Executor Responsibilities
Posted by Gail | Filed under Money & Family
Death can be taxing, in more ways than one. First, there’s the emotional stuff everyone must deal with. And then there’s all the financial stuff that must be waded through. When your Aunty Maud asked you all those years ago to be her executor, you had no idea your innocent “Sure” would end up embroiling you in a forest’s worth of paperwork or the squabbling between your cousins.
As executor of Aunty Maud’s estate, you’ll be called upon to manage everything from her funeral arrangements to locating her assets, paying her bills, filing her tax returns (yes, there will most likely be more than one), and divvying up the remains to the heirs, along with advising them what’s taxable and what’s not. So the job of executor carries important responsibilities. And it demands attention to detail. Mess up and you could be held personally liable.
Assuming I haven’t scared your pants off and you’ve decided to go through with your executor responsibilities, you’ll need to present the original will and notify all the beneficiaries under the will. Having sworn an affidavit of service, which you’ll file with the court, about six to eight weeks later you’ll receive a certificate that gives you the authority to act so that anyone who needs proof — the bank, the brokerage house, the credit card company — knows you’re “legal”.
Your first step even before you’re certified should be to read the will to see if there’s anything that needs immediate action such as specifics for the funeral. While you’re not bound by the testator’s wishes, following through is preferable to being haunted. Are minor children left orphaned? If so, apply to put designated guardianships into effect quickly.
You’ll need to take an inventory of the deceased’s assets and debts. You will be responsible for safeguarding and valuing the assets, dealing with banks, brokers, and insurance companies, and arranging for the investment or liquidation of assets.
Don’t rush to pay out Aunty Maud’s bequests too soon, no matter how much pressure your cousins are putting on you. If you do and then don’t have enough left to pay debts and taxes, the money will come out of your own pocket unless you can persuade beneficiaries to give back some money. Fat chance!
On the tax front, you’ll have to file tax returns for any years for which returns have not been filed wherever else the deceased may have held assets. And you’ll also have to file a special return for each year the estate exists and earns income. Get a clearance certificate from the tax man to ensure no future disputes over property valuations and deductions claimed before you distributed the estate. Also make sure you’ve taken steps to uncover all debts owning. Advertisements to creditors that includes a fixed date for distribution a month or two from the advertisement date followed by payment of all debts that have come to light should do it. Skip these steps and you could find yourself on the hook personally for unpaid bills or taxes.
For your time and trouble, you may bill the estate between 3 and 5 percent of the estate’s value, or more if the will specifically says so. Keep meticulous records of the time you spend and expenses you pay out of your own pocket so that if you’re you can prove your worth.
If the going looks tough, you don’t have to go it alone. You can hire a professional to step in and be your guide. A lawyer, estate administrator (available through your local trust company), and accountant can help. Be careful whom you choose. Since, under the law, you can never give up your discretionary responsibility for how those assets are handled, if your “helper” does a terrible job and the estate suffers losses as a result, you can be held liable for those losses. While the estate pays these blokes, it’ll be your responsibility to make sure their fees are reasonable.
Or you could say no. Just because you’ve been named executor doesn’t mean you have to take the job. You have the option of declining the honour.
So it’s time to send in some success stories for Getting to Debt Free. My pool of stories is almost gone! Are you still enjoying the stories, or has that section had its run? You can submit your story here. Remember to identify it as a “success post” by clicking the button.
I’m also taking votes on your favorite blogs, so if there’s a blog that really struck a note with you, let me know which it was.
And for all of you who love a good case study…
Lola is a 35 year old college-educated health-care professional who has been on long-term disability pension for about 8 years. With a body that is extremely sensitive to stress Lola must be very careful not to overdo it in order to remain stable and safe.
With a net income of $27K, Lola purchased a 3 bedroom home for $118,000.00. She had a downpayment of $10,000.00, and rents out the extra bedrooms generating between $350-700 in rental income per month. She is making bi-weekly accelerated payments of $341.00. She is also trying to get rid of her consumer credit: $16,000.00 at an average rate of interest of prime + 0.9%, which she accumulated to pay for closing costs and necessary home repairs. She’s taking full advantage of her taxes and she has a good credit score so she is frequently offered and eagerly takes advantage of credit card promotional interest rates on balance transfers.
Lola is fairly frugal. She doesn’t have cable, eats out at restaurants only as a treat once in a while, and is an awesome bargain hunter of previously used items. She has retirement savings of about $2400.
Becoming more financially responsible is a high priority for Lola, and living in and managing her own home (despite the extra expenses) has been a huge boost to her quality of life and sense of self-esteem.
Lola wonders if she’s on the right track. Should she stick with her current long-term plan of keeping the home, focusing on paying down debt, and then accelerating mortgage payments OR should she sell and downsize to be more appropriate for her income?
Should she refinance her mortgage by breaking the term and going with a variable rate of approx. 3.5%, but continuing with the same bi-weekly payments to shave 5 years off the amortization period?
May 8, 2009 at 7:23 am
She should explore the possiblilty of breaking the contract with her banker or mortgage broker so she can see what the IRD (interest rate differential) would be…if she wanted that variable rate she’d have to come up with the IRD out of pocket…her banker can do some calculations to see if it would be in her favour.
May 8, 2009 at 8:09 am
She should pay off the LoC and when done, keep her mortgage payments the same and enhance her retirement investing with her new surplus.
She could break the mortgage but penalties could negate any benefit.
May 8, 2009 at 9:00 am
i have another post for the success story…i keep meaning to send it to you gail…
May 8, 2009 at 9:08 am
To answer the case study some figuring is needed.
Lola takes home $27K per year. If she is paid bi-weekly (which I’m thinking is why she’s accelerated her mortgage to bi-weekly payments), that means she takes home $1038.46 each paycheck. From this she pays $341 per paycheck to her mortgage. Lola has been smart about renting out the rooms, as depending on the sublet contracts she has in place, this will bring in enough money to cover at least one of her bi-weekly mortgage payments, thus allowing her to divert that payment to her consumer debt payments.
In order to be making any headway on her consumer debt, she will have to be paying more than her minimum balance each month. At prime + 0.9%, her interest rate is about 4% on her consumer debt (Holy moses!!) So with that being said, using the 15% Rule Gail has given us, her minimum payments on a $16,000 debt are more than 15% of her take home income after mortgage payments. Her minimum payments are about $200 on her outstanding consumer debt. If she continues to rent out the rooms until her debt has been paid off, she can offset the mortgage payments, and put more onto her debt, while still maintaining both and not being overly stretched/stressed on her current salary.
While a variable interest rate for her mortgage may save her some money in the next year or two, rates can only start creeping up again, thus perhaps for the first two years in a variable she saves a ton on interest and makes more headway on her principle but three years from now the markets could start to flourish again and the interest rates begin climbing higher and higher, forcing her to stretch her money further.
My suggestion to Lola would be, speak with your bank people to determine the costs of breaking the mortgage now in favour of a slightly better variable, but discuss market trends for the future – interest can only go up form here I think. So while at this moment it might save her some interst on her mortgage, are those costs over the next five years going to be worth the initial break? and will she want to break the variable again when interest starts going back up to lock in a low interest rate to save again before the next five year term is up? It seems to me that it will actually end up costing her more in five years to break now for a lower interest rate, when her’s currently may not be that much higher and on a fixed will be locked in for enough time to get that consumer debt gone and open up some much needed room in her current budget. That way when the turn happens, she is not left trying to increase her payments on the variable terms to match the increase in interest rates, and instead will sit comfortably at the low interest rate she locked into keeping the payments the same and probably coming out ahead five years from now.
It’s a bit of strain now, but in a few years I think she’ll be happy she didn’t break it!! Lola could also always find a way to MAKE MORE MONEY for a little while to get that debt paid off, while still having the rental income to offset mortgage payments. She may even be able to get cable in the future too!!
I like the idea of her getting that consumer debt paid off, and being able to move some more money to her retirement plan until her mortgage term comes due
May 8, 2009 at 10:21 am
Just one point to add regarding being an executor that was missed on the blog.
When it comes to claiming executor fees for your time and work, keep in mind that it IS ‘taxable income’ and must be inluded on your income tax return.
Depending on specifics, it may be better not to bill the estate for it.
May 8, 2009 at 10:45 am
Re: Case study
Careful with ‘MAKE MORE MONEY’ – that could jeopardize her disability pension. Before doing this, she should be clear on what restrictions her disability pension impose. If making more money does not jeapardize the pension, then go for it.
Also, what is the current value of her house – she purchased for $118K, what could she reasonably sell if for and where would she live – condo, smaller house, etc and what is the cost of doing so (including moving and closing costs). She needs to consider her disability and the future. If her disability is such that living and caring for a 3-bed house will put a strain on her finances, she should consider down-sizing (yes, that would be rental income lost, but lower costs all around – presumably!).
Also, why is she accelerating her mortgage payments when she has consumer debt to pay off and little in the way of retirement funds and no emergency fund mentioned? I understand the perceived ‘need’ to pay off the mortgage but we all have to pay something to live somewhere – whether it’s rent or mortgage, what is the big deal with being mortgage free if it squeezes the life out of you! If you keep the interest rate reasonable and pay what you can, increasing payments when higher rate debt is paid off and when little windfalls come your way (bonus at work, auntie M leaving some money, etc), then it makes more sense to me.
I refuse to be house poor, and I pay my mortgage at the payment required to keep it reasonable (including amortization). My focus is on paying down the LOC (which by the way is at the same interest rate as the mortgage), but the LOC is extra stuff I got myself into and it’s not ‘what it costs to put a roof over my head’ so I see it very differently.
May 8, 2009 at 11:41 am
I think “accelerated” refers to the fact it is bi weekly as opposed to monthly.
May 8, 2009 at 11:43 am
Lola needs to find a way to contribute to a RDSP. This would be a emergency fund topped up by the government. (What we do) If she even puts $125 per month, she will get $5000 per year. That will go a long way to helping with both an emergency fund and retirement if she doesn’t need it for emergencies. The range in rent suggests that she is renting two rooms for $350 each and has one long term renter and one room that is less consistent. If so, budget based on only one room and when the other is rented, put the money toward the line of credit. That way you aren’t counting on the money and when it does come in, you don’t miss it when it goes straight into the LOC.
There are some good disability programs out there, but some limit the amount of money you can earn with out jeopardizing her DIP. This effectually traps disabled people at lower income points.
Also, what is left on her mortgage? If she has been on long term disability for 8 years, she may have bought the house more than 8 years ago when she would qualify for a larger mortgage.
The other thing is “trying to pay down debt” isn’t a great phrase. Is that “yeah, I’m trying to pay down my debt, at some point,” or “darn it, I am doing everything possible to get rid of that debt?”
My sister is “trying to pay down debt.” She also has a budget. It’s just that her budget includes a shoe “budget” that is greater than my weekly grocery bill.
The brief doesn’t list credit card debt. Lola eagerly takes advantage of credit card offers… what does that mean? Is she racking up debt on the credit card bills or is she using the cards to pay for the LOC and then paying off the card?
May 8, 2009 at 12:01 pm
With an income that small and that fixed, a variable rate mortgage is just to much risk. Not to mention, those payments suggest her current mortgage rate is just shy of 6%. That’s pretty reasonable.
With prime being just over 2% right now, her consumer debt costs less than her mortgage. She’ll save money if she focuses on her mortgage payments. Make minimal overpayments to the consumer debt so that she is actually making headway and then put whatever may be left into an emergency fund because her income is so small.
RSPs are important, but for this person, having the house paid off by the time she retires, with the potential to continue renting is going to be more useful than having cash on hand to pay rents that can (and likely will) fluctuate throughout her retirement.
And finally – no one has commented on the emotional benefits Lola is getting from owning her home. As long as she can make the ends meet, then she shouldn’t give up something that makes her happy.
May 8, 2009 at 12:31 pm
For someone who cannot handle any stress, changing to a variable rate seems like a bad idea. I think the savings would have to be SIGNIFICANT for this to be suitable for her. Some people just can’t handle the variability.
Also, living with roommates in a big house that needs maintenance can be stressful as well, depending on the roommates and the house – so IF she can get enough money for selling her house to pay some of her debts and moving costs (these days?) and IF she can find an acceptable smaller place with less maintenance (condo?) and a smaller mortgage, then it may make sense. Depends on the real estate market.
Someone mentioned that she should consider the second renter’s income as a windfall and put it on the line of credit. I would go further – I think she should not be counting on either renter’s contributions for her mortgage or any other expenses, whether the renter is long-term or not. Either one of them could move out at any time. Her budget should include debt repayment, emergency fund and retirement savings, without the renter money. (Gail says budget for the worst case!). If she can’t make a budget without the renter money, she should quit accelerating her mortgage. The renter money should be considered a windfall, split between consumer debt, emerg fund and retirement.
Finally, I agree with the poster who said she needs an emergency fund and retirement savings – but starting now, since her low income is not likely to change, she’ll need more time to get ready for retirement than people who are not on a fixed income. …..unless disability insurance carries on past retirement age? I don’t know much about that.
May 8, 2009 at 1:45 pm
I happen to think she’s on the right track.
May 8, 2009 at 2:21 pm
Oh boy…. the executor thing sounds like a bit of a potential nightmare!
I have seen some uncharacteristically selfish and nasty behaviour displayed around estates. I’ve never understood that mentality.
When my dad died when I was only 18, my younger sister and I did not expect anything, he had a wife that survived him, and he made it clear that she would automatically get everything on his passing. His reasoning was that we had our whole lives ahead of us, so we did not need anything. I took that unquestionably as the truth, so I have a hard time seeing people fight wills as if they are entitled to something!
Over the years, I have seen siblings go savage with greed over their parent’s estates, and I have seen lawyers being the only ones that benefit from it! The fight would continue until there was nothing left but hurt feelings and a huge bill! I pity the executors that are dragged through years of legal hell over the fine print and contesting of wills.
Really isn’t death tragic enough without the squabbling and bad-blood and drawing-out of the agony?
May 8, 2009 at 4:01 pm
I need to bookmark this post for the future! Thanks for this valuable info. I am on the hook for my favourite aunt, and likely my parents (although they will probably make my brother and I co-executors). I know its a ton of work, from supporting my mom emotionally through the process when my grandfather died. I really think there might be value in hiring professionals if the estate can afford it-I wouldn’t buy a house or write a will without professional help (I know some people like the DIY wills, but the idea freaks me out-what if I screwed something up and can’t fix it because I’m dead) so why would I try to execute a will without such advice? Perhaps isntead of hiring pros, a “Being an Executor for Dummies” book is in order-perhaps you could write one in your spare time Gail
May 9, 2009 at 1:23 am
One of the most important things that Lois needs to do is thoroughly investigate what tax benefits and financial risks there are to renting a portion of her primary residence.
A portion of mortgage interest, property taxes, fire insurance premiums, maintenance and heating costs would all be tax deductible, especially since she’s renting 2 of 3 bedrooms and presumably sharing common space.
She can also look at the renos that she did (did she buy appliances for tenant use, for example? if so there may be some capital depreciation that she can claim.
Lois also needs to make sure that she maintains “principal residence” status to ensure that she doesn’t have to pay capital gains taxes when she sells the place or decides to not rent it anymore.
In the end, along with educating herself, she may need to find a tax advisor who is VERY knowledgeable when it comes to renting a portion of a principal residence.
Finally, she should also consider budgeting maintenance for her place – doubly so, since not only is it her place to live, but also a source of needed income.
May 9, 2009 at 1:25 am
PS: Here’s the rental information from CRA for those who might be considering going this route:
http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html
May 11, 2009 at 8:42 pm
I don’t think Lola should try to break her mortgage – banks are all using the interest-rate differential calculation right now, which generates a very high penalty, and the chances of her saving enough in interest to recoup the penalty in the time remaining in the term is minimal. Moreover, if she only had $10,000 in down payment, she has a CMHC or Genworth insured mortgage, so the penalty would have to be paid from cash up-front, not added to the mortgage balance. Since she has no cash, she would just be going deeper into debt. If cash-flow is the issue, she could go to NON-accelerated bi-weekly payments. Lola has found that owning a home has been a “huge boost to her quality of life and self-esteem.” Why, then, would she change it? Moreover, her mortgage payments, in any scenario, are very modest and reasonable. For that kind of rent money, she’d be lucky to get a basement suite! And she has rental income, which is covering the half the payment!
The costs of selling are huge, especially in a flat market – realtor fees, property transfer tax on a new purchase, legal and moving fees, and a possible mortgage penalty. I don’t know where she found a 3 bedroom house for $118,000 – but what would she “downsize” to? A condo likely won’t provide rental income, and strata fees can go from reasonable to catastrophic as soon as the damn thing starts to leak. And condo living is not stress-free – there’s always one busy-body who loves to report “rule breakers” to the strata council.
I agree with Lexi, who said that Lola’s core budget should be independent of the rental income. That income, instead, should be directed to accelerated savings. She needs a maintenance account for the house, and savings for herself, especially since her ongoing medical costs are likely to increase as time goes on, and she will have diminished RSP and CPP options. She should set up a TFSA, and transfer the maximum into it every year. She should also pay for a couple of hours consultation with a good accountant, who could provide her with the necessary tax advice.