Glancing through the news recently I noticed a story about an executor who has had a warrant issued for his arrest due to his failure to comply with his duties. The role of an executor carries quite significant obligations and the consequences for failing to correctly administer an estate can be much more severe than people appreciate. As a solicitor, I am often contacted by family members after the passing of a relative, asking who is supposed to deal with the estate. This is especially the case where there are family tensions and competing ideas about what should be done. Here are some key points to note about the role of an executor:
Who is an executor?
An executor is the person appointed under a Will to administer the deceased’s estate. This includes arranging the funeral, valuing assets, applying for probate (if needed) and ensuring that all liabilities are paid. Once liabilities are settled the executor must then ensure that the estate is distributed in accordance with the Will or, if there are any parts of the Will that fail, in accordance with the intestacy rules.
The role carries fiduciary duties and means that the executors must act in the best interest of all the beneficiaries, must avoid conflicts of interest, and must ensure that estate assets are protected and correctly dealt with.
Do Executors have any discretion as to how the estate should be distributed?
Generally speaking, the executor will not have any discretion about the estate distribution. This is because the Will or intestacy rules set out who receive the estate and in what shares. The law does give the executor the ability to give assets directly to a beneficiary, rather than requiring the executor to sell the estate assets and pass cash. This is known as appropriation. The ability to appropriate may however be limited by the Will, or by the law, if the executor is themselves a beneficiary. Valuing an asset for this purpose is also a specialist point and advice should be taken.
Executors may be given discretion in relation to how personal items (known as chattels) are to be distributed. This needs to be carefully considered and, where a chattel is valuable, this should be accounted for in the estate, either against a beneficiary’s share or by allowing the person to buy the asset from the estate so that the beneficiaries do not lose out financially.
What are the risks to executors?
Executors are responsible for the assets within the estate and so can be held personally liable when these are incorrectly dealt with. Below is a list of some of the main areas of risk, although others do exist:
Unknown creditors - the executors are responsible for ensuring that all debts of the estate are paid before distributing assets to the beneficiaries. This includes any tax that may be due (lifetime and post-death), funeral expenses and any debts owed at the date of death or incurred by the estate. If the executors distribute the estate and a creditor later comes forward, the executor would be personally liable to settle this debt. There are ways of limiting the risk of unknown creditors and it is strongly advised that an executor takes professional advice when dealing with an estate where this is more likely such as the estates of business owners, spendthrifts, or bankrupts.
Disappointed beneficiaries - certain people are entitled to bring a claim against the estate where they feel that they have been inadequately provided for in the Will. There are set time limits during which claims can be brought. An executor should be careful not to distribute the estate while a claim is still possible.
Missing beneficiaries - it can sometimes be difficult to trace all the beneficiaries in an estate. An executor should not however distribute funds simply assuming that a beneficiary has died or will not come forward. There are several steps that can be taken, depending on whether a beneficiary is known to have existed, or where the executors simply cannot be sure that there are no further beneficiaries. A clause leaving gifts to ”my grandchildren” can create this difficulty where the testator became estranged from a child. Executors can take out insurance to cover the risk, seek the court’s consent to a distribution, or obtain indemnities from the known beneficiaries (as a few examples). Without these steps the executor would be personally liable to the beneficiary for their share in the estate if they come forward at a later date.
The rule against self-dealing - the law prohibits an executor from buying assets from the estate, even at full market value, or from having assets appropriated to them, except in certain circumstances and with relevant consents. If these requirements are not met then the transaction is voidable and the beneficiaries can demand that it be reversed or that the estate is compensated.
Damage to property - a point that is often overlooked is the executor’s duty to secure and protect estate property. This includes any house or other valuable items. Executors should ensure that property is insured (and that insurance remains valid while the property is empty). If not, the executor would be liable for the loss suffered by the estate if the property burnt down, was flooded or suffered damage in any other way. This is a critical point, and executors may find themselves having to pay insurance premiums out of their own pockets very early in the adminstration before they have gained access to estate funds.
Tax liabilities – with large estates, or ones comprising of capital assets such as houses or share portfolios, these must be dealt with in a way to minimise the instance of capital gains tax. There are technical solutions to minimising CGT that most non-professional executors will not be aware of. If an executor could have minimised CGT but fails to, they may find themselves personally liable to make up the loss to the estate.
The larger the estate the greater the personal risk for an executor. To cap it all off, lay executors are not allowed to charge the estate at all for all the work they do, even though this may amount to many months worth of activity. For these reasons, some testators choose to appoint professionals, to ensure that the estate is correctly administered. Alternatively, executors appointed under a Will may seek professional assistance.
If you have any questions or concerns in relation to your duties as an executor, or if you would like assistance in dealing with the administration of an estate then please contact a member of our Wealth Management Team.