Comedian W.C. Fields left his executor a nightmare task. Fearful of being stranded in strange places, the actor opened bank accounts in whistle-stops across the country. What's more, he often used fictitious names, so that finding all of the accounts after his death posed an enormous challenge.
While you can't put your executor through quite the same hoops now that banks are required to issue 1099 forms reporting interest income, you still need someone who can accurately account for all your assets when you die and manage those assets wisely until they can be distributed. The choice of an executor (called a personal representative in some states) is critical to a well-thought-out estate plan. Yet many people simply name a relative or a friend, without giving the matter much thought.
"USELESS." Being an executor isn't an honor. It's a job--and a big job at that. Once you look at what an executor must do, you'll want to choose an individual with both financial knowhow and the willingness to carry through. Willingness is as vital as competence, says trusts and estates attorney Jerome Manning of Stroock & Stroock & Lavan in New York. "You can pick someone with financial experience, terrific judgment, and good sound business knowledge, but if they won't spend the time doing the job, they're worse than useless."
Before you name your executor, check into the rules in your state. Florida, for example, requires that a personal representative be either a blood relative or state resident. Then think about just how much you're asking your executor to do, and bear in mind that this time-consuming responsibility can easily last from 18 months to three years. Name a successor executor in your will in case your first choice is unable or unwilling to serve at the time of your death.
Executors have five major tasks:
-- Attending to the initial formalities, including probating the will, obtaining a federal tax number for the estate, and hiring professional help.
Despite its bad press, probate is relatively simple. In fact, if you live in one of the 16 states that have adopted the Uniform Probate Code (Alaska, Arizona, Colorado, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, and Utah), all your executor will have to do is register the will with the appropriate court official. The hard part comes next.
-- Collecting assets and paying debts, a chore that includes securing date-of-death valuations for brokerage and bank accounts, arranging appraisals of real estate and tangible personal property, and identifying valid creditors' claims. This can take a long time and cause a lot of headaches if you own hard-to-value assets such as real estate or an art collection.
-- Managing assets, including opening bank and brokerage accounts for the estate, collecting life insurance and employer benefits, retitling property, arranging safekeeping of tangible personal property--and most important, making investment decisions.
Taking inventory may be easy, but deciding what to do with the assets is fraught with danger, because the executor can be held personally responsible for mistakes that cost the beneficiaries money. "The executor must size up the portfolio and make decisions," says Manning. You may have held on to a stock out of habit or because you didn't want to sell and incur capital-gains tax, but your executor must act in the best interests of your beneficiaries. You could sit on an investment, in other words, but your executor cannot.
-- Filing tax returns and paying taxes, which can mean completing federal and state income tax returns for the individual and for the estate itself, plus a federal estate tax return (where an estate exceeds $600,000, even if no tax is due) and state inheritance or estate tax returns.
-- Closing out the estate, distributing the assets, and making a final accounting to both the beneficiaries and the courts. Distributions can begin before the estate is settled, but your executor must keep enough in reserve to settle any final tax bills or other claims against the estate. Figuring out how much is enough can be tricky because, although a response is often received within a year, the government has three years from the filing date (nine months after death) to audit the estate tax return.
If you have a modest estate or if all your assets consist of easily valued stocks and bonds, a reliable family member may be able to do the job. On the other hand, if you own a closely held business, real estate, or limited partnerships, you need someone with financial savvy. It's important to value such assets properly, says Howard Gladston, head of trusts and estates at Ballon Stoll Bader & Nadler in New York, "so they have as low a value as possible for IRS purposes, yet a realistic value that will pass audit."
DOWNSIDE. Financial skills can be hired, of course, but at the very least you'll want your executor to be able to evaluate advice intelligently. Some people turn to professionals, naming a bank or trust company as executor. While a well-chosen institutional executor can offer an array of services, says Manning, "the downside that most people complain about with corporate fiduciaries is they change personnel a lot. It can be unsettling to a family to work one day with Harry, another with Elizabeth, then she leaves, and you're left with George."
Another problem with a large institutional executor may be that there is no one decision-maker. Everything has to go to committee. "How much leeway is given officers differs from institution to institution," Manning notes, "but institutions are generally defensive about investments and concerned about the liability in holding on to risky assets." An individual, he believes, is more likely to go along with your wishes.
An institutional executor makes the most sense with very large estates, says Gladston. "Most banks and trust companies really aren't interested unless an estate is a few million dollars."
Nonetheless, it may be wise to use an institutional executor if your will provides for a long-term trust. William Knox, an attorney with Neuberger & Berman Trust Co. in New York, points out that "some banks won't serve as trustees of estates that weren't professionally handled. They feel something might be overlooked, something might blow up."
One solution is to name an individual and a bank as co-executors. Gladston likes this approach because "it ensures the personal touch, while making sure things get done in a timely fashion. Otherwise, with a big institution, time limits can get lost in the shuffle."
FINAL SAY. Another possibility: Select an individual and give him or her 60 days or so to choose a professional co-executor. This gives the individual the chance to talk to different banks to find a compatible institution. You can ensure that a decision is made by stating in your will: "If you don't act within 60 days, then bank X will be your co-executor." When naming co-executors, you can give one the final say on decisions, if you like, to avoid inaction because of split opinions.
What does your executor get out of all this, besides the satisfaction of a job well done? States have different rules about executor compensation, often based on a percentage of assets in the estate. In New York, for example, the fee ranges from 5% on an estate of $100,000 or less to $134,000 plus 2% of anything over $5 million.
Don't assume that a beneficiary acting as executor should forgo a fee. Although executors must pay income tax on their compensation, it can make good financial sense to remove the executor's fee from an estate that is subject to hefty federal estate tax. With the highest income tax rate at 39.6% and the highest federal estate tax rate at 55%, the 15 percentage-point spread can be money in the pocket of someone who is serving both as beneficiary and executor.