An executor (in Colorado, the term is personal representative) is responsible for settling an estate. Basically, this involves paying debts (including taxes) and then distributing the remaining assets. (There are also related tasks such as closing accounts, liquidating assets and so forth.) Typically, an executor is a family member, an attorney, a CPA or an institutional executor (such as the trust department in a bank). There are many things to do as an executor. In this article, we’ll be discussing the personal risks an executor faces. For simplicity, we’ll assume you’re doing this for your spouse and that you both lived in Colorado in the same household.
Should I Be an Executor?
Being an executor for your spouse can be a real act of love. It can comfort them prior to death knowing that a reliable person will fulfill their final wishes. On the other hand, it is a lot of work and can require your attention on a part-time basis for anywhere from 6-18 months for typical estates. So, when asked to be an executor, it’s really important to think this over and decline upfront rather than after your spouse has passed away. In addition to the work itself, there can be other issues. Most notably, dividing up assets can cause family problems that were never evident beforehand. Beyond that, you can have personal liability (up to the value of the estate) if assets are distributed before all debts are settled and taxes paid. Should you decide to become an executor, there are various things you can do to minimize your personal liability. Here are a few of the common ones.
Add a No-Contest Clause
While your spouse is creating their will, ask them to add a no-contest clause. This is simply some language that states that anyone who challenges the will and fails will be excluded from the will (they won’t receive anything). The enforceability of no-contest clauses varies by state. Colorado allows their enforcement unless the litigant had probable cause to sue. So, this can be helpful, but it’s not bulletproof. For example, suppose the will leaves $100,000 to one child and nothing to a second child. The second child has nothing to lose, so they can sue without risk (neglecting their legal fees). (That’s one reason that people leave something, say $10,000 in this example, so that there’s a disincentive to risk being excluded.)
Act as a Fiduciary
Once your spouse has passed away, your overarching responsibility is to protect the financial interests of the beneficiaries. If you do this, if you are transparent with them and if you keep good records, you’ll have taken a big step in protecting yourself.
Consider Liability Insurance
Oddly enough, this is nearly unheard of in the U.S. It is much more common in Canada, England and Wales. However, a personal liability umbrella will protect you from legal actions in the case of your spouse. (Such coverage actually protects you when handling the estate of anyone who was living in your household – such as a parent.) Liability insurance is a good element in your financial plans whether you’re an executor or not. For a modest cost, it helps protect your assets.
Hire an Estate Attorney
A lot of people like to include an estate attorney on their team. Such a person has been through this process many times before. The attorney should practice law in the state where you and your spouse reside since estate law varies by state. Ideally, it should be the attorney who wrote your spouse’s will since they will have a detailed understanding of your spouse’s intentions.
Hire a CPA
Federal and state estate tax returns must be prepared and also Federal and state personal returns for the year in which your spouse died. It’s true that many estates do not pay any Federal taxes right now. In 2022, estates are exempt from Federal taxes if they are smaller than $11.7 million. State laws on estate taxes vary. Colorado does not have an estate tax at this time. (Nor does it have inheritance taxes – the taxes an individual owes when they receive assets from an estate.)
Seek Out Creditors
If you don’t pay debts (including taxes) before distributing assets, you may be personally liable for these expenses. Some debts will be obvious through credit card statements, mortgage statements and so forth. It’s important to actively seek out any creditors. Colorado statutes specify the following requirements: Unless one year or more has elapsed since the death of the decedent, a personal representative shall cause a notice to creditors to be published in some daily or weekly newspaper published in the county in which the estate is being administered, or if there is no such newspaper, then in some newspaper of general circulation in an adjoining county. Such notice shall be published not less than three times, at least once during each of three successive calendar weeks.
Protect Assets from Family
It’s actually not uncommon for family members to enter the deceased’s home and take things they’d like to have. Until you’re able to sort things out and determine a fair way to distribute belongings, it’s better to tell family members that you are required to retain control of everything for now. In some families, this actually means changing the locks. Failure to take prudent precautions may leave you open to actions by other family members.
Keep Good Records
Beneficiaries may ask for an accounting of how you’ve been managing the estate. So, good record keeping is very important. A spreadsheet of expenses and income is good. The use of a dedicated estate checking account is advised. Some type of journal is useful. And, documenting any oral communications in writing can be helpful later on.
Have Good Communication
You’ll head off many problems by keeping the beneficiaries up to date on important information. This begins by sending them each a copy of the will. It includes informing them of important steps you take. Importantly, it includes setting their expectations as to when distributions can be made (after creditors are paid and taxes are settled).
Consider Compensation
As I mentioned, many people agree to be an executor as an act of love and compensation is not front and center. If this is your position, you should at least reimburse yourself for out-of-pocket expenses. Your compensation may be specified in the will itself. You can accept this or decline it. (Note that whatever compensation you are paid is taxed as ordinary income. If you’re a beneficiary, estate benefits are often tax free.) If the will does not specify compensation and you’d like to be paid for your work, Colorado does not have specific laws about this and instead defaults to the notion of reasonable compensation. This can be hourly or a percentage of the estate. If a percentage is used, a smaller percentage is typically applied to larger estates. Compensation of 2% is a good mental ballpark for this. (It can range from about 1%-5% depending on state law and estate size.) The estate attorney that you hire should be able to advise you on this.
You can see that being an executor involves many steps and that while things normally go pretty smoothly, there is room for trouble and personal liability. Hopefully this article has given you some ideas about how to protect yourself. If you’d like to talk about being an executor or go over any other financial matter, we can discuss things in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.