Selecting an Executor for Your EstateFebruary 2013
Choosing an executor is one of the most important decisions individuals make when preparing their will. This Insights explains the executor’s role and covers key qualities to consider when choosing an executor for your estate.
Acting as executor of an estate comes with a great deal of responsibility and requires a broad range of skills. It can be time consuming and often requires working with a myriad of professionals including lawyers, accountants and investment professionals.
Executors are responsible for settling estates. An executor may either be an individual or a financial institution, such as a bank or trust company. Or, a bank or trust company may serve as co-executor with an individual such as the decedent’s spouse, child, advisor or other person.
When settling an estate, an executor performs five basic functions:
- Locates, collects and has responsibility for the estate’s assets until they are distributed to the beneficiaries
- Determines and raises the cash needs for the estate
- Pays the decedent’s funeral expenses, debts and estate administration expenses
- Handles tax matters
- Distributes the remaining assets in accordance with the terms of the will
- Prepares the decedent’s final income and gift tax return
- Pays the estate’s income and estate taxes
- Coordinates tax planning for the estate and the beneficiaries
SIX QUALITIES TO CONSIDER WHEN SELECTING YOUR ESTATE’S EXECUTOR
In many cases, executors are called upon to provide a broad range of services. To ensure your executor is equipped to handle this important role, look for the following qualities:
When selecting an executor, a primary consideration should be the honesty and integrity of the individual or financial institution.
Knowledge of Financial Matters
Ideally, an executor should have a broad understanding of financial matters. Executors are responsible for locating, collecting, and if necessary, taking physical possession of assets owned by the decedent. They must also secure, insure and appraise those assets. When necessary, executors must also raise the cash required to pay debts, taxes and administration expenses.
To carry out these financial responsibilities, executors must first make an investment analysis of all assets in the estate and determine which assets to retain, which to sell and how the estate’s cash needs will be met. A reputable bank or trust company has an experienced staff with the knowledge needed to perform these tasks in a timely and efficient manner. Usually, this staff of professionals will include an investment advisor who can make recommendations concerning the sale, retention or reinvestment of the assets.
Experience with Tax Matters
Executors should be experienced in tax matters, because they prepare and file the decedent’s final federal and state personal income tax returns. Executors must also prepare and file income tax returns for prior years and when appropriate, gift tax returns, if those returns were not filed.
For estates of decedents with assets exceeding $5.25 million in 2013, an executor is responsible for filing a federal estate tax return and, depending upon the jurisdiction, a state estate or inheritance tax return. The federal estate tax return is a complex and comprehensive return, due nine months after the date of death. Since the estate is a separate taxpayer, an executor is also required to prepare and file annual income tax returns for the estate. A knowledgeable executor will also propose a comprehensive tax plan to minimize the income taxes paid by the estate and its beneficiaries.
Naming a family member or friend as your executor may place that individual in an uncomfortable position, and could even cause a conflict of interest, particularly when the executor is also a beneficiary of the estate. Certain decisions the executor must make, such as tax elections, may have a direct financial impact on each beneficiary.
For example, depending on the nature and value of the assets, the form of ownership and the relevant provisions of the will or trust agreement, the executor may be faced with a multitude of decisions, referred to as “elections,” on the federal and state estate tax returns. The exercise or non-exercise of these elections determines the amount of taxes paid, the source of payment of those taxes and the amount of taxes deferred until the death of another individual or other specified event.
Therefore, a family member or friend who acts as your executor must be able to make these decisions impartially, without favoring one beneficiary over another.
Settling an estate can take more than 24 months. Your executor must be willing and able to commit time and energy to the task. Delays can arise when, for example, a valuation issue on the federal estate tax return prompts an audit by the Internal Revenue Service. The audit process can easily extend the settlement of the estate for an additional 6 to 12 months.
A bank or trust company’s experienced staff is available to: (i) resolve issues concerning an audit; (ii) handle the day-to-day tasks during the course of the estate’s administration; and (iii) provide continuity during the entire settlement period. An individual executor may not always be available to perform these tasks due to personal or business commitments, illness, infirmity or death.
If trusts are created under a will or trust agreement, availability is also an important factor to consider when selecting a trustee. With today’s sophisticated estate planning techniques, the appointment of a bank or trust company as a trustee or co-trustee provides the added benefit of continuity for an individual’s estate plan.
The information gathered and the relationships developed during the estate settlement process can be carried over to the administration of the trust. Since a typical estate plan may provide for the creation of a trust or trusts which can last for 70 years or longer, an established bank or trust for several generations.
The final major consideration is the accountability and financial responsibility of the individual or entity selected job for the estate administration department in a bank or trust company. By comparison, it is usually a one-time, part-time job for an individual. A bank or trust company is regulated by state and federal laws. It is also subject to both internal and external audits. An individual is not subject to these regulations and audit procedures. What occurs if the executor makes or fails to make a decision that results in a substantial loss to the value of the estate’s assets? For example, the executor may make the wrong decision concerning one or more of the many tax elections that may arise during the estate’s administration. An individual may not have the same financial resources to cover the resulting loss that a bank or trust company would have.
Selecting the best possible candidate to act as executor for your estate should not be made solely on the basis of a family relationship or years of friendship. Carefully consider the full spectrum of qualities an executor should possess to ensure your intentions are properly carried out.
Your Executor Should be Knowledgeable and Experienced
Here are some of the many responsibilities your executor will be required to perform:
- Locating, appraising, insuring and safeguarding assets
- Paying bills
- Performing financial analysis
- Managing assets
- Tax planning and tax return preparation
- Managing real estate and property
- Regularly communicating with beneficiaries
Consider the Many Benefits Banks and Trust Companies Offer
The settlement of an estate is usually a one-time, part-time job for an individual. In contrast, it’s a full-time job for the estate administration department in a bank or trust company. Carefully consider the benefits of engaging a bank or trust company to act as your executor.
This communication is intended solely to provide general information. The information and opinions stated are as of February 2013, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.
IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction of matter addressed herein.
ABOUT THE AUTHOR
Michael M. Mariani is responsible for the Trust and Estate Administration departments at Fiduciary Trust. He is also an Adjunct Professor at St. John's University School of Law and has lectured and written articles on numerous trusts and estates topics.
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