Who Should Be Your Executor?

While the executor is usually a spouse or close family member, you can name anyone you wish to be your executor. A bank, estate planning attorney, or professional trustee at a trust company may also serve as the executor, according to a recent article from Twin Cities-Pioneer Press titled “Your Money: What you need to know about naming an executor.”

Regardless of who you select, the person has a legal duty to be honest, impartial, financially responsible and to put your interests ahead of their own. This person and one or two backup candidates should be named in your will, just in case the primary executor declines or is unable to serve.

How does someone become an executor? When your will is entered into probate, the court checks to be sure the person you name meets all of your state’s legal requirements. Once the court approves (and usually the court does), then their role is official and you executor can get to work.

The executor has many responsibilities. You can help your executor do a better job by making sure that financial and personal business documents are organized and readily available. Here are some, but not all, of the executor’s tasks:

  • Making an inventory of all assets and liabilities
  • Giving notice to creditors: credit card companies, banks, mortgage companies, etc.
  • Filing a final personal tax return and filing the estate tax return
  • Paying any debts and taxes
  • Distributing assets according to the directions in the will and in compliance with state law
  • Preparing and submitting a detailed report to the court of how the estate was settled

If there is no will, or if no executor is named in the will, or if the executor can’t serve, the court will appoint a professional administrator to settle your estate. It won’t be someone you know. Your family may not like all of the decisions made on your behalf, but there won’t be any options available.

Does an executor get paid? A family member may or may not wish to be paid. However, given how much time it takes to settle an estate, you might feel it’s fair for them to be compensated. The amount varies depending on where you live, but you can leave the person between 1% to 8% of your total estate. A professional administrator will likely cost considerably more.

How do you document your estate to help out the executor? If you think this task is too onerous, imagine how a family member will feel if they have to conduct a scavenger hunt to identify assets and debts. If a professional administrator ends up doing this work, it will take a bigger bite out of your estate and leave loved ones with a smaller inheritance.

Start by making a list of all of your assets and liabilities, plus a list of all advisors who help with the business side of your life. Recent tax returns will be helpful, as will contact information for your estate planning attorney, CPA and financial advisor. You should include retirement accounts, life insurance policies and any assets without beneficiary designations.

Reference: Twin Cities-Pioneer Press (June 25, 2022) “Your Money: What you need to know about naming an executor”

What are Responsibilities of Trustees and Executors?

Being a fiduciary requires putting the interest of the beneficiary over your own interests, no matter what. The person in charge of managing a trust, the trustee, has a fiduciary duty to the beneficiary, which is described by the terms of the trust. This is explained in a recent article titled “Estate Planning: Executors, executrix and personal representatives” from nwitimes.com.

Understanding the responsibilities of the trust requires a review of the trust documents, which can be long and complicated. An estate planning attorney will be able to review documents and explain the directions if the trust is a particularly complex one.

If the trust is a basic revocable living trust used to avoid having assets in the estate go through probate, duties are likely to be similar to those of a personal representative, also known as the executor. This is the person in charge of carrying out the directions in a last will.

A simple explanation of executor responsibilities is gathering the assets, filing tax returns, and paying creditors. The executor files for an EIN number, which functions like a Social Security number for the estate. The executor opens an estate bank account to hold assets that are not transferred directly to named beneficiaries. And the executor files the last tax returns for the decedent for the last year in which he or she was living, and an estate tax return. There’s more to it, but those are the basic tasks.

A person tasked with administering a trust for the benefit of another person must give great attention to detail. The instructions and terms of the trust must be followed to the letter, with no room for interpretation. Thinking you know what someone else wanted, despite what was written in the trust, is asking for trouble.

If there are investment duties involved, which is common when a trust contains significant assets managed in an investment portfolio, it will be best to work with a professional advisor. Investment duties may be subject to the Prudent Investor Act, or they may include the name of a specific advisor who was managing the accounts before the person died.

If there is room for any discretion whatsoever in the trust, be careful to document every decision. If the trust says you can distribute principal based on the needs of the beneficiary, document why you did or did not make the distribution. Don’t just hand over funds because the beneficiary asked for them. Make decisions based on sound reasoning and document your reasons.

Being asked to serve as a trustee reflects trust. It is also a serious responsibility, and one to be performed with great care.

Reference: nwitimes.com (July 18, 2021) “Estate Planning: Executors, executrix and personal representatives”

Distributing Inherited Assets in Many Accounts

This generous individual may be facing a number of legal and logistical hurdles, before assets in eight separate accounts can be passed to three relatives, says the article “Sorting through multiple inheritance accounts” from the Houston Chronicle. Does the heir need to speak with each of the investment companies? Would it make sense to combine all the assets into one account for the estate and then divide and distribute them from that one account?

If all the accounts were payable to this person upon the death of the brother, then the first thing is for the heir to contact each company and have all funds transferred to one account. It might be an already existing account in their name, or it may need to be a new account opened just for this purpose. The account could be at any of the brother’s investment firms, or it could be with a different firm.

If the accounts are not payable to the heir, but they are to be inherited as part of the brother’s estate, the estate must be probated before the funds can be claimed. In this case, it would be very helpful if the sole beneficiary is also the executor. This would put one person in charge of all of the work that needs to be done.

However, the person eventually will become the owner of all eight accounts. Once everything is in the heir’s name, then the assets can be distributed to the three relatives. There are some tax issues that must be addressed.

First, if the estate is large enough, it may owe federal estate taxes, which will diminish the size of the estate. The limit, if the brother died in 2020, is $11.58 million. If he died in an earlier year, the exemption will be considerably lower, and the estate and the executor may already be late in making federal tax payments. Penalties may apply, so a conversation with an estate planning attorney should take place as soon as possible.

If the brother lived in another state, there may be state estate or inheritance taxes owed to that state. While Texas does not have a state estate or inheritance tax, other states, like Pennsylvania, do. A consultation with an estate planning attorney can also answer this question.

When gifts are ultimately made to the three relatives, the first $15,000 given to each of them during a calendar year will be treated as a non-taxable gift. However, if any of the gifts exceed $15,000, the person will be using up their own $11.58 million exemption from gift and estate taxes. A gift tax return will need to be filed to report the gifts. If the heir is married, those numbers will likely double.

It may be possible to disclaim the inheritance, with the assets passing to the three relatives to whom the heir wishes to make these gifts. An experienced estate planning attorney will be able to work through the details to determine the best way to proceed with receiving and distributing the assets. Depending upon the size of the estate, there will be tax consequences that must be considered.

Reference: Houston Chronicle (March 24, 2020) “Sorting through multiple inheritance accounts”

Making a Fresh Start for 2020? Here’s Help

Some people like to start their New Year’s off with a clean slate, going through the past year’s files and tossing or shredding anything they don’t absolutely need. However, many don’t, in part because we’re not sure exactly what documents we need to keep, and which we can toss. This article from AARP Magazine provides the missing information so you can get started: “When to Keep, Shred or Scan Important Papers.”

Tax Returns. Unless you’re planning on running for office, the last three years of tax returns and supporting documents are enough. That’s the window the IRS has to audit taxpayers. But there are some exceptions: if you are self-employed or have a complex return, double that number to six years, which is how much time the IRS has to audit you, if it suspects something’s fishy.

Regardless of how you earn your income, visit MySocialSecurity.gov account before shredding to make sure that your income is being accurately recorded. Having your tax records in hand will make it easier to get any figures fixed.

As for documents regarding home ownership, keep records related until you sell the house. You can use home-improvement receipts to possibly reduce taxes at that time.

Banking and Investments. If you or your spouse might be applying for Medicaid to pay nursing home costs, you’ll need to have five years of financial records. That includes bank statements, credit card statements, and statements from brokerage or financial advisors. This is so the government can look for any asset transfers that might delay eligibility.

If that’s not the case, then you only need banking and financial statements for a year, except for those issued for income-related purposes to provide the IRS with a record of tax-related transactions. Your bank or credit card issuer may have online statements going back several years online. However, if not, download statements and save them in a password protected folder on your home computer.

Stocks and bonds purchases need to be kept for six years after filing the return reporting the sale of the security. Again, this is for the IRS.

If you have a stack of cancelled checks, shred them. Most every bank and credit union today have an electronic version of your checks.

Medical Records. These are the records you want to keep indefinitely, especially if you have had a serious illness or injury. The information may make a difference in how your physicians treat you in the future, so normal or not, hang on to the following documents: surgical reports, hospital discharge summaries and treatment plans for major illnesses. Put these in a password-protected folder in your computer or a secure cloud-based account, so they can be shared with future healthcare providers. You should also keep immunization and vaccination records. The goal is to have your own medical records and not to rely on your doctor’s office for these documents.

Maintain proof of payments to medical providers for six years, with the relevant tax return, in case the IRS questions a health care deduction.

Reference: AARP Magazine (August 5, 2019) “When to Keep, Shred or Scan Important Papers”