Fiduciary Duties and Wrapping up the Estate - Module 5 of 5

Fiduciary Duties and Wrapping up the Estate - Module 5 of 5


Fiduciary Duties and Wrapping up the Estate

Fiduciary Duties


Executors, as fiduciaries, have many responsibilities when it comes to managing an estate. If a will exists, the executor must defend the intentions expressed by the testator in the will and not advocate a position advancing his own self-interest that contradicts the document.[1] He is responsible to the creditors and beneficiaries of the estate for ensuring that notice is given to those entitled, that creditors are treated fairly, that taxes are filed as required[2] and that assets are managed appropriately and distributed as provided by law.  An executor must deal with beneficiaries and other interested parties in good faith and exercise the same degree of diligence and caution that a reasonably prudent person would exercise in the management of her own affairs. If the executor acts reasonably and in good faith, she is shielded from legal liability even if her judgment turns out to be wrong.[3]

An executor who acts in her own interests, or who does not act in good faith, may be held liable for:

·         improperly managing the assets of the estate

·         failing to collect money due to the estate

·         overpaying creditors

·         selling an asset without authority or at an inappropriate price

·         not filing tax returns on time

·         distributing property to the wrong beneficiaries, or

·         distributing property to beneficiaries before all creditors have been paid, etc.[4]

Failure to meet one’s fiduciary responsibility is referred to as a “breach of fiduciary duty.” Regardless of the executor’s prior experience, a breach of fiduciary duty can have serious consequences, including removal as executor, loss of the executor’s bond and reasonable attorney's fees incurred in the removal or in obtaining compliance regarding any statutory duty the representative has neglected.[5] Where assets have declined in value or other injury has been suffered as a result of the failure to act in good faith, the executor may be held personally responsible for the damages that result.[6]

To recover damages for breach of fiduciary duty, the plaintiff must establish: (1) a fiduciary relationship, (2) a breach of the resulting fiduciary duty and (3) an injury to the plaintiff or a benefit to the defendant as a result of that breach.[7]

Executors may obtain professional counsel for all decisions that may require expertise they do not possess. Aside from preventing a breach, keeping good records and obtaining court orders for decisions that require judgement can help in the event of a complaint alleging lack of good faith.[8]


Administering Trusts


Trusts of any kind add a layer of responsibility to the estate that executors must manage.[9] Although the named or acting trustee of a trust is responsible for the trust management, the existence of the trust may create complications for the estate. For example, where a deceased person has funded a revocable trust during lifetime with the majority of her assets, an executor may have to request contributions to the estate for expenses, taxes, creditors’ claims or beneficiary distributions.[10] The trust may be a creditor of the estate, or the trustee, as an interested party, may disagree with the payment or priority of certain creditors.[11] Moreover, the trust may be one the estate’s beneficiaries, entitled to distribution of assets when the estate is closed.

In most cases, state law governs the relative responsibilities of the executor and the trustee.[12] Executors are responsible for management of the estate. Except to the extent that the trust is a beneficiary, entitled to the same fiduciary care as any other beneficiary, the duties of the executor and trustee are separate entities, though it is, of course, possible (and, indeed, common) for the executor to also be named as trustee of a trust established or funded by the state.

There are also cases where the responsibilities of the executor and trustee overlap.[13] For example, the payments clause of a will may specify that the estate pay all fees and taxes, and from which shares of the estate payment should come first. If the estate is insolvent, or has insufficient assets to pay all gifts, fees, and expenses, a testamentary trust may not get funded, creating tension with the trust’s beneficiaries.[14]

Similarly, a revocable trust that was funded with assets during life may create different tensions. The will may specify how the assets of a revocable trust would be contributed to assist with payments of an insolvent or small estate. It may be incumbent on the executor to look to the trustee of a revocable trust for contribution.  This can result in disputes with the trustee or beneficiaries over the order of payments and the requirements of law with regard to contributions. Although state law may resolve those conflicts, the time and responsibility required adds to the executor’s responsibilities.  

Another example of where a trust may create issues for the executor is in the funding of a testamentary or revocable trust. A trust, whether created under the will or already in existence at death, may be a remainder beneficiary of the estate, and so, like all remainder beneficiaries, only receives distributions once the estate has paid its creditors, fees, taxes, and specific gifts to other beneficiaries. Decisions by an executor to prioritize or allow claims can affect the value of the assets transferred to the trust and create disputes with the executor or other beneficiaries. Payment of attorneys’, accountants’ and executors’ fees can raise issues regarding the allowability of those fees, which may be discretionary, but subject to state law guidelines.

These issues are sometimes resolved by the court in its oversight of the estate, such as where the court approves an accountant’s fee or the payment of a creditor. If they are not resolved by the court in the matter of course, those objections must be resolved before the estate is closed.


Wrapping up the Estate


The estate administration process can take anywhere from a few months to several years, depending upon a number of variables, including the requirements of the state court and the estate and beneficiaries at issue. Litigation, especially, can extend a probate administration significantly and require that what would have been a small or simple estate be converted to a full administration. Small or simple administrations naturally wrap up more quickly than full administrations.

Once the estate has identified assets, filed the inventory, paid creditors’ claims and wrapped up any litigation matters, the executor can finally move forward with closing the estate.

Many estates are required to file at least one income tax return, including the final return of the deceased person and an estate income tax return. The final return of the deceased person is due April 15th of the year following the year of death. It covers the period from January 1 through the date of death. It may be filed jointly with the surviving spouse.[15]


Closing a Small Estate


Small or “summary” administrations vary widely by state, but, as a whole, they are simpler to administer than larger, supervised or “formal” estates. Small administrations require less oversight from the court unless a dispute arises during the administration. That generally means less paperwork submitted to the court and less time spent on inventories and accountings.

In Colorado, for example, the opening of the estate includes the authority to dispose of assets in accordance with the will or intestacy laws. Court supervision is not provided or required, and although creditors are required to be paid, their payments don’t have to be reviewed by the court. In addition, neither an inventory nor a final accounting need be filed with the court before the estate is closed. Closing the estate informally does not result in court approval of the actions of the personal representative or a court discharge. It is merely the statement of the personal representative indicating a belief that the administration is completed. The appointment of the personal representative is terminated after one year if no other proceedings are pending. The court registrar takes no further action and no decree is issued. [16]

Like Colorado, Alaska allows the executor of a small estate to immediately transfer the property to the recipients. He doesn’t need to give notice to creditors or pay creditor claims. However, the executor must take all other probate steps, including preparing an accounting or obtaining waivers of the accounting. In addition, he must file a special closing statement after the property is transferred called a "Sworn Statement of Personal Representative Closing Small Estate" that asks the court to close the probate and end the appointment. Executor powers continue for one year after the statement is filed and terminate without a court hearing.[17]  

Montana’s small estate administration requires forms similar to formal administration, including an application for informal appointment of personal representative and informal probate of will, if needed; issuance of letters of administration, notice to heirs and devisees, a full appraisal and inventory of the estate; a full accounting; and a verified closing statement. Executors have up to two years to close the estate.[18]


Closing a Formal Administration


The first step in closing a full, formal or supervised administration is to ensure that all ancillary matters are concluded, and the executor has obtained an order or discharge, as appropriate, in each of those matters. For example, if an ancillary probate was opened in a state other than the state of domicile, the executor of the domiciliary proceeding should ensure that the ancillary administration is concluded. A domiciliary probate court will require an order of discharge from the judge in the ancillary matter before the domiciliary estate can be closed.

In addition, if the estate has instituted litigation or been sued by any party or is in negotiation with taxing authorities over any issue, the executor is a necessary party to such litigation or negotiations. Closing the domiciliary estate also discharges the executor, terminating her authority over the probate; therefore, the estate should never be closed before litigation or tax matters are discharged. The executor must obtain a copy of any settlement, judgment, or other discharge paperwork for filing in the domiciliary estate.[19]

The executor must also file estate income tax returns and determine whether federal or state estate or inheritance tax returns must be filed prior to closing the estate. The estate must file an income tax return if income of the estate, earned by assets such as savings accounts, CDs, stocks, bonds, mutual funds and rental property, generates more than $600 in gross income. The estate income tax return is filed, using a new tax ID number for the estate, by April 15 of the following year.[20]

For federal estate tax purposes, no filing is required for estates valued at less than the federal basic exemption, which was $11.4 million per person as of 2019 (and increases each year).[21] A handful of states also impose estate or inheritance tax.[22]  

For estates required to file state inheritance or estate return or a federal estate tax return,[23] the return must be filed within nine months of the date of death, with one automatic six-month extension.[24] The estate cannot be closed until the appropriate return is filed and the estate cleared by the appropriate taxing authority. [25]

Some state courts require probate to be closed within a certain period of time from the decedent’s death, the opening of the estate or the issuance of letters of administration. Executors should strive to close the estate within the required time frame; however, extended litigation or tax matters may extend the closing of the estate beyond the date set by the court for closing. In such case, the executor may file a request to continue the estate or extend the time for filing the final accounting and closing the estate for good reason shown.[26] Courts will generally approve such requests for good cause.

Once all external matters affecting the estate have been concluded and proof filed with the probate court, the executor should begin the process of preparing the final estate accounting (or obtaining waivers, if all relevant parties will sign them) and petition for final distribution or discharge. If waivers are obtained, the final accounting may not be required, but it’s up to the discretion of the court to decide whether to require an accounting even if all beneficiaries agree to waive it.[27]

The form of the petition and accounting will vary by state, and the state may provide a form for the executor to use. [28]  The general purpose of the accounting is the same: to inform the court about the disposition of assets and obtain approval for distributions to beneficiaries, relieve the executor of his fiduciary duties and close the estate.

The petition and final accounting provide all financial transactions for court review. The assets received by the executor are listed, and all debits and credits to any financial accounts are detailed, along with gains and losses and the final condition of the accounts and assets.[29] The petition and accounting may also include the status of heirs and beneficiaries, and whether a waiver was obtained and notice was provided to them of the petition to close the estate.[30]

           

Finally, in the petition, the executor will assert her compliance with probate laws, certify that she has paid creditors and request the court to discharge her from her duties.[31]

Once all fees and payments are accounted for and the proposed final distributions given court approval, the balance of the estate may be distributed to the remainder beneficiaries.[32] Beneficiaries may only be paid in accordance with the approved plan; any changes require the filing of an amended accounting and new court approval. The executor will obtain a receipt from each beneficiary for his distribution, which is then filed with the court.[33]

When all estate matters have been satisfactorily concluded, a court order closing the estate and discharging the executor is issued. The order is the final step in relieving the executor of her fiduciary duties to the estate, although not necessarily for liability for actions taken in management of the estate.[34]


Conclusion

            Thank you for participating in LawShelf’s video-course on the probate process. We hope that you are now better prepared to participate in the process and to understand its steps and requirements. We hope that you will take advantage of our other courses in elder law and estate planning and please feel free to contact us if you have any questions or comments.

 



[1] Kimberley Ann Murphy, Fiduciaries & Counselors Beware - A Lesson in Good Faith & Prudence, Virginia State Bar Trusts and Estates Newsletter Vol. 20, No. 1 (2004).

[2]Vose v. Lee (In re Estate of Vose), 390 P.3d 238 (Okla. 2017).

[3]  In re Estate of Storey, No. W2017-00689-COA-R3-CV, 2018 Tenn. App. LEXIS 121 (Ct. App. Mar. 5, 2018).

[4] Superior Court of California, County of Santa Clara, About Probate: How to Probate a Decedent’s Estate, http://www.scscourt.org/self_help/probate/property/probate_overview.shtml#duty (last accessed Apr. 18, 2019).

[6] See, Probate Division of the Seventeenth Judicial Circuit for Broward County, Florida, Personal Representative’s Handbook, http://www.17th.flcourts.org/wp-content/uploads/2017/08/PersonalRepresentativesHandbook_July2008.pdf (last accessed Apr. 18, 2019).

[7] See, Breach of Fiduciary Duty: Everything You Need to Know, upcounsel.com

 https://www.upcounsel.com/breach-of-fiduciary-duty (last accessed Apr. 18, 2019).

[8] The Trustee’s Right to Hire Professionals¸ Stimmel, Stimmel & Smith, https://www.stimmel-law.com/en/articles/trustees-right-hire-professionals, (last accessed Apr. 18, 2019).

[9] Connecticut Courts, Probate Court User Guide: Understanding Trusts,  http://www.ctprobate.gov/Documents/User%20Guide%20-%20Understanding%20Trusts.pdf (last accessed Apr. 18, 2019).

[10] Mickey R. Davis, Funding Testamentary Trusts: Tax and Non-Tax Issueshttp://daviswillms.com/yahoo_site_admin/assets/docs/Funding_Testamentary_Trusts-Tax_and_Non-Tax_Issues.220115728.pdf (last accessed Apr. 18, 2019).

[11] Id.

[12] William C. Hussey, II, Personal Representatives and Fiduciaries: Executors, Administrators and Trustees and Their Duties, https://www.whiteandwilliams.com/resources-alerts-Personal-Representatives-and-Fiduciaries-Executors-Administrators-and-Trustees-and-Their-Duties.html (last accessed Apr. 18, 2019).

[13] Executor Assist – frequently asked questions, Public Trust, https://www.publictrust.co.nz/personal/executorassist/faqs, (last accessed Apr. 18, 2019).

[14] Mickey R. Davis, Funding Testamentary Trusts: Tax and Non-Tax Issueshttp://daviswillms.com/yahoo_site_admin/assets/docs/Funding_Testamentary_Trusts-Tax_and_Non-Tax_Issues.220115728.pdf (last accessed Apr. 18, 2019).

[15] Final Income Tax Form for Decedent, available at https://taxmap.irs.gov/taxmap/pubs/p559-001.htm (last accessed Apr. 18, 2019).

[16] Instructions for Closing a Small Estate Informally, Colorado Judicial Department,  https://www.courts.state.co.us/Forms/PDF/JDF%20958%20Instructions%20for%20Closing%20a%20Small%20Estate%20Informally%20R7-13.pdf (last accessed Apr. 18, 2019).

[17] Alaska Court System Self-Help Services: Probate, Small Estates, http://www.courts.alaska.gov/shc/probate/probate-small-estates.htm (last accessed Apr. 18, 2019).

[18] Montana State University, How To Be a Personal Representative For a Small Estate,  http://www.montana.edu/estateplanning/documents/personal%20representative.pdf (last accessed Apr. 18, 2019).

[19] Probate of Wills and Administration, Mass.gov,  https://www.mass.gov/files/documents/2016/08/wc/art3.pdf  (last accessed Apr. 19, 2019).

[20]IRS, Deceased Taxpayers – Filing the Estate Income Tax Return, Form 1041, https://www.irs.gov/businesses/small-businesses-self-employed/deceased-taxpayers-filing-the-estate-income-tax-return-form-1041 (last accessed Apr. 18, 2019).

[21] Ashlea Ebling, IRS Announces Higher 2019 Estate and Gift Tax Limits, Nov. 15, 2018, available at https://www.forbes.com/sites/ashleaebeling/2018/11/15/irs-announces-higher-2019-estate-and-gift-tax-limits/#6400fa974295

[22] Morgan Scarboro,  Does Your State Have an Estate or Inheritance Tax?, Tax Foundation, Apr. 5, 2018, https://taxfoundation.org/state-estate-tax-inheritance-tax-2018

[23] There are other reasons for filing a federal estate tax return, including to preserve a portability election, marital deduction, or certain valuations. For more information, see https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

[24] Filing Estate and Gift Tax Returns, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/filing-estate-and-gift-tax-returns (last accessed Apr. 19, 2019).

[25] North Carolina Administrative Office of the Courts, Estate Procedures for Executors, Administrators, Collectors By Affidavit, and Summary Administration,  https://www.nccourts.gov/assets/documents/forms/e850-en.pdf?wAfy5o3sqw7oCN0qFSPp5N1aWnKA7nNK (last accessed Apr. 19, 2019).

[26] Kent County, Michigan, Probate Estate, Continuing, Closing, Reopening An Estate: Notice of Continued Administration, https://www.accesskent.com/Courts/Probate/closing_estate.htm (last accessed Apr. 19, 2019).

[28] Superior Court of Pinal County, Arizona, Administrating and Accounting Before Closing the Estatehttp://www.coscpinalcountyaz.gov/assets/administratingandaccountingbeforeclosingtheestate.pdf (last accessed Apr. 19, 2019).

[29] State of Connecticut, Court of Probate, Fiduciary’s Periodic or Final Account, http://www.ctprobate.gov/Forms/PC-441.pdf (last accessed Apr. 19, 2019).

[30] Waiver of Statutory Requirements and Beneficiary Receipt/Release, South Carolina Judiciary, https://www.sccourts.org/forms/pdf/365ES.pdf (last accessed Apr. 19, 2019).

[31] See, Superior Court of California, County of Santa Clara, Final Account and Report of Executor, http://www.scscourt.org/forms_and_filing/forms/Sample_Petition_for_Final_Distribution.pdf (last accessed Apr. 19, 2019).

[32] Julie Garber, A Probate Checklist: How to Probate and Estate, The Balance, Jan. 20, 2019.

[33] Superior Court of California, County of Alameda,  Closing and Distributing the Estate, http://www.alameda.courts.ca.gov/pages.aspx/Closing-and-Distributing-the-Estate#1  (last accessed Apr. 19, 2019).

[34] See e.g., Order Closing Estate, http://www.selegal.org/Estates.htm (last accessed Apr. 19, 2019).