Financial mistakes can haunt estate executors

Two chores that most people will gladly put off are writing a will and keeping it up to date to reflect changed circumstances. However, when you do get around to writing and revising your will, consider carefully when you select or replace an executor—the legal term for the person who is the key figure in the settlement of your estate.

The executor’s job is a potentially time-consuming and demanding position that requires a lot more work than many people realize. An executor has to perform four major functions.

The first chore is to assemble and value assets. It can be a formidable task to put together records of such assets as bank accounts and automobiles; loans to family members or others; traditional and Roth IRAs, 401(k)s and other retirement plans at work; brokerage accounts; mutual funds; insurance policies; and other property like real estate, jewelry or artworks. Add to that list gathering information about mortgages and other debts, tax returns and the location of safe-deposit boxes.

The next responsibility for executors is to pay all bills and charges, a task that often requires professional help, as it includes the timely filing of returns for federal estate taxes and state inheritance taxes, final income taxes for the deceased and current income taxes for the estate, as well as payment of those levies.

After executors have valued assets and paid bills, they are able to distribute what is left of the property in accordance with the will.

Their final responsibility is to submit an accounting to the court (usually designated probate and sometimes called orphan’s or surrogate’s) for everything that they have done.

Many executors have learned the hard way that they are not off the hook for mistakes just because they rely on the counsel of attorneys, accountants or other professional advisers. When something goes wrong with, say, federal taxes, the IRS bills the executors, because they are personally responsible when assets are distributed and taxes remain unpaid or forms are filed late.

The need to obtain proper tax advice was made expensively clear to the son and daughter-in-law of Henry Lammerts, who had designated them as his executors. On Lammerts’  death, his son took over leadership in settling the estate. Although under the impression that a tax return had to be filed for his father, the son was unaware that it was also necessary to file an income-tax return for the estate. This is where matters stood until his accountant discovered that no return had been filed reporting income received by the estate. The filing was eventually made seven months after the due date.

The IRS assessed a sizable late-filing penalty and the usual interest charges. The executors argued that they were new at this sort of thing and had relied on their accountant and the estate’s lawyer to do whatever was necessary.

But the accountant, in his own defense, testified that there was nothing in his past services to the family to suggest that, on his own initiative, he would have to file an income-tax return for the estate. Similarly, the estate’s lawyer pointed out that neither of the executors had asked him for a rundown of the responsibilities attached to being an executor. Consequently, the Second Circuit Court of Appeals upheld imposition of the penalty.

Julian Block is a syndicated columnist, attorney and former IRS investigator. He is on the Web at www.julianblocktaxexpert.com.