Choosing a relative or a close friend as executor or trustee (a fiduciary) of your estate often makes sense, because you trust his or her judgment. However, the job may prove more difficult than either of you imagined.
A fiduciary must carry out the terms of your plan at the very time he or she is grieving and perhaps unfamiliar with the ins and outs of the job’s responsibilities. Your fiduciary may not have enough financial knowledge to understand what’s expected or may miss important deadlines due to a lack of understanding, which may cost some serious penalties for the estate.
A Forbes article from earlier this year highlighted the case of a 73-year-old high-school-educated homemaker, Janice Specht, who was executor of her elderly cousin’s will. Due to a combination of negligence and errors, the cousin’s $12.5 million estate was charged $1.2 million in penalties, interest and estate taxes.
As it turns out, the lawyer who drafted the cousin’s will faced a battle with brain cancer after the cousin’s death and missed important deadlines for requesting extensions on tax returns. Having relied on this attorney to keep everything on track, a year went by before Specht ultimately had to hire a new one.
Distant relatives filed for malpractice, removing Specht as executor and pushing for a new co-fiduciary appointment. Specht is now on the hook for paying the penalties and interest. She failed to make her case in district court and has filed an appeal.
People Over Computers
Some folks may be tempted to use free or budget-priced online resources to help with executor duties. Unfortunately, inexperienced executors may unwittingly believe using these software sites are all they need in order to complete their duties adequately.
In addition, while fiduciaries are often eligible to receive reasonable compensation for the duties that are required, that payment becomes taxable income. If the executor is a family member who stands to inherit anyway, then they are sometimes better off waiving the fee and simply collecting their inheritance. If the estate is large enough to be subject to an estate tax, then the executor should definitely work with an experienced estate planning attorney and tax adviser.
Trustees—or Better Yet, A Team of Trustees
In the case of a trust, you named a trustee to manage your estate and the disbursement of the assets to beneficiaries. In some cases, you might be better served by having a team of trustees—with each one pulling from a different area of expertise or experience. If the trust is expected to last a long time or there are substantial assets, having more than one person managing things can be ideal. However, there can be downsides, too. Naming too many trustees can also cause problems if their roles are not clearly defined.
Mistakes Can Be Anticipated
If you plan to name an executor with no experience, encourage them to set up a meeting between the executor and their estate planning attorney, even for a simple 30-minute conversation, to discuss the expectations and obligations that go along with the job.
Being named an executor of an estate is a big responsibility, and you need to be aware of potential pitfalls. Be straightforward, if you are afraid that the executor is not up to the task. It is much easier and less costly to resolve these issues at the estate planning stage rather than after the fact.
Bedard, an elder law attorney with Carolina Family Estate Planning, can be reached at 919-443-3035.