Big Mistakes Executors Make and How to Avoid Them
Being named the executor of a family member or loved one’s estate is an honor. The decision shows that this person saw you as a highly trustworthy, capable person of integrity. But it’s also a major responsibility that can quickly become a burden if you aren’t set up to do your job correctly. Today I want to discuss the important role of an executor, some big mistakes executors can make, and how to avoid them.
Administering an estate comes with plenty of potential pitfalls that can threaten your loved one’s wealth — and your peace of mind. Additionally, without professional guidance, executors can make mistakes that expose the estate to litigation, increased tax liability, and other potential consequences. So, let’s look at five common mistakes to be aware of — so you can avoid them.
Mistake #1: Making distributions too early
The first common mistake executors make is paying out distributions too early. As executor, you are liable for the estate and its distributions. If you make distributions from the estate to family members BEFORE taxes and other liabilities are paid, you are personally responsible. The same is true if you make disproportionate payments to family members. Now, that’s not to say you can’t make these distributions. But a miscalculation puts you at risk of not being able to get that money back.
Mistake #2: Failing to make the “portability election”
A second mistake executors make is failing to take the “portability election” exemption. The concept of portability means that a surviving spouse can use both their federal estate tax exemption AND the unused exemption of the deceased spouse. In 2022, the federal exemption is $12.06 million per spouse. The estate tax exemption is adjusted annually to reflect changes and inflation. So, this would allow the surviving spouse to shelter a combined $24.12 million from any federal estate tax liability. While this exemption is permitted, you must ask for it or lose it. Even if no estate tax is due, you need to elect portability when filing Form 706 within 15 months of the death or file the appropriate extension.
Mistake #3: Failing to advertise the estate properly
Another mistake executors make is failing to properly advertise the estate. Especially if debts are owed, creditors must be notified so they can make claims against the estate if necessary. Advertising an estate in a local newspaper provides official notice. Each state has different laws that govern the advertisement of an estate. So, you should be sure to meet those requirements so you don’t expose yourself to personal creditors.
Mistake #4: Failing to liquidate securities through a market downturn
The fourth mistake we have seen in the industry is when executors don’t liquidate securities in a market downturn. Those appointed as executors are responsible for managing the estate’s assets, including any stock portfolios. That job may involve buying and selling stocks or other securities in response to bull and bear markets. While you don’t necessarily need to have the financial and business acumen of Warren Buffett, failing to monitor the markets and estate investments could seriously damage the estate’s value. As an executor, you’re also a fiduciary, meaning you are legally required to act in the best interests of the heirs or other beneficiaries of the deceased person and to follow the instructions the deceased person spelled out for you. That means it falls on your shoulders to ensure the estate’s financial health.
Mistake #5: Failing to conclude the estate properly
The fifth and final mistake we will discuss today is failing to close the estate properly. Executors who have properly distributed most of the estate’s assets often fail to close the estate properly. The conclusion may involve filing a family settlement agreement with the court showing that all beneficiaries agree that they have received their share of the estate or going through a court accounting process where a judge approves the distributions. We also recommend you work with an accountant or an estate administration lawyer in more complicated cases to ensure all tax matters are concluded before the estate is closed.
Estate administration is complex. Don’t go it alone.
As we have just reviewed, there are many details involved in estate administration, and the complexity of estate administration warrants consulting with a professional to help you navigate these details and avoid possible pitfalls. Seeking professional counsel will help you file the proper forms, protect your personal risk, and protect the estate’s value to ensure you don’t breach your fiduciary duty. As emotions may be high, especially due to an unexpected death, having the proper counsel can help you keep your focus on doing the best job possible as executor for all parties and to make for a smoother process during a difficult time.
Chris Zeches is a certified financial planner and managing partner at Zeches Wealth Management. Zeches Wealth Management has one singular focus: To financial planning and tax expertise to help multi-generational families and business owners achieve more of what they love.
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