Executors - Investing Estate Assets

After paying all of the estate’s debts and expenses, or perhaps while waiting until it is time to pay them, what does an executor do with all of the estate’s money? Is the executor responsible for actively investing the estate assets? Many people are under the mistaken impression he is.In fact, unless the will or the laws of the particular state specifically direct otherwise, the executor is under no duty to invest the estate funds. His primary responsibilities include discovering and collecting estate assets, paying all appropriate debts and expenses, and distributing the balance to the beneficiaries. This is not to say, however, that he need not pay attention to existing investments or that he can leave funds idle. At the very least, any cash or liquid funds should be deposited into interest-bearing bank accounts. In this context, he is not necessarily bound to search for the highest income-producing investment; his first consideration must be protection of the principal, even if it means accepting a lower return.

If, on the other hand, the will instructs him to invest estate funds or state law imposes some duty to invest, then he must do so, and when doing so, he is under the same duties as a trustee. That is, he must follow the “prudent man rule,” which basically suggests that he invest in securities of well-established companies with long-term dividend records or in bonds with ratings that are considered safe and suitable for this type of investment. Most states have what is called a “legal list” of investments that are considered suitable for funds held by fiduciaries, such as executors and trustees. Investments in securities included on the legal list or that are similar in all other respects, therefore, will usually be acceptable investments for an executor who is obliged to invest.

Occasionally, the executor “inherits” a questionable investment that the deceased was holding during his lifetime and is faced with the choice of making an unauthorized sale or watching the investment gradually sink in value. In such a case, he is not obliged to sell, but prudence should motivate him to ask the court and/or the beneficiaries for permission to do so. Obtaining the permission of either would normally take the executor off the hook for selling or failing to sell.

If the questionable investment consists of something the executor cannot sell, such as shares of stock in a small or privately held company, then he is under no obligation to take action other than to exercise his right to vote as a stockholder of the company and to keep aware of the status of the stock and the company.

An executor who is not obliged to invest would be well advised to avoid doing so and should simply place the funds in a safe bank, or if there are large sums of money, perhaps in U.S. treasury bills or notes. If an executor is not under a duty to invest but decides to do so anyway, he can be personally liable for any losses resulting from a bad investment, even though he acted in good faith, unless he can show that he made the particular investments at the beneficiary’s specific request or at the court’s direction.

The risk of personal loss for bad investments can be a serious one, especially where there are two or more executors and the investments are entrusted to one of them; this often happens when a family member and a professional person, such as an accountant, are named co-executors. Usually the nonprofessional will let the professional do the investing, paying little or no attention to what he does with the funds, unaware that he could be personally liable for the professional’s bad judgment.

An executor has to keep estate assets reasonably invested, yet at the same time keep investments liquid enough to pay the estate’s debts, taxes, and expenses, and distribute each beneficiary’s share when the executor completes probate.

Once the executor knows how large the estate is and what types of assets the estate encompasses, he can begin to estimate what debts the estate must pay and what specific cash bequests he will have to make. He also has to “guesstimate” how much money he will need to pay taxes and administration expenses. He has an obligation to determine whether the estate has sufficient liquidity to meet financial demands. If the estate does not, it is the executor’s duty to formulate an orderly investment plan to increase estate liquidity. If there is not enough cash to pay these expenses when the time comes (but there was enough value when he took over as executor), he could be “surcharged for speculating on the continued maintenance of estate values.”

To avoid these problems, an executor should take the following steps:

1. Value assets as quickly as possible.
2. Draw up a list of estimated debts, taxes, expenses, and other cash needs.
3. Compute the difference between “liquidity” (the cash he will have) and cash needs.
4. See how much of the estate consists of cash or “near cash” (bonds or savings instruments with a maturity date prior to the date he will need cash).
5. Decide which permanent assets should be sold to meet the estate’s needs if his analysis shows he does not have enough cash.
6. See if any assets should be disposed of immediately to avoid destruction or loss (including stocks or bonds that may fall in value or vacant non-income-producing real estate).
7. Consider selling small or odd-lot holdings as well as underproductive assets. Confer with beneficiaries and obtain their written approval before the executor makes any sales.
8. Surrender certificates of deposit to the issuer before maturity. This can be done without penalty when the owner dies.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Thursday, April 17th, 2008 at 2:01 pm and is filed under Estate Planning Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply