Clients often choose a relative or a close friend as executor or trustee (a fiduciary) of their estate. It makes sense, they trust them during life and trust their judgment when they stand in their shoes so to speak. However, the job can prove more difficult than either of them imagined.
A fiduciary must carry out the terms of a client's plan at the very time she is grieving, and many times she is unfamiliar with the ins and outs of the job's responsibilities. She may not have enough financial knowledge to understand what's expected or may miss important deadlines due to a lack of understanding, often costing 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 the 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.
According to Forbes, the district court judge noted "the factual circumstances are both complex and sad," but "reliance on counsel cannot constitute reasonable cause for the late filing and payment of taxes."
Person Over 'Puter
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. Just as TurboTax does not replace the expertise of a good accountant, online executor-in-a-box tools are not a replacement for professional legal advice.
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 advisor.
Trustees - or Better Yet a Team of Trustees
In the case of a trust, a client named a trustee to manage his estate and the disbursement of the assets to beneficiaries. In some cases, clients 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 family members as co-trustees can lead to tensions, especially when children are equally named as trustees. Naming too many trustees can also cause problems if their roles are not clearly defined.
Mistakes Can Be Anticipated
We recommend that you think about these potential fiduciary issues. If clients plan to name an executor with no experience, we encourage them to set up a meeting between the executor and their estate planning attorney, even for a simple thirty-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 clients need to be aware of potential pitfalls. It is important to be straightforward with them if attorneys are afraid that the executor they want to name 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.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.