Being an executor is more than an honour; it’s also hard work. And if you don’t have a legal or financial background, it can be difficult to avoid pitfalls. Here are five common blunders.
1. Administrative delay
How long it takes to administer an estate depends on its complexity. An estate with an operating business or real property outside the country typically takes much longer to settle.
According to an informal rule known as the Executor’s Year, you should wind up an estate within one year of the testator’s death. The rule serves both executors and beneficiaries. It provides you with time to do your work, while setting reasonable expectations for the beneficiaries.
If the administration hasn’t progressed enough after a year, beneficiaries may take action against you for unnecessary delay. It’s important to note that an action will probably succeed only when you were 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.
Some beneficiaries have inheritance rights under provincial law; for instance, a spouse and/or dependants 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 to initiate a challenge or claim during which no distribution should be made unless they’ve waived that right or there’s a court order.
Potential creditors must also be considered. You’re 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. If you ignore the deadlines and distribute the estate before the claim periods expire, you could be personally liable if a successful challenge is made.
3. Failing to locate, protect and secure all estate assets
You’re responsible for all estate assets pending their sale or distribution. It’s critical to identify, locate and secure all estate assets as soon as possible.
To secure a bank account, 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 changed, the insurer notified, a vacancy permit obtained and security arranged. Ensure the integrity of the property by doing regular maintenance.
When assets include livestock or pets, take immediate steps to ensure the animals are properly protected. Where the deceased owned an operating company, you need to make payroll and uphold the company’s value pending its distribution or sale, among other duties.
If you don’t locate and protect all estate assets, you could be personally liable to beneficiaries for any resulting loss in value or damage, or other claims.
4. Conflict of interest
Your fundamental obligation is to act in the best interest of beneficiaries. You are not legally entitled to benefit from your role. You can be compensated for your work as executor in some provinces, but you must avoid purchasing assets from the estate and taking payments from the estate for services beyond expense reimbursement.
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 own landscaping company to service estate-owned property.
5. Improper reporting of tax matters
Income tax matters represent a significant portion of estate administration. You’re responsible for filing the terminal T1 (return for year of death) and any unfiled returns from previous years.
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 can leave you exposed 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, it’s best to get professional assistance.