Being asked to be the executor of someone’s estate is both an incredible honor and a big responsibility. Unfortunately, most people don’t realize that can also be certain personal financial risks involved in accepting this position.
As the executor of an estate, you’ll have a fiduciary duty to act in the best interest of the estate and its beneficiaries. If you fail to do so, you could be held personally liable for any losses.
Where do the financial challenges and risks lie?
Essentially, being an executor puts you in a position of trust with respect to the estate – and that is not without its challenges. Here are some areas where executors make missteps that can lead to financial consequences:
- The mismanagement of assets: If you mismanage or mishandle the estate’s assets, such as investments or real estate, you may be held responsible for any losses caused to the estate by your negligence.
- Ignoring valid creditor claims: Debts don’t all die with the testator. As an executor, you are responsible for ensuring that the estate’s valid debts and obligations are paid. If you distribute the assets of the estate to beneficiaries before satisfying legitimate creditor claims, you could be personally liable for those unpaid debts.
- Forgetting about tax obligations: Executors are responsible for filing the deceased person’s final income tax return and, if necessary, estate tax returns. If you fail to fulfill these tax obligations properly, you could face penalties, interest and more from the Internal Revenue Service or local tax authorities.
- Litigation from unhappy parties: The actions you take as an executor can be subject to legal challenges by disgruntled beneficiaries (and other interested parties). Legal disputes can be costly and time-consuming, potentially impacting the estate’s assets and your personal finances.
- Absorbing small out-of-pocket costs: From getting death certificates to the loss of work hours while you attend to the details of the estate, there are out-of-pocket costs associated with being an executor – and you may struggle to recover them all without proper documentation or a commission agreement.
The financial risks associated with being an executor can increase when an estate is particularly valuable or when there are complex investments and holdings, but you can mitigate the potential for problems by relying on experienced legal guidance to help you through the probate process.