Executors: 4 Mistakes That Could Lead to Personal Liability

Individuals who undertake managing the estate of a friend or family member as an executor could face expensive bills personally.

A recent English case provides a salutary tale of a Mr Harris who ended up owing the British tax authorities hundreds of thousands of pounds.  He had distributed the assets of an estate on what he claimed was the understanding that the beneficiary would pay the inheritance tax (death duties) owed. The beneficiary left for Barbados without settling the tax liability, leaving Mr Harris to cover the cost of his error.

Key Facts

Mr Harris became the personal representative of Helena McDonald’s estate in 2003.  On her death, he was appointed by the court (in this case, there was no will) and became responsible for distributing the estate’s assets.

He filed an inheritance tax return to the tax authorities and paid the initial taxes due.  As the estate included land, the remaining balance owed to the taxman did not need to be paid up front.  The majority of the £1.2 million estate (approximately $2m) was given to a Mr Whitfield Harewood (the deceased’s brother and a beneficiary) on the understanding, Mr Harris claimed, that Mr Harewood would settle the tax bill.

However, the beneficiary travelled to Barbados where he lived and did not pay the death duties owed.   Mr Harris was unable to make contact with him and was left solely responsible for paying the tax due of £341,278 (approximately $600,000).

Mr Harris launched an appeal claiming he no longer had the funds from the estate needed to pay the outstanding tax bill and should not be liable for it.  However, Judge Nicholas Alexsander rejected this argument, adding “Nor is it a defence that Mr Harris was ignorant of his obligations, as a personal representative, to pay the inheritance tax owing.”

This case highlights the possible difficulties faced by estate administrators.  One commentator called this a cautionary tale for others in this position: “Many people take on roles as estate executors because they are a family member, but they simply don’t understand the potential implications of what they’re doing.  This case is a stark reminder of how complicated this process can be … Potentially the Revenue could go after his own personal assets.  He could have a house which is up for grabs because he has to pay this money. Mr Harris is on the hook.”

There are no death duties in New South Wales, but an executor does have responsibility for the tax liabilities of the estate including filing tax returns and paying tax on behalf of beneficiaries. Generally speaking, an executor is potentially liable for contracts entered into after the date of death.  This will require particular care where there is a business as part of the estate which may be ongoing or needing to be disposed of.

Key Issues

The duties of an executor of an estate must be performed in a timely and proper manner.  The executor is responsible for collecting the deceased’s assets, paying any debts and then distributing the balance to the beneficiaries.  A grant of probate is the legal document that authorises an executor to manage an estate in accordance with the provisions of the will.

Many taking on the role of executor are unaware of what they are taking on and of the potentially disastrous situation whereby they could become personally liable. 

Avoiding Personal Liability for an Executor

An executor can become personally liable, even for oversights, and should pay particular heed to avoid the following errors:

·        Failure to identify all liabilities of the estate and distributing the assets too quickly.  As Mr Harris found to his cost, recovering funds from a beneficiary can be problematic. If there are any contingent liabilities for which the estate may be liable, (such as Capital Gains Tax), and the estate has been distributed, it may not be possible to recoup the funds, and the executor will be personally liable to pay the unpaid debt(s).

·        Failure to identify all the assets of the estate, perhaps in haste to apply for a grant of probate, which will then need to be disclosed to the court later. This could lead to exposure for the executor if any creditors or beneficiaries are adversely affected by the oversight.

·        Failure to administer the estate in a timely manner, or not acting in the interests of beneficiaries, could result in the executor being at risk of personal liability or being removed from office.

·        Failure to keep proper records could result in the executor becoming personally liable, for example, for certain items of expenditure. If a beneficiary requires details of certain expenditures the executor must provide evidence and, if unable to do so, could be personally liable.

What does it mean?

Hopefully many executors will find the process reasonably straightforward but, for example, disputes over estates are increasing and there have been a number of cases where executors have faced personal financial and legal claims from beneficiaries and creditors including tax authorities.  As commentators opined about the unfortunate experience of Mr Harris:

“Being an executor is an onerous task that carries great responsibility.  But it is important to note that no one has to act. Whether you are appointed under a will as an executor or you become an administrator by way of intestacy, you have the right to renounce your role.  If you do decide to accept the role ... it is important that advice is taken to ensure you fulfil all of your legal duties, especially on a sizeable taxable estate.”

“Complex estates often warrant paying for professional help.  It is often sensible to get legal advice in circumstances where the deceased held assets overseas or had business assets, or where the estate was left to a number of beneficiaries.  Executors should be aware of what their duties are and seek professional help if they think it is beyond their level of expertise....it could be the best money you ever spend.”

The lessons from Mr Harris’s predicament are to be wary of the pitfalls and appoint a professional to deal with the estate if there are any doubts about your ability to get everything right

Contact our Solicitors in Sydney and New South Wales

If you have been appointed as an executor or for any other matters relating to Wills, Estates or Contesting a Will contact Szabo & Associates, Solicitors, where our specialist solicitors can advise on all aspects of Wills and Estates.  Call us on (02) 9281-5088 or fill in our online contact form.