Choose an Executor for Your Estate Carefully
Two chores that most people will gladly put off are writing a will and keeping it up to date to reflect changed circumstances. However, when you do get around to writing and revising your will, consider carefully when you select or replace an executor â the legal term for the person who is the key figure in the settlement of your estate.
The executor's job is a potentially time-consuming and demanding position that requires a lot more work than people realize. An executor has to perform four major functions.
The first chore is to assemble and value assets. It can be a formidable task to assemble records of such assets as:
- Bank accounts
- Loans to family members or others
- Traditional and Roth IRAs, 401(k)s, and other retirement plans at work
- Brokerage accounts
- Mutual funds
- Insurance policies
- Other property, like real estate, jewelry, or artwork
Add to that list gathering information about mortgages and other debts, tax returns, and the location of safe-deposit boxes.
The next responsibility for executors is to pay all bills and charges, a task that often requires professional help, as it includes the timely filing of returns for federal estate taxes and state inheritance taxes, final income taxes for the deceased, and current income taxes for the estate, as well as payment of those levies.
After executors have valued assets and paid bills, they're able to distribute what's left of the property in accordance with the will.
Their final responsibility is to submit an accounting to the court (usually designated probate and sometimes called orphan's or surrogate's) for everything they've done.
IRS Doesn't Forgive Executor Mistakes
Many executors have learned the hard way that they aren't off the hook for mistakes just because they rely on the counsel of attorneys, accountants, or other professional advisors. When something goes wrong with, say, federal taxes, the IRS bills the executors because they're personally responsible when assets are distributed and taxes remain unpaid or forms are filed late.
The need to obtain proper tax advice was made expensively clear to the son and daughter-in-law of Henry Lammerts, who had designated them as his executors. On Henry's death, his son took over leadership in settling the estate. Although under the impression that a tax return had to be filed for his father, the son was unaware that it also was necessary to file an income tax return for the estate.
This is where matters stood until his accountant discovered that no return had been filed reporting income received by the estate. The filing was eventually made seven months after the due date.
The IRS assessed a sizable late-filing penalty and the usual interest charges. The executors argued that they were new at this sort of thing and had relied on their accountant and the estate's lawyer to do whatever was necessary.
But the accountant, in his own defense, testified that there was nothing in his past services to the family to suggest that, on his own initiative, he would have to file an income tax return for the estate. Similarly, the estate's lawyer pointed out that neither of the executors had asked him for a rundown of the responsibilities attached to being an executor. Consequently, the 2nd Circuit Court of Appeals upheld imposition of the penalty.
Consider the predicament of Kenneth Leigh, production manager of a dress business. Because of his familiarity with the business, Kenneth became the court-appointed administrator of the estate of the owner, who died without a will. The manager knew nothing about administering an estate, but retained an attorney in whom he had complete confidence.
He tried to read estate documents presented to him for signature; by and large, however, he blindly relied on the lawyer's competence. Several days before Kenneth's final accounting and request for an order to distribute the assets was to be filed with the probate court, the attorney asked him to sign an amended estate tax return, which listed assets overlooked in the original return. Kenneth saw that the amended return's cover page showed an additional $27,000 due, but he signed without questioning the lawyer about the amount due.
The probate court approved the accounting, although it didn't reflect the additional estate tax. To wind things up, or so Kenneth thought, he went ahead with a distribution of the remaining assets to the heirs.
Not long afterward, he received an IRS notification. Sorry, it said, but Kenneth was personally liable for the $27,000, as he was aware that taxes were due at a time when the estate had sufficient assets to pay them.
Apparently, Kenneth was unable to get the heirs to take care of the taxes. So the dispute wound up in the Tax Court, which rejected his argument that, as a layman inexperienced with estate matters, his reliance on competent counsel relieved him of the duty to inquire as to the proper disposition of the estate.
The court cited his awareness of the general obligation of estate taxes, signing of the original tax return and payment of the tax, and signing of the amended return â circumstances that indicated actual knowledge on his part of the existence of the debt. He had an obligation, said the court, independent of any reliance on his attorney, to look at the face of the amended return to see whether any additional tax was due. Then a reasonable inquiry of the lawyer would've revealed that the tax was still unpaid. Because Kenneth failed to do those things, he was personally liable for the taxes.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from âJulian Block's Year Round Tax Strategies,â available at julianblocktaxexpert.com.