In a previous article (AER November 2013), I explained what I consider to be the top five mistakes executors make when administering estates. Unfortunately, the list of common blunders doesn’t end there. Here are five more.
1. Administrative delay
How long it takes to administer an estate usually depends on its complexity. An estate with an operating business or real property outside the country typically takes much longer to settle than an estate comprised of investable assets and a family home.
There’s an informal rule known as the Executor’s Year, which says an executor’s expected to wind up an estate within one year of the testator’s death or the grant of probate (where applicable). The rule serves both executors and beneficiaries. It provides executors with time to do the work required of them, and helps set reasonable expectations for beneficiaries.
If the administration hasn’t progressed satisfactorily after a year, beneficiaries may be able to take action against the executor for unnecessary delay, and may be entitled to interest on any outstanding cash legacies. It’s important to note that an action is likely to succeed only where it can be shown that the executor was remiss in performing duties. Most estates take much longer than one year to fully administer.
2. Administrative haste
Moving too quickly can also mean disgruntled beneficiaries and potential liability for the executor.
Some beneficiaries have inheritance rights under provincial law; for instance, a spouse and/or dependents may be able to make a claim against the estate based on their relationship to the deceased. Potential claimants have a specified period of time (varies by province) to initiate a challenge or claim.
For instance, in Ontario, a surviving spouse (legally married only) has the option of taking his or her entitlement under the will or electing to take an “equalization” under section 5 of the Family Law Act. The surviving spouse has six months from the date of death to make the election. So, in an estate where this type of claim is possible, no distribution should be made within six months of the spouse’s death unless the surviving spouse gives written consent to the distribution or the court authorizes the distribution.
In Ontario, a dependant has six months from the grant of The Certificate of Appointment of Estate Trustee (commonly referred to as “letters probate”) to make a support claim. Potential creditors must also be considered. Executors are always encouraged to advertise for creditors of the estate.
Each province has rules or guidelines related to publication of the Notice for Creditors, including timelines for filing claims. An executor who fails to heed these deadlines and distributes the estate prior to the expiry of applicable claim periods does so at her own risk, and may become personally liable should a challenge
3. Failing to locate, protect and secure all estate assets
An executor is responsible for all estate assets, pending their sale or distribution. It’s critical for an executor to identify, locate and secure all estate assets as soon as possible following the testator’s death. What’s involved depends on the nature of the asset.
To secure a bank account, the executor must notify the bank of the account holder’s death and ensure the account’s frozen. Where real estate owned by the deceased is now vacant, locks should be immediately changed, the insurer notified, a vacancy permit obtained and security arranged. The latter may involve regular checks by neighbours or a professional security firm, depending on the property’s value and location. Steps must also be taken to ensure the integrity of the property. In winter, this may include keeping walkways free of ice and ensuring pipes don’t freeze. In the warm months, keep lawns and gardens in good order.
When assets include livestock or pets, the executor must take immediate steps to ensure the animals are properly protected. Where the deceased owned an operating company, the executor has to make payroll and uphold the company’s value, pending its distribution or sale, among other duties.
Executors who fail to properly locate and protect all estate assets may find themselves personally liable to beneficiaries for any resulting loss in value or damage, or other claims arising from the negligent behaviour.
4. Conflict of interest
The fundamental obligation of the executor is to act in the best interest of beneficiaries. Executors are not to benefit from the role. In the past this rule was broadly interpreted to include a prohibition on compensation; legislation in all provinces now specifically authorizes compensation for executors. Nonetheless, the general rule prevails and prohibits behaviour such as purchasing assets from the estate, and taking payments for services (reimbursement for reasonable expenses is acceptable).
The rule preventing the purchase of estate assets is based on the conflicting goals of buyer and seller: the seller (the estate) wants the highest possible price; the buyer (the executor) wants to pay as little as possible. Strictly interpreted, the prohibition should also deter an executor from hiring, for instance, his landscaping company to service estate-owned property.
The duty to avoid conflicts of interest includes a prohibition on self-dealing. Self-dealing is conduct by the executor that involves acting in his or her own best interests, instead of the best interests of the estate or beneficiaries.
This is why bank-owned corporate trustees generally request specific authorization in the will to deal with related parties (i.e., other parts of the bank) for general banking, investment and foreign exchange services. In the absence of such authorization, a bank-owned trust company may be obliged to retain the services of a competitor.
5. Improper tax reporting
Income tax matters represent a significant portion of estate administration. An executor is responsible for filing the terminal T1 (return for year of death) and any unfiled returns from previous years. A prudent executor may file additional optional year-of-death returns, and may be responsible for filing in other jurisdictions where the deceased owned property or had a connection (e.g., was a citizen). Typically, at least one T3 trust return is also required. The following are examples of common errors made with tax matters:
- failure to file all required tax returns at death;
- failure to take advantage of tax minimization opportunities, such as available elections, exemptions, rollovers and elective returns;
- improper preparation of tax returns;
- missed filing deadlines;
- failure to withhold taxes for foreign beneficiaries;
- failure to file U.S. estate and/or income tax returns (where applicable); and
- improper valuation of assets.
Any omission or error resulting in a loss to the estate may expose the executor to personal liability.
Estate administration involves a long list of duties and responsibilities. Failure to properly discharge the expected duties and standard of care may result in personal liability to the executor or be cause for removal from the role. For many executors, the best advice you can provide is to get professional assistance.
5 common Problems with drafting wills
1. Assets are not described accurately, or have changed form. For example, real estate is not given the correct legal description. Or an operating company or other assets are reorganized between the date the will is drafted and the testator’s death, and they are held in a different corporation or no longer directly. The intended beneficiary may receive nothing, while another beneficiary may receive an unintended windfall.
2. A beneficiary is not correctly identified. Also, if beneficiaries are described as a group, the will must clearly define the group, such as “my grandchildren,” and the date for determining whether someone is a group member (e.g., “as of January 31, 2014.”). Problems can also arise where a charity is not described by its correct legal name and there is an ambiguity as to which charity is to benefit. If a named beneficiary is no longer alive when the testator dies and was a close family member, provincial legislation generally allows the gift to go to that deceased beneficiary’s family members, unless a contrary intention is expressed. It’s possible this may not have been what the testator intended.
3. Trusts are ineffectively drafted and may not legally defer the time a beneficiary is to receive a gift. So a young beneficiary may become entitled to a substantial inheritance at the age of majority, instead of at a more financially mature age.
4. Trust terms fail to set out how to deal with all trust property, including all income and capital of the trust during and after the lifetime of a primary beneficiary.
5. Trust terms do not consider legal limits for its lifetime. This may result in the trust being void or voidable.
– Margaret O’Sullivan is principal of O’Sullivan Estate Lawyers in Toronto.
Elaine blades is director, Fiduciary Services, at Scotia Private Client Group.
Originally published in Advisor's Edge Report
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