Third parties can help executors avoid pitfalls, focus attention
By AdvocateDaily.com Staff
Administering an estate is a daunting task that can require extensive skills beyond the scope of some executors, and seeking guidance from knowledgeable third parties can be an important part of ensuring all responsibilities of the role are met, says Avi Dahary, founder of AccounTrust.
“Most people don’t know what it means to be an executor or a trustee, so when they do land in that role because somebody died and named them as an executor, they need to know that now they’re in a fiduciary role. This means that they’re in a position of trust, and the assets that they’re in charge of are not their assets. Their role as an executor is to safeguard these assets — it’s to preserve and maintain them, solely for the beneficiaries of the estate,” he tells AdvocateDaily.com.
“It is a very complex and sometimes daunting situation to be in, especially for somebody who has never done it before. Even for people who have experience and have been executors of other estates, it can still be challenging, and it’s very easy to make mistakes,” says Dahary.
Part of the executor’s role, for example, is to ensure that filings are made with the various government authorities, he says.
“The executor is responsible for filing all of the tax returns — both the final tax return for the deceased, and the estate tax returns going forward for as long as the estate exists. They also have to pay the estate administration tax based on the market value of all the assets at the date of death,” explains Dahary.
In addition, he says an executor will need to obtain a certificate of appointment of estate trustee and complete the estate information return.
The executor will also need to ensure that any personal liabilities are paid, such as income taxes owing up to the date of death, as well as liabilities for the estate, says Dahary.
“If they don’t pay these liabilities, then they can become personally liable for it. In many cases, executors don’t realize that,” he says.
“As part of the responsibility to beneficiaries, you have to account to them how you managed the affairs of the estate as the executor.”
Not doing so, Dahary cautions, may expose the executor to lawsuits. Some of the reasons executors are sued are improper accounting, mishandling or misappropriation of assets or dealing with assets for their own benefit and to the detriment of the beneficiaries.
As such, for those who are taking on the complex role of executor — as well as power of attorney or guardian — he says having an experienced accountant and lawyer on their team to help ensure they are meeting their responsibilities, recognizing important issues and focusing their attention on the right areas, can be key to avoiding pitfalls.
Part of the task from a third-party perspective, says Dahary, will be to highlight the importance to the executor of putting strong internal controls in place to detect and prevent misappropriation of assets or commingling of funds between the estate and their private funds.
“That’s a big mistake that sometimes happens when an executor thinks that they can do as they wish with the estate’s money and they start commingling between their personal funds and the estate’s funds and that’s a big no-no. So an important part is to have internal controls over funds that may exist with a bank or an investment broker and to ensure that funds are properly accounted for,” he says.
Internal controls over the management of assets would include setting out who makes the decisions regarding investments, rental property management or the distribution and sale of a valuable art collection, for example.
“You need to have internal controls in place, and to have somebody skilled in the area of internal controls to advise the executor. An accountant who is knowledgeable in this area would be the proper person to go to,” says Dahary.