One definition of a pitfall is ‘a covered pit for use as a trap’. Although the inference of setting traps does not sit well with estate law, there are indeed traps awaiting the unwary executor.
An executor has the legal responsibility in the administration of a deceased person’s estate: to preserve and collect in assets, pay debts, resolve claims against the estate and then carry out the testator’s wishes (distribute the estate) in accordance with the testator’s will.
If executors fail in the proper performance of their duties, serious consequences will follow.
This article touches on various areas of an executor’s duties that need to be considered, including the following:
- fitness for office;
- conflict of interest;
- collection of assets;
- distribution of the estate;
- litigation (family provision, disputes);
- taxation responsibilities (income and capital gains taxes);
- estate liabilities and debts;
- time limits;
- cost orders;
- the fiduciary duty to beneficiaries; and
- the overriding consideration – the due administration of the estate.
Each of these areas could well be covered by a substantial article or chapter of a book but here we offer a small insight into some of them.
A fit and proper person
In choosing an executor, testators should look beyond their favourite children and friends and consider the person who would best manage the administration of their estate. An executor requires skills to manage not only the assets of an estate, but also skills to communicate with the beneficiaries, the lawyer acting for the estate, asset-holders and other stakeholders.
The primary qualification for an executor is for the person to be reliable and honest[1]. Proper estate management also includes completing the administration of the estate efficiently and without delay.
In many cases, multiple executors may be appointed. Where multiple executors are unable to work together, an application may be made to remove one or all executors and appoint an independent administrator to administer the estate. For example, in the case of Re McLennan [2018] QSC 124, one executor applied to remove the other executor, as he displayed a clear conflict between his interests and his duties as executor, causing a delay in the administration of the estate. The Court found that it was not necessary to demonstrate misconduct or unfitness and ordered that both executors be removed because the administration of the estate was best served by their removal.[2]
Litigation
Litigation is an option when executors wish to resolve disputes. It does have its disadvantages, for example, it may divide families and reduce the asset pool of the estate. Other options include seeking judicial advice[3] which may be given in the form of advising whether or not the executor is justified in taking a particular action. The executor is protected from liability by following the advice given.
Judicial advice may be sought in a number of situations. For example, as to whether the executors are justified in embarking upon litigation[4]. In the case of Application of Gordon Albert Salier [2017] NSWSC 473, an application for judicial advice was made so that the administrator could continue litigation proceedings that had been previously started by the administrator as a limitation period was due to expire.
If you are seeking judicial advice, be aware that the Court will not answer a question, which may never arise, and the Court is not an arbiter of the terms of a commercial contract. However, the Court will consider whether the executor has the power to enter into such a transaction[5].
In a recent Queensland decision, the executor was removed from office after the Judge held that it was completely inappropriate to litigate the validity of the testator’s transactions in proceedings involving an application for a family provision order sought by the executor. The executor’s interest in defending the transactions was likely to lead him to prefer his own interests over the due administration of the estate[6].
Another option for the executor is endeavouring to settle a dispute without going to court, especially in the case of small estates. Further, an administrator can be appointed solely for the purpose of conducting litigation on behalf of the deceased estate, if an executor is making his or her own family provision application.
Taxation
An executor is required to lodge tax returns for the deceased up to the date of death and for the estate from the date of death. It is recommended that executors seek specific tax advice from an accountant or tax advisor.
When no tax returns are required to be lodged, an executor should notify the Commissioner of Taxation accordingly.
Once an estate has been fully administered, an executor must lodge a final tax return and ensure that sufficient funds are held in trust to pay any tax liability. It is an executor’s responsibility to pay the outstanding tax liabilities for the deceased and the estate.
There may also be Capital Gains Tax (‘CGT’) implications if an asset in an estate (for example, real property) that was acquired on or after 20 September 1985 is disposed of in the course of administering an estate or by a beneficiary. CGT consequences may also arise if an asset is disposed of to a “tax exempt organisation or to a foreign resident”[7].
Cost orders
Executors must act for the benefit of the estate, otherwise they may suffer cost consequences. In the decision of Rattigan v Hanly [2020] NSWSC 1722, an executor was ordered to pay 70% of legal costs that he had taken from the estate to hold in trust until resolution of the matter, as the executor acted unreasonably and for his own benefit rather than for the benefit of the estate.
Liability for debts
Part of the executor’s role is to pay for estate liabilities and those that are incurred in the administration of an estate.
Prior to distributing any monies to the beneficiaries, executors should ensure that there are sufficient funds in an estate to meet estate liabilities and expenses, or they may be personally liable. However, an executor is not personally liable beyond the amount of estate assets that come into the hands of the executor.
Distribution
If an executor has not distributed an estate within 12 months of the date of death, then a beneficiary of a legacy (that is, a gift of money), may claim interest on the unpaid legacy until it is paid in full. In NSW and Victoria the relevant interest rate is 2% above the cash rate last published by the Reserve Bank of Australia before 1 January in the calendar year in which interest begins to accrue. In Queensland, the rate is 8% unless otherwise determined by the Court.[8]
You may have heard of an “Executor’s Year”. This is the general principle that the executor has an obligation to realise the estate assets, pay any estate liabilities and distribute an estate within 12 months of the date of death of a testator. This is a general “rule of convenience”, rather than a statutory rule[9]. However, the executor may be unable to administer and distribute an estate within this time frame, particularly if it is a complex estate or litigation is unresolved.
Pending the distribution of the estate, it is prudent for an executor to open an estate account and to invest estate funds for the benefit of the beneficiaries[10].
Family Provision Applications and Distribution
Statutory time limits are to be observed regarding applications for family provision orders. Time limits for lodging applications vary depending on the jurisdiction in which it is made. For example, in Queensland, applicants are required to deliver a Notice of intended Family Provision application to the personal representative of the estate within 6 months of the deceased’s date of death and applications must be made to Court within 9 months of the date of death. In New South Wales, eligible persons have 12 months from the date of death to lodge applications for family provision orders. While in Victoria, family provision applications must be made within 6 months of the date that Probate is granted.
The Court does have the power to extend these time limits in certain circumstances.
If an executor distributes the estate before the expiry of the relevant time limit, the executor should expect to be personally liable to meet an award to a successful applicant.
Cost of Transferring Assets
Once an executor agrees to distribute an estate, it is usually the beneficiary who is responsible for the cost of delivering an asset or transferring an asset (unless the testator’s Will states otherwise). While death duties have been abolished, stamp duty may be payable on the transmission of some assets to beneficiaries. For example, nominal duty may be payable on the transfer of real property to a beneficiary[11].
Finally
Estates are commonly administered without difficulty. It is suggested that a number of pitfalls could be avoided if a testator and legal adviser give careful consideration to the most appropriate person to be an executor, bearing in mind the duties that must be attended to and relationships among beneficiaries who are family members.
By: Maree Harris and Terence B. Ogge
[1] Re Aitken [2018] VSC 817.
[2] Re McLennan [2018] QSC 124
[3] See s 96, Trusts Act 1973 (Qld), s 63, Trustee Act 1925 (NSW)
[4] Re Beddoe [1893] 1 Ch 547
[5] Davidson v Cameron [2015] QSC 294
[6] Re Permewan [2021] QSC 151
[7] John de Groot, Wills Probate and Administration Practice (NSW) at [406.2.8]
[8] s 84A, Probate and Administration Act 1898 (NSW)
[9] Benson v Maude (1821) 56 ER 994
[10] Byrnes v Kendle [2011] HCA 26
[11] s 63(1), Duties Act 1997
