For your FREE Copy of Preserving Wealth, CLICK HERE
The first three days of our vacation were perfect. The temperature was near thirty degrees, with just enough of a breeze for windsurfing. The kids were behaving, and all seemed right with the world.
Sally was at the cottage this week, too but was staying up in the cabin to try to keep her sanity. She wasn’t used to having kids like Connor and Paige running around all over the place.
Mark was staying up for the week with his mom at their cottage, supposedly to help with some odd jobs around the place, but we hadn’t heard the banging of his hammer much during those first few days.
When it was time for Uncle Wayne’s session on Wednesday, I decided to head over on my windsurfer. Sally took our tin boat and picked up Mark on the way. Sandra stayed behind, happy to get a little time to herself on the deck while Connor and Paige were taking their afternoon naps.
As I tried to land over at Uncle Wayne’s, I was going a bit too fast and crashed into the dock with a loud thud. From the deck up above, I heard Mark yell, “Great landing, Jack. Do you think you could teach me how to do that?”
“Sure,” I shot back. “Right after I teach you how to putt!” If Uncle Wayne hadn’t been there, I believe I might have heard an expletive or two in response.
Fortunately, I hadn’t gotten wet, and as I climbed up the stairs, I saw Sally, Mark, and Uncle Wayne sipping pina coladas on the sundeck.
“Don’t be shy, Jack, yours is in the kitchen,” quipped Uncle Wayne.
After I poured my drink and sat down, Sally brought me up to speed. “We were just talking about being an executor. Since you’re my brother, I’ve taken for granted that you’re doing a good job, Jack, but in all honesty, I don’t even know what it involves.”
“Well, for starters,” I told her, “I was spending a lot of time, probably three or four hours a week, on various things like meeting with lawyers, the banks, and financial advisors, and also paying the bills, changing the contact for insurance policies for all property, claiming Dad’s life insurance, and sorting out the annuity policy and applying for Dad’s Canada Pension Plan entitlement. I also had to send documents to the government and …”
“Gee, it seems like a big job,” Mark commented.
“Yes, I’d say so.”
Uncle Wayne jumped in and added, “That’s why it’s so important to select your executor carefully. Besides a lot of time and effort, it requires some capabilities. I would say the biggest burden is living up to the trust put in you by the person who named you executor. You only have one chance to do a good job.”
“Is it a burden, Jack?” asked Sally.
“I think Uncle Wayne hit it on the nose. I want to do a good job because if I mess up, not only will I have to let Dad down but also you, David, and all our kids. It’s quite a responsibility to handle all those assets, which can run in the hundreds of thousands of dollars when you’re only used to handling your own monthly bills.
“Fortunately, our family has always got along pretty well. There have been no major disagreements so far regarding any of the terms of Dad’s will. He divided everything equally, which is how he treated us all his life. As for Dad’s personal belongings, well, we haven’t divided those up yet, but I think we can manage that by seeing who wants what and, if necessary, drawing straws. We were also lucky that Dad didn’t have a rare painting or coin collection, as I’ve heard of families fighting over who may get a personal item that’s worth a lot of money, and the executor has to act as a referee!”
Sally commented, “Dad did a good job in communicating his wishes to us, and it has been really helpful that you’ve kept us in the loop. As with many things in life, a lack of communication can create problems.”
“Thanks, Sally; the only thing that bothers me is that I’m constantly reminded of Dad’s death whenever I have to pay one of the bills or meet with his accountant, stuff like that.”
Sally’s eyes got a bit misty. “I hadn’t thought of that.”
Mark took that as a cue to change the subject. “What’s happening with the cottage?”
“It’s part of the overall estate,” I said, “and I think Dad did the right thing by not leaving it specifically to any one of us. Whoever really wants it and can afford it can buy it from the estate at market value. If it had been left to one of us kids, a conflict might occur if one of the others became jealous because they wanted the cottage. In addition, the child who received the cottage might not be able to afford the upkeep, or it might not fit into their long-term plans. Anyway, the cottage is up for sale, and we’ll divide the proceeds evenly. In the meantime, we’ve split up the weeks of the summer, and everyone gets some personal time there until it’s sold.”
Sally was still thinking about an executor’s duties. “I didn’t realize how tough this could be for you, Jack. I know we don’t get along perfectly all the time, but can you imagine how you’d feel if there was a real family dispute and you were stuck in the middle?”
“There’s another very real burden in all this that Jack hasn’t mentioned,” said Uncle Wayne. “As executor, he is personally liable for the consequences of every decision he makes, such as a mistake in the amount of estate taxes paid.”
“Personally liable? Unbelievable,” Mark said. “Let’s say there’s a family feud underway. Could a person turn down the job, even if they’ve been named executor in a will?”
“Yes, you can,” Uncle Wayne told us, “but in many cases, a family feud won’t start until after the mother or father dies. There may be jealousy over the terms of the will, or someone may go into a parent’s house and cart away the personal items of greatest value, whether financial or sentimental. It’s not unusual for disputes like that to crop up. A lot of people react strangely to the idea of getting money or not getting money that they believe is rightfully theirs. I’ve seen this happen first-hand with some of my friends’ children. If kids don’t get along when the parents are alive, they normally won’t get along any better when the parents are gone. There’s a reason they’re called adult children.
“If an executor is worried about the job because of family conflicts, or it’s too big of a job for them to handle, they could outsource the role and hire a trust company to assist with the duties. This would add a layer of protection for the executor. If an executor is really, really worried, they could refuse the position before they begin to act, or if they have started to act and have second thoughts, they could resign. This is complicated, so you’d have to review it with their lawyer immediately.
“If the beneficiaries are concerned about what the executor has done, they can approach the courts for a procedure called ‘passing of accounts,’ where the executor can be required to provide a full accounting of all the transactions that have taken place. As a last step, if the beneficiaries believe that the executor is not doing the job properly, they can approach the courts to have the executor replaced. This can be costly and requires a great deal of evidence; however, any costs could be recoverable if they win. As Sally mentioned wisely, ongoing communication is required to hopefully avoid conflicts.”
“That sounds like a real mess, Uncle Wayne. I’m glad you all get along most of the time. I’m going to be the executor of my mom’s will many years from now, knock wood,” Mark said. “As her only child, I don’t exactly expect a family feud, but I’d like to know what my primary duties will be. Could you summarize them?”
“Sure thing. Basically, here’s what you’ve got to do:
- Locate and review the will.
- Notify the beneficiaries and provide them with a copy of the will.
- Plan the funeral.
- Become familiar with the assets of the estate.
- Protect the estate by making sure the assets, including homes, cars, and cottages, are still insured.
- Notify all the insurance companies and obtain a vacancy permit (insurance for the vacant property), as insurance on a vacant property may terminate after a specific number of days,
- Arrange property checks as required in the policies on the vacant property to keep insurance in effect.
- Obtain help from lawyers and accountants.
- Locate all the assets and ensure they are properly valued and/or appraised as required (for the Estate Information Review in Ontario).
- Turn off access to all online accounts to prevent identity theft.
- Meet with the family to discuss the terms of the will.
- Have the will probated.
- Pay all creditors.
- Keep good records.
- Settle all taxes.
- Distribute the assets according to the terms of the will.”
I nodded to Uncle Wayne and said, “That pretty well sums up the way I’m going at things. The job was made easier because, fortunately, Dad was really organized. He would do an annual review with me, which felt weird at the time, but it was important for me to know where all the assets were and who his lawyer was, as well as his financial planner and his accountant. He wrote everything down, including his bank account numbers and insurance policies, and he had a digital estate plan with passwords as well. A friend of mine recommended that I close down all the online accounts, as the incidents of identity theft when accounts are left dormant are tremendous. Also, if that information is scattered about, it could take months or even years to find all the assets of an estate.”
“I guess I’d better go over all that stuff with Mom,” Mark said, “although I don’t look forward to talking with her about her death. Can we go back to this liability thing for a minute? I wouldn’t mind hearing more about the kinds of things or decisions that could leave an executor liable.”
“You’d be held liable if there is contention over any of the estate assets,” Uncle Wayne answered. “For example, there could be a dispute over the price received on the sale of certain assets if one of the beneficiaries felt the price was too low. And here’s a biggie— if the executor has distributed the assets before receiving the final clearance certificate from Canadian Revenue Agency, the executor is responsible for any shortfall and must personally come up with the money to pay any taxes due from the estate. There’s also something called the ‘executor’s year,’ in which the executor has a year to wind up the estate, in most circumstances, and could owe the beneficiaries interest if it takes longer or if they’re dragging their feet.”
“Wow, that wouldn’t be good. Why would anyone distribute the estate before the final clearance?” Sally asked in a bewildered tone.
“Pressure from the heirs,” I responded, “who either want or need the money right away.”
Sally had another question. “How could you reduce the potential liability and conflict between the executor and the beneficiaries?”
Uncle Wayne thought for a moment and then answered. “I think the best way is to keep good, clear records of where the money is and what it’s being spent on. It’s a good idea to send written updates to the beneficiaries about what you’re doing. Also, it’s very important, not to mention smart, to use professional help from lawyers and accountants to do the taxes and probate the will. This will help to reduce your liability as well by transferring it to the professionals.”
“Speaking of taxes, how many returns have you had to do for Dad’s estate?” Sally wondered.
“Too many,” I said. “The first was Dad’s final personal income tax return right up until the date of his death. Now I’ve got to file an annual return for the estate itself from the date of death until the final distribution of all assets, and that could be several years if the cottage doesn’t sell right away. Also, Dad had set up some trusts for the grandchildren, so tax returns have to be done for those too. I also have to apply for the clearance certificate from the CRA.”
“No wonder you need an accountant and lawyer,” Mark added. “That’s a lot of detailed paperwork.”
“I can’t overstate the importance of getting professional help and keeping good records,” Uncle Wayne said. “Being an executor is a very difficult and time-consuming role that carries a great deal of responsibility and liability. You must take great care both in being one and in choosing one for your own estate.”
And with that, Uncle Wayne waved his empty pina colada glass in the air. “Time to make another batch, my dear Sally. We’ll discuss whether or not, as a beneficiary of your father’s estate, you should trust the executor, even if he is your brother!”
SHOULD A BENEFICIARY TRUST THE EXECUTOR?
When we’d all settled back again with fresh drinks on Uncle Wayne’s deck, he turned to me with a mischievous smile and asked, “Jack, if you were an unscrupulous executor, what could you do?”
“For starters,” I answered, “I could go to the bank and write myself a cheque for the full estate account.”
Sally’s mouth dropped about a foot. “Do you mean you could legally liquidate everything and write yourself a cheque without us knowing?”
“Who said anything about it being legal? Of course, it’s not, but the money could all disappear pretty quickly, and me with it! If you’re worried,” I added, “I suppose I could be bonded by an insurance company.”
“That won’t be necessary,” Sally replied. “Just give me your first-born child until this is all settled.”
“I have a serious question,” Mark said. “What could we do if we think we’re entitled to an inheritance from someone’s will, but we don’t know for sure?”
“That’s easy enough,” Uncle Wayne answered. “Ask for a copy of the will.”
“What if the executor won’t give you one or just says you aren’t a beneficiary?” Mark countered.
“Once the will is probated, it becomes part of the public record, and you can obtain a copy at the court registry office in the county where the person died.”
I thought back over my own experience and added, “I’d recommend that any executor give copies of the will to all beneficiaries to avoid confusion and bad feelings.”
“Makes sense,” Uncle Wayne agreed. “And if you think you might be named in a will, be sure not to sign any form or document without understanding exactly what it means.”
“I think the odds on whether or not an executor deserves your trust improve drastically if he or she gives the beneficiaries regular updates that account for the movement of all money into and out of the estate, whether it’s for expenses, investments, professional fees, or sums distributed to beneficiaries.”
“So,” said Sally, “in other words, if the executor seems too quiet about what’s going on or fails to respond to your questions, it could be a sign that you’ve got a problem. Are there other major concerns to watch out for?”
Uncle Wayne sipped his drink and looked over at me once again before he answered. “I would watch out if the executor was also a beneficiary … nothing personal, Jack. Also, there could be potential trouble and pressure applied if beneficiaries are competing over an asset. For example, if Jack wanted the cottage, he could turn down all offers to buy it without anyone else knowing it and eventually buy it himself at a low price after a few summers”
“I could see where that could be a problem in some families,” Sally commented.
Mark got back into the discussion by asking about the executor’s fees. He wanted to know how much executors can charge and whether or not executors who are family members and beneficiaries themselves usually forego the fees.
“Well,” Uncle Wayne replied, “executors’ fees are a fuzzy subject. In Ontario, they’re usually between 3% and 5% of the estate value, and it’s not unusual for professional executors, such as trust companies, to charge top-of-the-line fees. However, executors who are also beneficiaries often will do the job at minimal or no cost.”
Sally intervened and asked, “Why would you do it for no fees, Jack?”
I responded to her. “There are a couple of reasons. When you receive an inheritance, it’s tax-free, but executor fees are considered earned income, so it’s taxable. But the main reason is if I took a fee of 5%, it could be around $20,000 or more, which is a lot of money so that the other beneficiaries may be envious or jealous.”
“Well, what can people do if there’s a conflict over executor fees?” Mark asked.
I jumped in to answer. “If you think the fees are too high, you can challenge them in the Superior Court of Justice. They’ll have the final say on the amount that can be charged. The other provinces all have similar courts; however, they may refer to them by a different name. Also, keep your eyes peeled to make sure the executor doesn’t prepay his own fees before distributing the estate.”
They all looked at me wide-eyed. “I already ran some of these questions past our lawyer,” I explained.
“Are there any other fees we have to watch out for?” Sally asked as she looked at Uncle Wayne.
“If a trust is set up, the trustee fees are usually two-fifths of 1% of the total value of the trust for care and maintenance, and additional fees of up to 2.5% of the capital receipts and disbursements, as well as up to 2.5% of the income receipts and disbursements. If you are going to use a professional trustee, they all have a compensation agreement you can review ahead of time.”
“Well, Uncle Wayne, is there anything else we should watch out for?” Mark asked as he drained the last of his pina colada.
“I think that’s about it,” he answered. “Who wants to take a crack at summarizing the key details for us?”
I said I would try:
- “Being an executor is a tough job because of the burden of living up to the trust placed in you by the person who gave you the job. It also takes up a lot of time and carries a large amount of personal liability for decisions made.
- The main job is to manage the estate according to the terms of the will, but this includes making many decisions.
- The basic duties are:
- locate and review the will;
- notify the beneficiaries and provide them with a copy of the will;
- plan the funeral;
- become familiar with the assets of the estate;
- protect the estate by making sure the assets, including home, cars, and cottage, are still insured;
- notify all the insurance companies and consider obtaining a vacancy permit (special insurance for the vacant property), as insurance on a vacant property may terminate after a specific number of days;
- arrange property checks on the vacant property to keep property insurance in effect;
- obtain help from lawyers and accountants;
- locate all the assets and ensure they are properly valued and/or appraised as required (for the Estate Information Review in Ontario);
- turn off access to all online accounts to prevent identity theft;
- meet with the family to discuss the terms and conditions of the will;
- have the will probated;
- pay all creditors;
- keep good records;
- settle all taxes; and
- distribute the assets according to the terms of the will.
- An executor needs professional assistance from a lawyer and accountant.
- An executor can build trust with the beneficiaries by:
- giving a copy of the will to each beneficiary (This is required if the will is probated.);
- maintaining good records of all transactions;
- sending regular written updates to beneficiaries; and
- staying in contact and answering all questions promptly.
- A beneficiary should be concerned if an executor:
- refuses to provide a copy of the will (as required);
- does not send regular updates;
- ignores your questions or ducks your emails and telephone calls; and
- is unusually quiet.
- It is in a beneficiary’s best interest to:
- monitor executor fees and challenge them if they seem too high, and
- watch for double billing by professional executors.”
“That’s a pretty good summary,” Sally said with a smile. “I think we can trust you, Jack. However, if you’re thinking of doing anything rotten, just remember that we will hunt you down like a pig.”
For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing, and transferring wealth by Jack Lumsden, MBA, CFP®.
Sign up for our newsletter: CLICK HERE
For your FREE Copy of Preserving Wealth, CLICK HERE
For your Free Retirement Review, CLICK HERE
This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.
Insurance products are services provided through Assante Estate and Insurance Services Inc.