Executors should proceed with caution

By Rosemary McCracken | May 12 2015 08:50AM

Your client is considering naming a son or a daughter to act as the executor of his will. Another client has just begun the process of settling her mother’s estate. Are they aware that executors may be leaving themselves open to unlimited personal financial and legal liability?photo_web_1490_2Most executors are rookies who are trying their best to figure out what they need to do to settle the estates. “They are the brother, the sister, the adult child or the trusted friend of the deceased,” said Myron Neufeld, Kitchener, Ont.-based president of Estate Risk Protection Plan Inc. “They’re stepping into a completely new experience, and they never have a chance to get good at it because they only do it once or twice in a lifetime.”

And they may not know that they can be held personally liable for losses they cause to the estate. “They need to understand that this is a job that has to be completed in a timely manner on behalf of the deceased,” said Carol Bezaire, senior vice-president, tax, estate and strategic philanthropy, at Mackenzie Investments in Toronto. “They have to distance themselves from their emotions and deal with the estate – now.”

A slow-moving executor can be held liable for penalties and interest on the final tax return if it was filed late without good reason. He can also be liable if he exposes the estate’s assets to falling real estate and stock markets. Moving too quickly can also cause problems. “A beneficiary may argue that if the executor had done his research before selling a home, he would have found the property was being zoned as commercial and soon would have been worth a lot than he sold it for,” Neufeld said.

Heirs more demanding

Beneficiaries are now more demanding than they’ve ever been. “Before the body is cold, they have their hands out wanting to know when they’ll receive their inheritances,” Bezaire said.

Some beneficiaries are suing executors if they believe their bequests were compromised by mismanagement of the estate. “Estate litigation is one of the fastest-growing areas of litigation today,” Neufeld added. He spoke of a 76-year-old executor of her brother’s estate who had to take out a $200,000 mortgage on her home to defend herself against her niece and nephew’s allegations of mismanagement.

Estate litigation is one of the fastest-growing areas of litigation today.

– Myron Neufeld

Beneficiaries’ demands may be the result of the increase in blended families after second or third marriages; some members of these families have no vested interest in other members. “And more people today want instant gratification,” Neufeld said. “There are also more people with heavy debt loads. They have factored inheritances into their financial plans, and spent them in advance.”

Charities are also making demands. “Twenty-five years ago, an executor would send a charity a letter saying it had been named as a beneficiary, and the charity would say ‘great’ and wait to receive its bequest,” Neufeld said. “Today it’s not unusual for charity to demand an accounting of whether there is an investment policy in place, where the assets are invested and when it can expect to receive distributions. Creditors are doing this as well.”

New probate rules

And governments are making demands. Mike Love at Legacy Private Trust Co. in Toronto noted that under the new probate rules that came into effect on Jan. 1 in Ontario, “if the provincial government determines that the executor has underestimated the value of an estate, it can issue a reassessment notice for up to four years after the probate certificate is issued.” Executors who make false statements may be liable to a fine, penalties or imprisonment.

Financial advisors need to inform their clients of the risks their executors face in carrying out their final wishes and what steps that can be taken to protect these individuals. Clients who take on the role of executor also have to be informed.

Executor liability insurance is one way to manage some of the risks involved in carrying out the executor’s duties. Neufeld said the product Estate Risk Protection Plan has come up with covers the cost of defending and settling claims for damages brought by a beneficiary, creditor or other third party. He said it is the only coverage of its kind available in Canada, and a three-year policy would cost approximately $2,000 for an estate valued at just under $1 million.

“Your client can authorize his executor to purchase coverage in a codicil to the will, directing that ‘I instruct my executor to purchase liability protection at the expense of my estate,’” Neufeld said. “Or the client can sign a letter of direction and give this letter to his executor.”

Coverage needs to be purchased within 60 days of the testator’s death.

Bezaire said proper planning and good communication can prevent many problems. “Advisors need to have their clients clarify their primary goals in planning their estates,” she said. “They are usually to provide for the families. But will reducing the tax hit on the estate further that goal? To avoid probate tax, a mother may arrange to hold her home jointly with right of survivorship with one of her children, but this strategy will only work if the child is the intended beneficiary of the home. Upon the mother’s death, the surviving joint owner will automatically become the owner of the home – but this may not be what the mother intended if she had other children.”

Advisors also need to get clients to think through who they will appoint as their executors. “Make sure this person is living in the same jurisdiction,” Bezaire said. “If a son is living in the U.S., he may have to post a bond with the courts that is equal of the value of the estate.

“And is the executor up to the job?” she asked. “Many will have no experience in settling an estate. And some will be unprepared emotionally.”

The advisor needs to ensure the client gets the right legal advice. “Have the client go to an estate lawyer to draw up a will in the legal wording the courts will understand,” Bezaire said. “A family lawyer may miss an important point.”

And forget do-it-yourself wills, she added. Kits for do-it-yourself wills can be found online or in stationery stores; they’ll save the cost of hiring a lawyer but may end up costing more in the long run if a court ruling is required for interpretation. Bezaire recalled a situation in which an elderly man wrote a do-it-yourself will stating he was leaving everything to the children. “Some of his children had children of their own and maintained that they were also entitled to a share of the estate. It took six months to get it sorted out.”

“We’ve seen a situation in which a man said he wanted to leave $15,000 to his three nieces,” Neufeld added. “But was that $15,000 to each niece of a total of $15,000 to be divided among them?”

Inheritance expectations

Have your clients talk to their families about their inheritance expectations, he said. “We’ve seen situations in which loans were given to children and were not documented. If your client gives his son $100,000 to buy a home and doesn’t document it, there is no actual proof but the other children know very well that their dad helped their brother. After the father’s death, there will be arguments over the bequests. Advisors can add terrific value by making sure these debts are documented, either in the will, or in a signed note that is kept in the client’s safety deposit box.

“Or a daughter may have been the client’s primary caregiver in his final years,” Neufeld added. “What are her inheritance expectations? Talk to your client about this.”

Bezaire suggested getting to know all the players who will be involved in the settling of your client’s estate during his lifetime. “As your client ages, ask if he would be comfortable if you met with his executor and his beneficiaries.”

Upon the client’s death, the advisor should offer to help the executor put together an investment policy for the estate, Neufeld said. “The executor has to ensure that assets are well managed until they can be distributed. If the estate has $1 million in a variety of investments, the beneficiaries may have different needs – perhaps a different risk tolerance – than the client did. This is also a way the advisor can build relationships with the executor and beneficiaries.”

Bezaire said advisors should meet with the executor and beneficiaries as a group soon after the funeral. “This is when the advisor can present a plan for managing the assets until they can be distributed,” she said, “and answer any questions.”

In carrying out his duties as quickly as possible, the executor will need to document all the steps he takes and let everyone concerned know what he is doing, she added. “Good communication can go a long way in preventing problems.”

An overwhelmed executor?

Mike Love noted that settling an estate can take a year and a half to two years, and about 160 hours. “Many people who are appointed executors have full-time jobs and families, and don’t have the time to put into the role. They can turn it down upon the death of the testator, but many want to honour the wishes of the deceased.”

Trust companies can be called upon to help. “Your client can name a company such as ours as a co-executor in his will,” Love said. “Or the executor can hire us as an ‘agent’ after the client’s death. We’ll lay out a road map of what needs to be done; we can handle it all or selected tasks.”

He said the tasks executors often want help with are:

  • Getting organized to file an application for probate. “Date-of-death valuations, information on beneficiaries – we’ll gather all this so it can be presented to the family’s lawyer,” Love said.
  • Preparing and filing the final tax return.
  • Dealing with the home – searching for important documents and valuables, and preparing the house for sale.
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    Beneficiaries' questions

    The advantages of seeking the assistance of a trust company, Neufeld said, is that the company won’t die or move to another jurisdiction. “It has experience in settling estates, and it will be impartial to beneficiaries.” The disadvantages, he added, are the fees it will charge – generally, the percentage of the value of the estate that an executor is entitled to as compensation in the province in which the testator lived.