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It's crucial that executors understand all their obligations

I was driving into Toronto this week when I noticed a bumper sticker on the car in front of me. It read: "Where there's a will, I want to be in it!"

Imagine if life were like the movies, where a long lost uncle leaves you, his sole surviving relative, millions of dollars in his will.

Yeah, right. Now pinch yourself and wake up.

The fact is, being in someone else's will doesn't always mean you're going to get an inheritance. You might, for example, be named the executor of the will and not a beneficiary, in which case you won't exactly be cashing in.

In fact, the executor's job comes with a number of responsibilities.

Last week I talked about the importance of having a will. This week, I want to focus on the obligations of your executor.

These seven obligations of an executor come courtesy of author and lawyer Edward Olkovich (http://www.mrwills.com), and can be found in his book, Estate Planning in Six Simple Steps (ECW Press).

1. Obligation as fiduciaries

Your executor has a fiduciary duty that requires him or her to act for the benefit of others (the beneficiaries of your estate).

An executor must act reasonably, and not arbitrarily when using any discretion that you provide in your will, such as dividing up personal property (your knick-knacks, for example).

2. Treat beneficiaries equally

Unless your will provides otherwise, your executor cannot prefer one beneficiary over another or show bias.

The executor can't give a larger share of your estate to one beneficiary and a smaller share to another beneficiary.

3. Don't profit from the estate

An executor can't buy estate assets without court approval or the consent of all beneficiaries.

The exception is where your will specifically provides this right. If a business partner is both your executor and a buyer of your share of the business, your will should include this provision. By the way, executor fees are permitted and will not be considered as profiting from the estate.

4. Account for all transactions

An executor must keep financial records and be prepared to explain their conduct to the court and beneficiaries.

Your funeral arrangements, for example, can't be outlandish. Your executor must be reasonable if the will provides no guidance.

5. Pay all of your creditors

Your executor must file tax returns and pay your creditors.

No distribution to beneficiaries can take place until these bills are paid. To the extent your estate has sufficient assets to pay these bills, your executor will be personally liable if taxes and creditors are not paid.

If you die with more debts than assets, don't worry, your executor won't have to pay those debts out of his or her own pocket.

6. Defend your will

If your will is contested, your executor must defend it in court, which may mean hiring a lawyer, to protect the beneficiaries' interests. This includes defending the estate against the claims of creditors or beneficiaries.

7. Act as a prudent investor

Your executor must develop an investment plan for your estate assets. This will involve making investments authorized by law or under the terms of your will.

Most people include a provision in the will that provides the executor with maximum flexibility to make investment decisions. This obligation is reason enough to work with a professional investment adviser.

It reduces the likelihood that your executor will run into problems later.

These obligations make it important that you speak to your executor today, to make sure he or she is willing to take on the task.

Tim Cestnick, FCA, CPA, CFP, TEP, is a tax specialist and author of Winning the Tax Game 2005 and The Tax Freedom Zone.

tim@timcestnick.com



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