Guidelines for Individual Executors and Trustees
You have been named as an Executor or Trustee under a family member’s or a friend’s Will and the person has passed away recently. What do you do? First understand that each of the jobs means that you will be acting in a fiduciary capacity for the estate of the deceased person. A fiduciary capacity is a special relationship of trust that carries with it a responsibility to act in the best interest of the estate, its creditors and beneficiaries. Assuming that you are willing to serve, file the Will for probate in the county of the residence or domicile (See The Probate Process). Upon appointment by the probate court, take control of the deceased person’s (“Decedent”) assets and business affairs and begin the process of determining the debts of the Decedent and at the appropriate time make sure the debts are paid, file necessary tax returns for the Decedent and the Estate, and then assets are distributed as the Decedent’s Will provides.
Glossary of terms:
- Administrator (Administratrix). An individual, entity, bank or trust company that is appointed by a probate court to act for an intestate estate (without a Will) that administers the estate of the Decedent in accordance with the laws of the Decedent’s state.
- Beneficiary – A person for whose benefit a will or trust was made; the person who is to receive property, either outright or in trust, now or later.
- Executor (Executrix)(Personal Representative). An individual, bank or trust company that administers the estate of a Decedent according to the terms of the will. Executor is the male version of the term while Executrix is the female version. The term Personal Representative means either the Executor or Executrix and in some states is the only term used.
- Fiduciary – An individual, bank or trust company that acts in a capacity of trust for the benefit of another. Trustees, executors, administrators and personal representatives are all fiduciaries.
- Grantor (Settlor)(Trustor). An individual who transfers property to a trustee to hold or own subject to the terms of the trust agreement setting forth his or her wishes.
- Income. The returns from the Principal (corpus) of the trust, such as interest, dividends, rents.
- Living Trust (Inter Vivos Trust). A trust established by a Grantor during his or her life for the benefit of the Grantor and/or others.
- Principal (Corpus). The property placed in the trust for management and administration by the Trustee.
- Testator (Testatrix). A person who has made a valid will.
- Trustee – An individual, bank or trust company that holds legal title to property for the benefit of another and acts according to the terms of the trust. A Trustee can sometimes be both a trustee and a beneficiary of the same trust, either a living trust or a testamentary trust.
- Testamentary Trust. A trust established as a part of the Will of a Decedent.
Review and Gain An Understanding Of The Will
The first step is to read the will or trust so that you gain an understanding what property is involved, who the beneficiaries are, what they are to receive and when, and whom, if anyone, you will work with as a co-fiduciary. The Will generally lists the specific and general ( or residue bequests) by describing the property to be given in the case of specific bequests and the persons to whom given, describes how the residue (remainder after expenses taxes and specific bequests) is to be distributed (either outright or in trust) and names the people or describes the class of persons to receive the property or it benefit. The document also may provide specific directions to the fiduciary concerning which assets should be used to pay taxes and expenses or to fund a particular bequest. The document will usually list the fiduciary’s powers in some detail. Understand, if you accept the appointment to serve as an executor or trustee, you will be held responsible for understanding and implementing the terms of the trust or will. Seek advice from an attorney to review step by step the provisions of the will or trust (or both) and the process that you will be required to use to administer the estate or trust so that you will understand your role.
Assemble the Estate Assets
It is the fiduciary’s responsibility to assemble (gather) the assets comprising an estate or trust. The executor of an estate receives an order of appointment from the probate court and Letters Testamentary, which are used to prove to third parties the Executor has the legal authority to act. A Trustee of a Living Trust or a Testamentary Trust will need to prove that the trust is in existence and the powers of the trustee, usually through a Certificate of Trust or providing a copy of the trust to the third party concerned. It is important to secure all assets as soon as possible and have them appraised as soon as possible as of the date of death. The usual practice is to engage a professional appraiser to value the decedent’s tangible property, such as household furniture, automobiles, jewelry, artwork, and collectibles. Depending on the nature and value of the property, this may be a routine activity, but you may need the services of a specialist appraiser if, for example, the decedent had rare or unusual items or was a serious collector. Real estate, both residential and commercial, and any business interests also must be valued. In addition to providing a valuation for assets that may be reported on a court-required inventory or on the state or federal estate tax return, the appraisal can help the fiduciary gauge whether the decedent’s insurance coverage on the assets is sufficient. Appropriate insurance should be maintained throughout the fiduciary’s job. The fiduciary also must value financial assets, including bank and securities accounts.
Expenses of Administration and Payment of Debts
The fiduciary is responsible for the determination of unpaid debts of the decedent. A Notice to Debtors and Creditors should be published with the legal newspaper in the county of the estate proceeding immediately after appointment. All expenses incurred by the Executor in the administration of the estate are paid with priority before the payment of debts to creditors and distributions to beneficiaries. Consultation with an attorney is important to determine the priority of the payments of expenses of administration and debts of the decedent as the fiduciary can be held personally liable for improperly spending estate or trust assets or for failing to protect the estate assets properly, such as by maintaining adequate insurance coverage. The fiduciary may be responsible for filing a number of tax returns. These tax returns include the final income tax return for the year of the decedent’s death, a gift or generation-skipping tax return for the current year, if needed, and prior years’ returns that may be on extension. The only way to be certain is to investigate. In addition, if the value of the estate (whether under a will or trust) before deductions exceeds the amount sheltered by the estate tax exemption amount, which is $5.43 million in 2015 inflation adjusted, a federal estate tax return will need to be filed. Even if the value of the estate does not exceed the estate tax exemption amount, a federal estate tax return still may need to be filed to preserve the exemption for use by the surviving spouse, under the concept of portability of exemptions.
The estate or trust is a taxpayer in its own right. A new tax identification number must be obtained and a fiduciary income tax return must be filed for the estate or trust. A tax identification number can be obtained online from the IRS website. You cannot use the decedent’s social security number for the estate or any trusts that exist following the decedent’s death.
It is important to note for income tax planning that the estate or trust and its beneficiaries may not be in the same income tax brackets. Thus, timing of certain distributions can save money for all concerned. Caution also should be exercised because trusts and estates are subject to different rules that can be quite complex and can reach the highest tax rates at very low levels of income. Some tax return preparers and accountants specialize in preparing such fiduciary income tax returns and can be very helpful. They are familiar with the filing deadlines, will be able to determine whether the estate or trust must pay estimated taxes quarterly, and may be able to help you plan distributions or other steps to reduce tax costs.
Most expenses that a fiduciary incurs in the administration of the estate or trust are properly payable from the decedent’s assets and have priority before debts of the Decedent. These include funeral expenses, appraisal fees, attorney’s and accountant’s fees, insurance premiums and other expenses of the Fiduciary associated with the administration of the Estate. Careful records should be kept, and receipts should always be obtained. If any expenses are payable to you or someone related to you, consult with an attorney about any special precautions that should be taken.
Distribution of Property or Money to Fund the Bequests
Specific bequests of specific property (my “car to my friend”) or funds (or “$5,000 to my son”) must be distributed before the residue is distributed. The residue may be distributed outright or in further trust, such as a trust for a surviving spouse or a trust for minor children. It is extremely important that all debts, taxes, and expenses are paid or provided for before distributing any property to beneficiaries because you may be held personally liable if insufficient assets do not remain to meet estate expenses. The general practice of a fiduciary is to obtain a receipt and indemnity agreement (“refunding agreement”) from the beneficiary that states that he or she agrees to refund any excess distribution made in error by the fiduciary. Without such an agreement it will be difficult to obtain any refund. In some states, a fiduciary will need court approval before any distributions may be made. Where distributions are made to ongoing trusts or according to a formula described in the will or trust, it is best to consult an attorney to be sure the funding is completed properly. Tax consequences of a distribution sometimes can be surprising, so careful planning is important.
Administration of Trusts
Trusts are designed to distinguish between income and principal (corpus). Many trusts provide for income to be distributed to one person at one time and principal to be distributed to that same person at a different time or to another person. A trust may provide for current income distributions to one party, discretionary distributions for specific reasons to that same party and payment of the corpus of the Trust a third party. For example, a trust for the surviving spouse may provide for current income and discretionary distributions to the spouse in specific circumstances (such as insufficient support income available or in the case of a medical emergency) and the corpus of the Trust to the children of the Decedent. Income payments and principal distributions can be made in cash, or at the trustee’s discretion, by distributing securities as well as cash. Determine the specific provisions of the Will or Trust. Don’t leave the construction of the language to chance. Consult with an attorney to determine the meaning of all dispositive provisions of the Will or Trust.
Unless a fiduciary has financial expertise, he or she should seek professional advice regarding the investment of trust assets. State law determines the duty of the fiduciary to properly invest the funds. In addition to investing for good investment results, the fiduciary should invest within the applicable state’s prudent investor rule that governs the trust or estate and with careful consideration of the terms of the will or trust, which may modify the otherwise applicable state law rules. A skilled investment advisor can help the fiduciary decide how to invest, what assets to sell to produce cash for expenses, taxes or outright gifts of cash, and how to minimize income and capital gains taxes. Simply maintaining the investments that the decedent owned will not be a defense if an heir claims you did not invest wisely or violated the law governing trust investments. No matter the size of the Trust fund, it is imperative to have a written investment policy statement stating what investment goals are being pursued.
During the period of administration, the fiduciary must provide an annual income tax statement (called a Schedule K-1) to each beneficiary who is taxable on any income earned by the trust. The fiduciary also must file an income tax return for the trust annually. The fiduciary can be held personally liable for interest and penalties if the income tax return is not filed and the tax paid by the due date, generally April 15th.
Closing the Estate or Trust
Estates may be closed when the fiduciary has paid all debts, administration expenses, and taxes, has received tax clearance certificates from the IRS and the state that all taxes have been paid, and has distributed all assets on hand. Trusts terminate when an event described in the document occurs. It could be the death of a beneficiary, or a specific date described in the document, such as the date the beneficiary attains a stated age. The fiduciary is given a reasonable period of time thereafter to make the actual distributions. Some states require a petition to be filed in court before the assets are distributed and the estate or trust closed. When such a formal court proceeding is not required, it is good practice to require all beneficiaries to sign a document, prepared by an attorney, in which they approve of the fiduciary’s actions as fiduciary and acknowledge receipt of assets due them. This document protects the fiduciary from later claims by a beneficiary. Don’t allow the fact that the beneficiaries are relatives change the procedure, as that alone is never an assurance that one of them will not have an issue and pursue a legal claim against you.
What is the Proper way for a fiduciary list ownership of bank and other accounts? The Fiduciary should check with the specific bank, trust company or investment (brokerage) firm to determine its specific requirements. Generally, for an estate, the fiduciary should use “Jim Johnson, Executor, Estate of Joe Jones, Deceased.” For a Trust use, “Jim Johnson, Trustee, Joe Jones Trust dated December 31, 2000,” or, in a shorthand version, “Joyce Jones, Trustee under agreement dated December 31, 2000.”
How Do I Sign My Name in a Fiduciary Capacity?
An executor signs: ” Jim Johnson, Executor (or Personal Representative) of the Estate of Joe Jones, Deceased”. A trustee signs: ” Jim Johnson, Trustee”
Where Do I Hold the Estate or Trust Assets?
You should open an investment account with a bank, trust company, or brokerage company in the name of the estate or trust. All expenses and disbursements must be made from these accounts, and you should receive regular statements.
What Does an Executor or Trustee Get Paid?
Virtually all wills and trust documents provide for the payment of fees to the fiduciary for the work involved in administration of the estate or trust. If the document does not, Georgia law provides a fixed schedule of fees but allows for additional fee as provided for by the court or the beneficiaries in a written document for the Executor and a fixed fee schedule for Trustees if the parties have not agreed otherwise in the document. Executor’s or trustee’s fees are taxable compensation to the fiduciary. It is prudent to determine whether court or other permission is required before a fiduciary pays himself or herself, so consult an attorney before you write yourself a check. Many fiduciaries who are family members of the Decedent in the same family as the decedent are quick to waive fees. Before doing this, however, consult with the attorney for the estate and be certain you understand the full scope of your duties and any ramifications of waiver.
What if a Beneficiary Complains?
Following the guidelines given by your attorney, following local law and having good communication with the beneficiaries is the best way to avoid complaints from them, however even professional fiduciaries receive complaints from a beneficiary from time to time. Lack of communication during the administration process is the reason for a great portion of all complaints. Regular and frequent communication with beneficiaries is a must. Be proactive by communicating throughout the estate or trust administration process and handling all matters with appropriate formality. If a complaint involves more than routine issues, consult with an attorney who specializes in trust and estate matters.
Can I Be Sued or Be Held Personally Liable?
The errors or mismanagement of a trust or estate can subject the fiduciary to personal liability. Failing to pay taxes or filing returns on time, failing to pay debts, improper investment choices (whether too conservative, too speculative, or favoring one beneficiary over another), self-dealing (buying assets for yourself or a family member from the estate or trust, whether at market price), or allowing property or casualty insurance to lapse, resulting in a loss to the estate or trust. Following professional advice from your attorney, account or investment advisor, communicating regularly with the beneficiaries, and approaching the process with appropriate formalities and fully document your actions and decisions is the best way to avoid liability.
How Am I Discharged as Fiduciary at the End of the Administration? What if I Want to Resign?
Whether you stop acting as a fiduciary because the estate or trust has terminated or you wish to resign before the conclusion of your administration, you must be discharged, either by the local court or by the beneficiaries. In some states, discharge is a formal process that involves the preparation of an accounting. In other states, you can be discharged with the use of a relatively simple document signed by the beneficiaries. If you are resigning prior to the conclusion of your administration, check the will or trust document to see who succeeds you as fiduciary. If no successor is named, you may need a court proceeding to appoint a successor before you can be discharged.
For over forty years, our clients have relied on Thomas E. Raines, PC to help them make prudent business, financial, and personal decisions in Probate and Administration of Estates. If you need assistance in the area of Probate or Estate Administration, please contact our Atlanta Probate Lawyer at Thomas E. Raines, PC immediately at 770-263-0093 or via the contact portion of this website.