Administering a trust or an estate is an important responsibility. In addition to keeping track of all relevant assets, income and expenses, executors must attend to the interests of the beneficiaries while often undergoing the grieving process themselves. Here's how to balance the emotional aspects and the financial reality.
1. FAILURE TO CONSIDER CARRYING COSTS
Carrying costs can quickly accumulate and eat away at the value of an estate, so when it comes to the estate settlement process, time is money. The executor is responsible for controlling carrying costs, such as the costs of maintaining a residence, for the decedent's estate. The executor should ensure that ongoing costs such as property taxes, insurance and lawn care or snow removal are met.
Other costs may include making necessary repairs and reviewing insurance coverage for a vacant home. It is recommended that the executor organize the home's sale or transfer as soon as is practicable.
2. FAILURE TO CONSIDER OPPORTUNITY COSTS
Just as the value of a decedent's residence is subject to carrying costs, there are opportunity costs to leaving assets in an estate as well. Inflation will inevitably diminish the value of assets held in an estate. Also, some assets may be subject to unexpected losses and could be put to better use in other investments or to pay down debt and thereby reduce interest payments and fees. Over time, these opportunity costs can reduce a person's legacy by 10 per cent per year or more. A prudent executor will work quickly to gather and distribute all assets from the estate as soon as is legally permissible, giving the beneficiaries the opportunity to grow their inheritance.
3. EXCESSIVE SENTIMENTALITY & SLOW DECISION MAKING
As the executor of a loved one's estate, you will need to process your own grief while also making practical decisions. It may be helpful to think of your role as an executor as a professional responsibility, separate from your obligation to the decedent as a family member or friend. This will give you the distance to make business-like decisions for the estate, and not sink into sentimentality. The decedent trusted you to be organized, diligent and professional in carrying out their final wishes prudently and expeditiously. If the decedent was a loved one, it might be beneficial – even healing – for you and other beneficiaries to spend some time examining their possessions and revisiting memories. Beware, though, of getting lost in minutiae as it can quickly increase your costs while not significantly increasing your inheritance.
4. NOT HIRING HELP TO CARRY OUT KEY FUNCTIONS
Many individuals adopt a "do it yourself" approach to administering an estate instead of hiring professionals, such as accountants, appraisers, lawyers and contractors. Many people don't realize that by "DIY-ing" it, the savings to anyone beneficiary is low, but the liability for the executor can be extremely high. Owners may seek to impose liability if you or another non-professional unknowingly violate building codes, miss deadlines, or fail to acquire necessary licenses or permits. In addition, a good accountant and attorney are well worth their fees for what they may save you in taxes and time.
5. IGNORING THE CALENDAR
Be sure to keep track of tax filing dates, real estate cycles, and seasonal costs. For most clients, filing estate and trust income tax returns on a calendar year (vs. fiscal year) basis make the most sense. Imagine a client who passed away late in the year: most likely, it will be impossible to close out his or her estate in a few months, and therefore tax returns may be required for two years at least. As a result, you will want to keep an eye on the calendar so that you can reduce the number of years required for filing returns.
Real estate cycles are also important to keep in mind regarding the sale of the decedent's home, which is often their greatest asset. Realtors say that March, April and May are the best months to list a home, while November and December are the worst. In addition to putting a home on the market when it has the best chance of selling for a high price, it is important to think about allowing yourself enough time between the sale and the applicable filing deadlines to file all necessary paperwork and tax returns. Allow appropriate time to clear out a residence, make needed repairs, and hire professional cleaners to present the property in a good light, but do not embark on a program of capital improvements.
As you can see, being an executor or trustee can be a trying task, but our team of attorneys and paralegals are here to help make the process as painless as possible.
August 10, 2021