When people have cheap or DIY wills, often “there’s little guidance, [and] executors don’t understand their duties or roles,” she says. “If the will isn’t clear, they have to get advice on what to do.”
Distributing personal and household items can be especially problematic.
“Wills often don’t say anything about the contents of the home,” Butler says. “So family members help themselves to mementos they believe their parents meant them to have.” This can lead to accounting headaches for the executor, and “family disputes can be especially bitter when they centre on sentimental items such as photo albums or a parent’s wedding ring,” she says.
Butler says inexperienced executors may not want to hire accountants, lawyers, realtors or appraisers to mediate these issues. “They look at it as depletion of the estate,” she says. Yet an executor’s “liable for any loss he causes through negligence or mistakes, even in good faith.”
Avoid liability before it’s an issue
Examples of loss include:
- selling property at below market value;
- accidentally selling valuable items at garage sales;
- giving expensive household goods to charity.
“Most of the time the executor is trying to save money by not paying appraisers, or to keep beneficiaries happy by moving the estate along,” Butler says. “But not taking the time to understand what is being sold is a serious mistake.”
In extreme cases, executors can be removed, forced to repay losses out of the executor fee, and even taken to court. Executors can also be liable for court costs.
A new solution
For executors concerned about potential liability, Butler says executor’s insurance, a relatively new product, is a viable solution.
She says typical policies cost $1,700 for a three-year term per $1 million of estate value. Most offer three years of protection—enough time to wrap up the majority of estates—and cover negligence, errors and legal fees if a challenge is brought to court. Most insurers insist the executor hire a qualified estate lawyer before underwriting the policy.
For executors worried about potential liability, insurance is the only option. “There’s no other way to protect yourself against damages or cost of defence,” she says. And executors should avoid getting involved in a difficult estate in the first place.
“If I were appointed, first I would take that will to an experienced lawyer, and [ask] what my problems would to be. Is this will going to help me? Or is it going to end up with me being sued?” she says.
At that initial reading, look for an out-of-date will; illogical or unusual will provisions; a business or real estate that might be difficult to sell or value; and overseas beneficiaries. If those exist, executors can choose to decline or purchase the insurance before administering the estate.
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Originally published in Advisor's Edge