An executor is the person whom you name to handle the settlement of your estate after you die, taking your estate through probate, a court-supervised process that winds up your affairs in the state where you were living at the time of your death.
Typically, the executor is a spouse or close family member, but you may want to name a professional executor, such as a bank, attorney or professional trustee at a trust company. In any case, an executor has a fiduciary duty to be honest, impartial and financially responsible, and should be someone whom you trust to carry out your wishes as stated in your will. Don’t forget to name one or two backup executors in case the primary executor rejects the job.
NAMING YOUR EXECUTOR IN YOUR WILL; RESPONSIBILITIES
In order for the court to accept your appointed executor, you will need to name that person in your will. If your executor meets your state’s legal requirements and is otherwise fit to serve, the court generally approves the application. Your executor’s duties may include:
- Finding and collecting your assets, including outstanding debts owed to you
- Inventorying and appraising your assets
- Giving notice to your creditors (e.g., credit card companies, banks, retail stores)
- Filing an estate tax return and paying estate taxes, if any
- Paying any debts or other taxes
- Distributing your assets according to your will and the law
- Providing a detailed report of how the estate was settled to the court and all interested parties
If you don’t name an executor in your will, or if the executor can’t serve for some reason, or if you die without a will, the court will appoint an administrator to settle your estate.
In addition, managing an estate can be a lot of work, and it’s fair and reasonable to compensate an executor for their efforts. You may decide to leave them a percentage of your assets as part of your will; customarily this can range between 1% and 5% of the value of your estate.
DOCUMENTING YOUR ASSETS AND LIABILITIES
To make your executor’s life easier, it’s a good idea to assemble records showing where your assets and liabilities reside, as well as a contact list for the advisers who have direct knowledge of your affairs. Having updated balance sheets and cash flow statements are invaluable, as well as an asset inventory prepared by your financial adviser. It’s also helpful to have a spreadsheet listing all of your financial accounts, online account logins, along with the contact information for your attorney, financial adviser and tax preparer.
Be sure to include any beneficiary-directed workplace retirement plan such as a 401(k) or 403(b) plan, IRAs, and life insurance policies. And it’s a good idea to flag any assets without a beneficiary designation, such as vehicles, cash in a savings account, savings bonds, stock certificates, valuables and other possessions. Leaving clear instructions regarding how you wish these assets to be distributed among your heirs, such as completing payable on death (POD) forms at your bank, will make your estate settlement process go much smoother for your executor. Review these beneficiary designations regularly to ensure they still reflect your wishes.
Finally, if your estate contains a trust, you will want to be sure that your appointed executor is willing to carry out the terms of the trust, as often they can reflect complex arrangements for managing assets for the benefit of another individual. Make sure your executor reads the trust document before they commit to serving as trustee.
PREPARING TAX RETURNS AND ANSWERING BENEFICIARY QUESTIONS
Generally, taxes must be filed for the deceased in the year of death. But the issue of taxes often will arise more broadly from beneficiaries asking about estate taxes and taxes on distributions. Unless you happen to also be the beneficiaries’ tax adviser, you should recommend that they talk to their tax professional to understand the tax implications of their inheritance.
You may get questions about estate taxes. For an estate to be subject to federal estate tax, it needs to exceed $12.06 million for a single individual or $24.12 million for a married couple. But many states have their own estate or inheritance tax laws with much lower thresholds — $3 million in Minnesota and $5 million in Maryland, for examples.
Other tax questions that may come up include how inherited IRA, annuity distributions and capital gains are taxed, including whether the asset in question received a step-up in basis. Because tax issues get complicated quickly, you’ll want to consult your tax adviser and should recommend that beneficiaries do the same.
This article was originally published in the Pioneer Press.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Wealth Enhancement Group does not offer tax or legal advice.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
