What are the risks of being an executor? An executor has a lot of power and responsibility during probate, but is correspondingly accountable for everything that happens within the estate.

We’ll cover how an executor has risk of even personal liability, how long that risk lasts, and how an executor can protect himself from these risks.

Executor personally liable for debts and taxes

The executor has personal liability for debts, taxes, and anything wrong with the estate. If an executor makes an error, the court’s first reaction is to deny payment of the executor’s commission. If the commission is not enough to cover the court-determined error, the executor’s PERSONAL assets (home, bank accounts, etc.) are legally at risk if court rules that the executor screwed up.

When someone chooses an executor and that person accepts the role, it’s very possible that neither party is aware of the risks. The risks can be more than the executor forgetting to pay a tax bill and becoming personally liable for it. Some scenarios are a bit more nuanced. For example, the executor sells the real estate, but at the closing a few months later, the heirs dispute the sale price. The heirs might seek the difference in the price from the executor’s commission or from him personally. Another example is when the executor fails to pay a “knowable” debt or tax or fails to take the steps to find out if debts exist.

How long is an executor liable for debts?

Theoretically, the executor can be liable forever. There are some limits, but practically an aggressive lawsuit can get around those limits

Many states have laws that give creditors 7 months (or similar time limit) to submit verified claims. There is a specific legal procedure to become an official creditor or else the executor is not personally liable for that debt. However, even in absence of a formal claim, the executor can be held to have constructively known about the debt, or even should have known!

The best practice when closing an estate is to ask heirs to sign a receipt and release, which says the heirs accept their check as full and final settlement, and agree not to try to sue the executor later. Theoretically, the release is iron-clad protection for the executor. But practically, the heirs can get around it. An heir could claim that she signed the receipt and release because the executor failed to disclose information, otherwise she wouldn’t have signed it, etc.

How executors can protect themselves

The good news is that there are ways to protect yourself if you are an executor.

First, get the tax clearance. Don’t distribute estate funds until the IRS and state have confirmed you’re good to go. Although painfully slow, they have procedures to formally release an executor from personal liability. If you fail to get the tax clearance (or even fail to search for tax that is owed), the taxing authorities have and will slap you with large and completely unexpected tax bills.

Second, when closing an estate, do a full accounting with receipt and releases. The accounting is composed of the books and records of the estate in court-approved format. It provides full disclosure to the heirs and gives heirs/creditors less wiggle room to argue that the executor failed to inform them.

Next, keep a reserve. Hang on to a small percentage of the estate funds to pay those surprise debts or taxes, just in case.

Of course, the reserve will be paid out to the heirs eventually. But, give yourself some time to make extra sure that the estate doesn’t owe any debts or taxes. No matter how good an executor is and even though the estate is closed, things tend to come up down the road. If you have a decent reserve, then you won’t have to hunt down the heirs asking them to pay back the debt. And believe me, the heirs will not return your calls and you’ll be out of luck.

Lastly, you can protect yourself by not being an executor: hire a professional! Even with a good probate lawyer, amateur executors are prone to making poor decisions that leave them open to risk. Why not have an experienced professional making those risk cost-benefit decisions, instead? Even a small mistake could leave an executor open to risks.

For those of you who are considering being executors or for those who are thinking about who to name as your executor, it is useful to know what an executor has to go through. To learn more, check out my book, “How to Hire an Executor.”

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How much does a professional executor cost? Most people are surprised to learn that executor fees are the same whether you choose an experienced professional or your unemployed nephew who has lots of spare time. When people realize that they are paying the same cost, they will probably choose a professional executor.

In fact, your estate will probably even save on expenses with a professional vs.an amateur.

Executor fees set by state law

Executor fees are almost always set by state law, whether it is a percentage of the estate or a reasonable fee. The percentage often works out to 2-3% of the estate’s value, which is less than half of a broker’s commission in most states. Some states use the “reasonable fee” standard, and the court accepts a customary percentage as “reasonable.”

Sometimes the reasonable fee is an hourly rate that the court deems acceptable. If you have an amateur executor, the hourly rate can get pretty expensive. If the executor doesn’t know much about probate, it will take him longer to accomplish tasks than a professional executor. Sometimes amateur family/friend executors attract more drama. The heirs are more likely to contest the fees, and the executor may not get paid at all.

Professional executor save time and expenses

As with anything else, a person who has done something hundreds of times is probably better at it than someone who has never tried. A professional executor is experienced, efficient, and has the right contacts. A professional executor knows the person to speak with at the bank rather than talking to 17 different banks. He knows which court clerk is the surly one and which one will push your paperwork through. He also knows which vendors have the best value for the cost (cleaning crews, painters, contractors, accountants, etc.).

A professional executor also knows which services are not necessary. For example, staging an apartment for sale is expensive, but usually not necessary. We’ve seen staging bills as high as $20,000! As an heir, I’d be upset that my inheritance went to pay for something like that. Some contractors pitch pretty extensive renovations, like a marble countertop. Because it’s not their money or their house, some executors go into HGTV-mode.  There is no need to knock out the walls; we just need to clean the home and make it look like it hasn’t been lived in for 40 years.

There are circumstances where it’s beneficial to stage and renovate a home, but not for estates. The longer a probate property sits around, the more it will cost the estate.

How much do banks charge to be executors?

Banks are the exception; they will sometimes ask for special language in the will or trust opting out of state law and getting higher fees with higher minimums. A large entity, like a bank, doesn’t want to be bothered with small estates and small fees.

On top of that, most banks won’t agree to be your executor unless you have a decent amount of liquid money invested in their bank. We made a recent call to a bank who refused to act as executor for a $2.5 million estate. Even if you have enough money to qualify, you still need to wait for their risk analysts and committees to accept. It is a long process…IF they even accept. you.

As you can see, it’s more cost-efficient to hire a professional executor than to choose your unemployed nephew. So if you don’t want to burden a relative or friend with the task, please check out my book, “How to Hire a Professional Executor,” available on Amazon.

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As we’ve spoken about before, Anthony can be your professional executor, even if you don’t live in New York. We have been seeing many inquires from out of state lately, and these are the top 5 looking for Anthony to be their professional executor. We are located in New York, so we are not including New York inquiries on this list. While this isn’t a scientific study, this is what we are seeing based on our daily calls.

Georgia

First on the list, much to our surprise, is Georgia. Maybe because it is retirement friendly, which we have learned that it is. There is low sales tax, no inheritance tax, low income tax, real estate is “more bang for your buck” compared to other states, and it’s warm and super friendly. Although it is retirement friendly, we aren’t seeing that there is a large network of professional executors there. It works out for Anthony, since he spends most summers in Atlanta and is very familiar with Georgia.

New Jersey

This is less of a surprise, as it’s right across the river. We’ve found that a lot of New Jersey folks seek out New York professionals, thinking they will get a “city caliber” professional. It doesn’t matter where your executor lives, the fee is set by New Jersey state law. So, whether it’s a professional executor or a non-professional such as your nephew, they will get paid exactly the same. So, you may as well get the most for your money. And for Anthony, he’s in New Jersey often, so this is fairly easy for him.

Texas

Third on our list is Texas, and we don’t really have an explanation for this one. Perhaps, like Georgia, maybe it’s a good place for retirement. Again, while searching online, we are not many professional executors. But why Anthony? The only thing Anthony can think of is that in real life, he tends to get along well with Texans. Maybe the viewers and listeners sense that and want to work with him? After all, a professional executor is someone you will work together with, at least annually, so you should definitely have a good rapport. This state also works for Anthony, because he does travel to Texas often.

California

Fourth, and possibly the most surprising is California. It’s far from New York and on paper, it doesn’t seem like a good fit. California even as a fairly robust local professional fiduciary industry. They even have a certification and a trade association for professional executors. But for whatever reason (maybe the requirement of upfront fees by CA executors), clients want Anthony all the way in New York. Believe us, he is happy to serve in California – he loves it there!

Florida

Last, but not least is Florida, and this makes the most sense. It’s a huge retirement state. However, for legal reasons, serving as a professional executor is problematic. Anthony can’t actually not serve as a professional executor in Florida, because he doesn’t live there. Only blood relatives may be out of state executors. But there are ways to deal with this. Anthony can be a nonresident Trustee for a Revocable Living Trust. Trusts are becoming very common in Florida to avoid probate. Clients who want to work with Anthony find this trustee workaround a great option. And again, he has no problem traveling to sunny, warm Florida, which he does often.

If you want to find out what is required of an executor, I suggest reading Anthony’s book, “How to Hire an Executor.”

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What information are heirs entitled to, and how often can they request it? There is a delicate balance for executors to keep heirs in the loop without draining their time or estate resources in constantly responding to inquiries.

Executor vs. beneficiary rights

Why is it important to balance executor and beneficiary rights?

If heirs demand too much, an overwhelmed executor may make errors with actual estate decisions, or grow weary. On a more emotional level, the executor may begin to resent the decedent for putting them through this.

On the flip side, if the executor ignores or stonewalls the heirs, the heirs may resent the decedent for his choice of executor. Disgruntled heirs may pointlessly sue the executor at the end during the accounting process.

The best way to strike a balance is to address their respective legal rights.

The Accounting

The main legal requirement of the executor is the accounting. Note that the accounting comes at the END of the estate. The accounting records every dollar in and out during the executor’s tenure. The executor presents the accounting to heirs, the court, and possibly creditors.

Unlike some other states, New York generally has a “give them enough rope” approach, where the executor has tons of autonomy and authority. But with great power comes great responsibility: the executor is personally liable for any “mistakes” at the end.

There is no statutory legal requirement for providing the heirs with constant updates, just the accounting at the end. But, real world expectations outside of the statutory limitations means giving periodic updates to the heirs.

Periodic updates

It is best practice for executors to update heirs during the big milestones, such as selling the real estate or successfully filing the tax return. Sometimes those milestones are far apart, so at the very least, the executor should update the heirs every 6 months or even quarterly. It is important for executors to set expectations in the beginning of how often the heirs will hear from them.

If the executor doesn’t update the heirs, a judge may not be happy. When heirs get frustrated, they can file a motion to compel accounting with the court. The judge won’t normally grant such a request 6 months into the estate. But, if the judge finds out that the heirs haven’t been updated in those 6 months, maybe he will be annoyed and approve the request.

Executors should also update the heirs because they may want to buy-in from the heirs regarding major decisions along the way. It would be bad if the heirs found out months later that mom’s house was sold for a certain amount. Keeping the heirs informed eliminates unpleasant surprises and lessens the chance that they will sue the executor for decisions they disagree with. The executor doesn’t have to ask the heirs for permission to do anything, but keeping them in the loop gives the heirs a say in decision-making.

If you want to find out what is required of an executor, I suggest reading my book, “How to Hire an Executor.” A non-professional executor may get overwhelmed by all of the questions and requests from heirs and may not know where to draw the line. Something to consider is hiring a professional executor to deal with your heirs instead of placing the burden on a family member or friend.

Request your free consultation

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