TWO CHORES that most people gladly put off: The first is writing a will—and the second is updating it to reflect changed circumstances. Either way, it’s crucial to name the right executors.
Regarding the first chore, my client roster includes recalcitrant individuals who’ve yet to write their wills. I regularly remind them how badly things could turn out if they fail to do so. For instance, their assets might wind up with individuals whom they never intended to benefit or they consider less deserving of their largess than others.
Regarding the second, I tell those who heed my homilies that costly and expensive events could occur if they neglect to update their wills to reflect changes in their lives. What changes? I cite events like moving to another state, entering into a marriage or ending one, significant increases or decreases in their net worth, or heirs that unexpectedly predecease them.
I also exhort clients to think carefully when selecting or replacing executors—the persons who are the key figures in the settling of their estates. They’re best served by individuals willing to take jobs that are potentially time-consuming and demanding. As for wannabe executors, I tell them to reflect on how badly things can end up if they make mistakes; more on that in a moment.
But let’s start by going down the list of executors’ duties. Their first duty is to assemble and value all of the deceased’s assets. Executors have to ferret out records for bank accounts, brokerage accounts, tax-deferred retirement accounts and insurance policies, as well as other assets like real estate, art, jewelry and automobiles.
Besides those chores, executors need to unearth information about debts, mortgages and tax records, and figure out if the person had safe deposit boxes, made loans to family members or others, or made charitable pledges.
Their next responsibility: Pay all bills and charges. Executors typically turn to professionals for those tasks. The list might include the timely filing of the deceased’s final income tax return, federal estate taxes, state inheritance taxes and the estate’s income tax return, along with the payment of any taxes owed.
When can executors distribute assets in accordance with wills? Only after they’ve valued assets and paid bills. The executors’ final responsibility: Submit accountings to the courts (usually designated “probate,” but sometimes called “orphan’s” or “surrogate’s”) for everything they’ve done.
That’s how the story usually ends. But many executors belatedly learn that their reliance on the counsel of attorneys, accountants and other professional advisors doesn’t relieve them of responsibility for mistakes.
Suppose the IRS says taxes remain unpaid or forms were filed late. The agency’s Stepford response is to bill the executors. After all, the law says they’re personally responsible in those kinds of situations. The courts routinely uphold IRS assessments of taxes, penalties and interest charges.
The need to obtain proper tax advice was made expensively clear to the son and daughter-in-law of Henry Lammerts, who owned a Cadillac dealership in Niagara Falls, New York, and died in 1961—and who had designated them as his executors. On Henry’s death, his son took over leadership in settling the estate. While the son was under the impression that a tax return had to be filed for his father, he was unaware of the need to file an income tax return for the estate.
The son found out from his accountant that no return had been filed reporting income received by the estate. The filing was eventually made seven months after the due date and elicited an IRS assessment that included a sizable late-filing penalty.
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. Mirabile dictu, the accountant’s and the lawyer’s recollections significantly differed when they testified in court.
The accountant said 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 lawyer pointed out that neither of the executors had asked him for a rundown of the responsibilities attached to being an executor. Consequently, the trial court’s approval of the penalty was upheld by the Second Circuit Court of Appeals.
Suppose, as is not uncommon, executors volunteered to serve without compensation and weren’t heirs. Would that persuade the courts to rule that executors who received nothing also owed nothing to the IRS? Put it this way: If I’m going to represent one of the two parties and I’m being compensated on a contingency basis, I’d want to represent the IRS.
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator). His previous articles include Taking Shelter, For the Record and The Dreaded Letter. Information about his books can be found at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.