With ongoing medical advances and an emphasis on healthy lifestyles,
Americans are living longer and longer. Even given the vagaries of the
economy, many of them enjoy a comfortable standard of living. Over the
course of a lifetime, an individual might very well accumulate one or
more homes, piles of possessions, stock investments, retirement
accounts, and more (including, in some cases, accompanying mounds of
debt). All of these assets and liabilities need to be handled properly
and competently not only during the owner’s lifetime, but also after his
or her death.
It all sounds logical on paper, but when you’re asked to administer a
trust or estate for a relative or friend (especially if that person
didn’t have a will), this responsibility can feel overwhelming during an
already difficult time. That’s why the popular For Dummies® series
has provided a practical reference for those in this position.
“Settling an estate and administering a trust can be complicated, messy,
and time-consuming for individuals named as executors or trustees,” says
Margaret Atkins Munro, coauthor along with Kathryn A Murphy of Estate
and Trust Administration For Dummies®, 2nd Edition
(Wiley, May 2013, ISBN: 978-1-118-41225-1, $26.99). “Often, this is the
case because executors and trustees have no previous experience with
these matters, causing them to unwittingly commit costly errors in terms
of time, energy, money, and even relationships among the survivors of
the deceased.”
Fortunately, say Munro and Murphy, much of administering a trust or
estate is similar to handling your personal finances. However, because of
this similarity you can easily forget that you’re actually working in a
fiduciary capacity, not an individual one, and that there are some major
differences.
“In fact, one of the biggest issues we’ve run up against when assisting
clients, family, and friends is in articulating where the differences
lie,” shares Murphy.
“One of the smartest things you can do when you assume control of
someone else’s affairs is to do your due diligence in learning about
your responsibilities before making decisions and moving
ahead,” Munro confirms. “Even if you think you know what you’re doing,
it’s best to educate yourself on what’s expected of you in your new
role, to review relevant terminology, and to make sure you know where to
turn for help in case you need it.”
Here, Munro and Murphy share ten pitfalls that often trip up unwary
administrators—and that you should avoid:
Failing to terminate an existing real estate purchase and sale
agreement. As far as costly mistakes go, not ending an existing
real estate purchase and sale agreement when the decedent (or deceased)
is the seller is huge! Keeping the original agreement in place may
substantially increase the taxes you’ll owe on the sale, costing the
estate and eventual heirs.
“Real estate rarely changes hands on the day the buyer and seller agree
to the purchase and sale; in fact, it often takes many weeks, if not
months, between the handshake and the deed,” points out Murphy. “When a
seller dies in mid-property transfer, canceling the old purchase and
sale agreement and rewriting a new one, with the estate as
the seller, puts you in the best position. Among other things, you’ll
avoid having to pay any income tax on the sale.”
Taking a lump sum distribution from a pension plan, IRA, or deferred
compensation plan. When you’re trying to figure out exactly how
much the estate owns, you may be tempted to liquidate everything into
cash. Don’t give into that temptation when it comes to any sort of
pension plan, IRA, or deferred compensation plan. As soon as you cash
out, the estate owes income taxes on every penny that the decedent
hadn’t already paid tax on.
“In addition to the income tax bite, if you’re dealing with a large
enough estate, you may also owe federal and/or state estate taxes on the
value of the account as of the date of death,” shares Munro. “Rolling
the income-tax-deferred account to the heirs, if you can, is far better
than taking a lump sum distribution in the estate. Using this technique,
no one owes any income taxes until the new beneficiaries begin to take
distributions; additionally, you can spread those distributions out over
a number of years, lessening the tax bracket each distribution is taxed
at.”
Creating a feeding frenzy when splitting personal property. Nothing
alienates family members like weddings and funerals, and nowhere is this
more apparent than when you’re dividing up the decedent’s personal
property among his or her heirs. If the decedent failed to leave
instructions regarding who was to receive what property, your job as
executor is to keep the situation under control.
“We’ve found that the most equitable way to distribute personal property
among the heirs is to use multicolored flea market stickers, easily
purchased at any discount or stationery store,” recommends Murphy. “Give
each heir a different color and have him or her take turns (oldest to
youngest, youngest to oldest, or in an order determined by choosing
random numbers) tagging one item at a time. By the time you finish,
you’ll discover that you’re either surrounded by a rainbow of tags or
that people mostly just want one or two remembrances; you can sell the
rest or give it to charity. Before the tagging event, don’t allow anyone
into the decedent’s residence unsupervised, and especially if you expect
contention, change the locks!”
Missing court deadlines. Courts hate to be ignored. Make
sure that you place all the probate court’s deadlines on your calendar,
circled and underlined. Even if you haven’t been able to complete the
task set by the court (preparing the probate inventory, for example),
showing up to explain why you’re unable to comply usually buys you
additional time. Fail to appear, and the courts often demand immediate
compliance.
“Don’t make the mistake of thinking that the probate court isn’t a real
court or that the judge isn’t a real judge just because proceedings have
been fairly low key to this point,” warns Munro. “These judges have full
judicial authority, which includes removing you as executor or trustee,
fining you, throwing you in the pokey for contempt of court, or any
other such sanctions they deem necessary to make you comply.”
Forgetting tax filing deadlines. You wouldn’t fail to file
your own tax returns; don’t forget to file the trust’s or estate’s,
either. Income tax returns (Form 1041) are due three and one half
months after the estate or trust’s year end, and estate tax returns (Form
706) are due nine months after the date of death.
“Place these dates on your calendar and begin preparation far in advance
of the due date so you know about any problems or lack of information
far in advance of the filing deadline,” suggests Murphy. “Don’t forget,
extensions are available if you’re unable to file returns when due, and
you may amend returns that turn out to be incorrect.”
Failing to communicate with heirs and legatees. Keep heirs
and legatees (individuals left specific property under the will) in the
loop as much as you can. By letting them know on a regular basis where
you are in the process and when they can realistically expect a payment
from the estate, you’re stopping most, if not all, of their complaints
before they have a chance to even think of them.
“You can’t please all the heirs all the time, especially those who are
upset that they weren’t named executor,” comments Munro. “But do be
especially responsive to their concerns. The estate process is under the
probate court’s supervision, so an heir who complains to the judge
creates more work for you because you now have to respond to the judge’s
questions as well.”
Exercising poor fiduciary judgment. As more people have
started investing personally, they think they’ve become much more
sophisticated and knowledgeable about the entire investment process. And
they’ve also become much more likely to comment unfavorably on your
handling of the trust or estate’s assets. As the executor and trustee,
you must act prudently and deliberately, seeking advice when you need
it, investing the assets wisely, and paying the bills and the
beneficiaries when they’re due to be paid.
“Remember that the decendent or the donor chose you to look after his or
her property because of your good judgment, and part of that judgment is
knowing when to ask for help,” points out Murphy. “Don’t hesitate to
employ a professional to help you in choosing investments for the estate
or trust. If you do turn to professional help, make sure that you check
references and determine how much experience that person has in the
investment of trust and estate assets.”
Underestimating the devotion required. People rarely
understand the magnitude of the task in front of them when someone asks
them to act as executor or trustee. Even if they did, the date when the
job ceases to be theoretical and the action really begins is often so
far in the future that they can’t even imagine such a time.
“If you’ve accepted an appointment as an executor, administrator, or
trustee, you’ve agreed to act reasonably and responsibly,” explains
Munro. “This job isn’t a small favor you can discharge in an hour or
two, or even in a day or two. It’s a major commitment on your part to
carry out the stated wishes of the testator or grantor. Treat this
commitment seriously.”
Taking nonsanctioned shortcuts. Although you may want to
look for ways to reduce your workload, resist the temptation to find an
easier route through the administration process. Failure to follow
through on any of your responsibilities may open you up to removal as
fiduciary, as well as potential lawsuits from any person having an
interest.
“No one will ever disagree that many of the steps you’re supposed to
take seem pointless and laborious, but you must take them nonetheless,”
confirms Murphy. “So if you’re supposed to publish a notice in a certain
paper, make sure to do so. If you should have a piece of property
appraised, don’t assign it a value, and move on; hire an appropriate
appraiser, pay the fee, and get the appraisal in writing. Taking
shortcuts through an estate or trust may save you some time up front,
but the cleanup costs on the other end, when the IRS wants to see the
proof that you’ve valued something correctly or your accounts don’t
balance, can be huge.”
Paying from the wrong pocket. Money may always seem like
money to you, but within a trust, it belongs to either principal or
income. And although making a distinction between the two may seem silly
when paying trust bills, you really must. Because different people may
be entitled to receive money and property from either income or
principal, make payments (whether expenses or distributions) from the
correct side of the account is crucial. More than on trustee has been
sued because they paid all trustee fees from principal (or income), for
example.
“When you make all payments from one side, you favor the eventual owners
of the property on the other side (because their share will grow
faster),” adds Munro. “To avoid any hint of favoritism, allocate fees
and expenses against the type of income that generated the cost. When
you’re not sure (like with your trustee’s fee), create an equitable
formula so that a certain portion of your fee is always paid from
principal, and the rest from income.”
“Administering a trust or estate isn’t always easy or pleasant, but it
can be done by a layperson with the right information and a commitment
to fully and correctly completing the task,” concludes Murphy.
“Mishandled, estate or trust administration can cause permanent family
rifts and legal troubles; however, competent and careful management
helps keep family members and Uncle Sam happy. Most
importantly, the wishes of the decent are honored and kept intact.”
