Responsibilities and liabilities of an executor

Assuming control of the deceased assets is one of the executor’s primary responsibilities. In an estate for outright distribution, the goal is to preserve the value of the assets until they’re distributed in kind or liquidated and distributed as cash.

When an estate includes continuing trusts, or can’t be distributed after approximately one year of the testator’s death, an executor’s role becomes more complex. In this case, an executor is usually responsible for not only preserving the assets, but also for their appreciation or growth, as well as the ongoing generation of income for the beneficiary(s).

Occasionally, estates increase rapidly in value when the testator’s death renders something he or she produced more valuable, for example, music, literary works or visual art. On the other hand, estates can also quickly decrease in value when the deceased was an integral part of the creation of the wealth. This often happens when a business owner dies.

For various reasons, executors can find themselves responsible for managing assets with a potential to fluctuate in value and/or managing assets for an extended length of time. In these cases, the investment decisions that an executor makes – or fails to make – can significantly impact an estate’s value.

Some factors, however, are beyond an executor’s control. These include the general state and organization of the deceased assets at death, the impact the testator’s death may have on the value of the assets and the overall market. It is the executor’s responsibility to manage the assets in light of these or other events.

While executors are legally accountable to the estate’s beneficiaries and can be held responsible for any losses an estate suffers, it’s common to hire financial advisors for investment advice as well as accountants and lawyers to advise on more complicated issues.

Legal backdrop

Most jurisdictions have some form of prudent investor rule, whether prescribed by statute, case law or both. Generally, the law requires a trustee to demonstrate the same diligence that a person of ordinary prudence and intelligence would exercise in managing his or her affairs. A trustee, however, is not allowed the same discretion in investing estate monies as a person has with his or her own money. Rather, the care that must be taken is akin to where investments are being made for persons to whom there is a moral obligation to provide. This is the standard against which an executor’s investment decisions are measured.

Having an investment plan or strategy is not mandated in all jurisdictions. However, following the prescribed criteria represents good practice. Further, an executor who adopts a comprehensive approach should be able to more easily make investment decisions and then explain them to the beneficiaries. A comprehensive strategy will also assist in deciding when adjustments may be needed

Beneficiary’s role

In addition to asking an executor/trustee to formulate an investment plan or strategy, there are a number of things a beneficiary can do to monitor and protect his or her interests, including asking for copies of periodic investment account statements or informal estate accounts, or accounts in passing form. The beneficiary can also request or require that the executor/trustee bring an application to pass those accounts before the court on notice to all those with an interest in the estate.

Where there’s a demonstrable cause for concern – related to an actual or anticipated decision – a beneficiary may bring an application to have the court review the exercise of a trustee’s discretion. This may be appropriate in an estate with more complex assets or a business where there is evidence of a decision that’s not based on proper principles. As well, there are a variety of instances in which a beneficiary may bring an application for the opinion, advice and direction of the court. These include ambiguity in a will or a lack of clarity as to how assets are to be dealt with, how decisions are to be made or how the respective beneficial interests created by a will are to be respected. It’s also possible that a beneficiary may bring an application for injunctive relief to require an executor/trustee to do or abstain from doing a particular act or making a particular decision which can be expected to impact estate assets and their value.

That being said, the courts are generally reluctant to usurp or take over a trustee’s decision-making authority. If a decision is within a trustee’s discretion, the court will not likely interfere. If a question posed on an application for directions is purely hypothetical, a court may decline to answer it.

Where a court is willing to intervene or make decisions for an estate or trust, all relevant and necessary information for the court to do so should be provided. Some instances in which a court is willing to intervene involve a deadlock in trustee decision-making or, possibly, where the sale or retention of assets is in issue. Examples of the latter include where the executor/trustee wants to enter into a contract with third parties involving the use of estate assets and the beneficiaries object to the terms or take the position that it does not represent the best deal that can or should be obtained. There is precedent for the court providing a forum in which a dispute over decision-making between an executor and beneficiaries can be addressed.

It should be pointed out that it may be either a beneficiary or an executor/trustee who seeks court approval of a sale or the entering into of a particular contract by the estate, or the withholding of that approval. A loss caused by executor/trustee error can be dealt with by a deduction from compensation. However, where a loss exceeds allowable compensation, an executor/trustee may be exposed to personal liability. There are risks associated with taking on an appointment as trustee.

A person who is approached to take on an appointment as an executor/trustee can seek to limit or minimize the downside risk of liability by negotiating an agreement containing specific terms of appointment with the testator prior to accepting the appointment. Such an agreement may contain exculpatory clauses or otherwise limit liability to losses caused by acts or omissions beyond mere negligence. A person willing to take on an appointment may also, after a testator’s death, seek to reach such an agreement with the beneficiaries containing similar such terms, provided the beneficiaries are all adult, ascertained and mentally capable. In neither instance does this mean that an error or loss or trustee misconduct will become unreviewable by the courts. The existence of such an agreement may, however, avert litigation or at least serve to guide a court’s analysis and decision.