Family members and friends who agree to serve as trustees or estate executors often find themselves in over their heads. The rules governing trusts and estates are complex and difficult for novices to understand. If something goes wrong, it might not just be the beneficiaries who pay the price. Trustees and executors have a legal responsibility to act in the best interests of the trust or estate beneficiaries and can be sued if they fail to do so—even if their missteps were accidental. Five common trustee and executor mistakes to avoid…
Mistake: Comingling estate/trust accounts with personal accounts. This is especially common when the executor or trustee is the surviving spouse. This spouse might, for example, pay the trust or estate bills out of the couple’s existing checking account rather than set up a new account. But comingling estate/trust assets with personal assets creates a tax-reporting nightmare. An accountant will have to be hired to separate the accounts—a job so difficult that some accountants turn down this sort of work. I know of one executor whose comingling accounts resulted in an accountant’s bill of almost $6,000.
Mistake: Purchasing items from the estate/trust. Let’s say that you’re the executor of an estate and you need a car. As it happens, the estate needs to sell the deceased’s car. Buying the car seems like a win-win solution—but doing that could open the door to a lawsuit from one of the estate’s beneficiaries. As an executor or a trustee, you are legally responsible for obtaining the best possible prices and terms for any assets sold. If you sell something to yourself—even at a fair price—it leaves you open to accusations that you might have been able to sell the item for more.
What to do: Obtain written permission from all of the beneficiaries before purchasing an item from the estate or trust, and include the purchase price in this document. If it isn’t possible to obtain written permission from the beneficiaries, hire a professional who has experience selling items of this sort, ask him/her to offer the item for sale to the public, then purchase it the same way anyone else could. And do not purchase the item until you confirm that the estate will have enough funds to pay off its creditors. Otherwise one of those creditors might argue in court that you could have obtained more for the item.
Mistake: Failing to communicate with beneficiaries. Beneficiaries who are not kept up to date on what’s going on with an estate or a trust sometimes start to suspect that someone might be keeping their money from them. Their next step might be to hire an attorney.
What to do: Let beneficiaries know as soon as possible that they are named as beneficiaries. Warn them that it might be a while before they receive assets. (Distribution of assets is unlikely to occur for at least several months with even a simple estate or trust and could take several years if there is complex litigation against the estate or trust.) Then send them regular updates as things progress. Also provide beneficiaries with periodic summaries of the estate/trust’s income and expenses. Not only do beneficiaries grow suspicious if they do not receive this information, many states have laws requiring that these accountings be provided at least annually.
Mistake: Failing to secure valuables. Heirs have been known to start grabbing items as soon as someone passes away. They might be doing this in good faith—perhaps Mom told your sister that she could have her jewelry. But by law, when someone dies, what that person said about the distribution of his/her possessions does not matter. What matters is what is in the will or trust. The executor or trustee is responsible for protecting the deceased’s possessions until they can be distributed according to the terms of these documents.
What to do: If no one is living in the deceased’s house, change the door locks as soon as possible, since you don’t know how many keys may be floating around. As executor or trustee, you have a legal right to have the locks changed. If you don’t have a key, you can grant permission to a locksmith to break in, if necessary, to change the locks. Move portable valuables to a secure location, such as a storage locker, a safe in your home or a bank safe-deposit box. (Do this even if you are confident that the beneficiaries will not take items—a burglar who sees the deceased’s name in the obituaries might target the house.) Move vehicles to a secured location, such as a private garage, as well. If some of the deceased’s possessions already have gone missing, let heirs know that you have to keep track of these things until the estate is settled. If no one admits to taking the missing items, tell them you will contact the police. This shows that you are trying to fulfill your legal responsibilities as executor or trustee, reducing the odds that you could be successfully sued.
Example: A painting worth thousands of dollars disappeared from a deceased person’s home. The beneficiary who took it gave it back—but only after the executor threatened police involvement.
Mistake: Distributing property before all estate/trust obligations are satisfied. Beneficiaries might pressure you to give them their inheritance right away. But if creditors make claims against the estate or trust after you have distributed some or all of its assets, you could be personally liable for paying off those creditors.
Example: An executor who also was one of the descendants of the deceased was pressured by his siblings to divide up his parent’s estate quickly. Only after the money was distributed did this executor learn that his parents had taken out a loan of more than $50,000 that now had to be repaid by the estate. Two of his siblings refused to give back their shares of the inheritance, leaving the executor to pay most of the $50,000 out of his own pocket…and ruining the siblings’ relationships.
Similar: Paying an estate’s or a trust’s bills promptly sometimes is a mistake, too. If it later is determined that the estate owes federal taxes, that tax bill likely would take legal precedence over other obligations. If there isn’t enough left to pay the taxes, an executor who already paid other estate bills could become personally liable for the remaining tax bill.
What to do: It is OK to make partial distributions before all claims against the estate or trust are in as long as you are confident that there will be sufficient assets remaining to cover all obligations. Otherwise, wait until you are sure all claims and bills have been received and paid before making distributions. Confirm that any tax payments made by the estate have been accepted, not just submitted. Be aware that in most states, creditors must make claims against estates within a limited window following the death—often three months. The executor might be responsible for placing notices of the death in local newspapers to start this clock ticking, however. Consult an estate-planning attorney familiar with the laws in the deceased’s state if you are not certain.
Serving as an executor or trustee usually is within the average person’s abilities, but it could become a massive burden if…
Even if you informally agreed beforehand to take on the role, after the person dies, ask the deceased’s attorney, family members and/or business associates for details about the estate or trust before formally agreeing to start acting as executor or trustee. You can decline simply by refusing to sign documents accepting the position. If you decline, do not take on any of the responsibilities of the role even temporarily until a replacement can be found—doing this could cause a court to rule that you officially accepted the position, and once you have done that, it can be difficult to back out.
