Estate planning is a must for anyone, but the stakes are multiplied for high-net-worth individuals, who need to choose the right executor or executors to carry out their final wishes in their wills.
Winding up the estate of someone with at least $1-million in liquid assets – the general definition of someone of high net worth – isn't necessarily straightforward, and involves careful thought, planning and foresight because there are both emotional and practical factors to consider.
Executor duties can be given to a relative, a close friend, a beneficiary, a professional – such as a lawyer or accountant – or a corporate executor (incorporated trust companies that are typically subsidiaries of banks).
"The decision about whom to pick is a major one, so take the time, [and]look at all the options to see what works best," says Frank Fazzari, chartered accountant with Fazzari and Partners LLP in Vaughan, Ont., who has been asked by some high-net-worth clients, who are also friends, to accept the role of executor.
An executor is charged with duties such as assembling and valuing the estate assets, filing tax returns, paying all taxes and debts, ensuring beneficiaries get what is willed to them, and ensuring proper records are kept of everything that has been paid and disbursed. He or she should also be someone who is likely to outlive the person who has written the will, is skilled and educated in legal and financial matters, is hopefully familiar with the estate, has no conflict of interest, and is known for his or her honesty and loyalty.
Friends and family members are often considered most likely to be executors, but a person with wealth and often business assets, or people with complex personal situations – such as those involving blended families, divorced or estranged family members – may want to use someone such as a lawyer, accountant or corporate executor to cut down on possible controversy.
Paul Fensom, a Toronto-based director with Scotia Private Client Group, estate and trust services, says people with straightforward assets and family situations may not need to appoint an outside entity as executor. However, although most people are at first honoured to be named executors, they also aren't aware of the time involved and knowledge required, and would not necessarily take on the role again.
"It can take 18 months or more [to execute a will] and that's a lot of time for someone to invest, particularly if an executor has another job," Mr. Fensom says. He gives the example of a client who had to take a leave of absence from her job to deal with her deceased brother's affairs because he had a small business that made dealing with the will more complicated and time consuming.
As well, individuals who are appointed executors carry all the legal responsibilities of a corporate trustee, notes Leanne Kaufman, vice-president, Professional Practice Group, RBC Wealth Management, and author of The Executor's Handbook.
"There are all sorts of pitfalls of potential personal liability in the administration of a will, so it's important for executors to know what they're doing; if they mess it up, they may be putting all their own assets, as well as those of the beneficiaries, at risk," she says from her Toronto office.
One of the biggest responsibilities of an executor is to ensure all creditors and the proper taxes are paid before assets are distributed to beneficiaries. If a mistake is made, the executor can be held personally liable – for that reason, a corporate executor, with knowledge and assistance in estate, trust and tax laws, asset gathering and valuation, property management, investing and accounting, can be invaluable, some experts say.
"We have had situations where our expertise in tax filing and knowledge around certain [options people have when filing someone's tax return after their death]have created tax savings that someone without the same level of expertise wouldn't be able to find or receive – and that has significantly offset the executor fee," Ms. Kaufman notes.
A personal executor can take the same fee as a corporate executor, although many personal executors who are also beneficiaries may not choose to be compensated because the money has to be declared on personal taxes as income and might put them in a higher tax bracket. The executor fee can be as high as 2.5 per cent of the assets coming in and 2.5 per cent of the assets going out, as well as a fee on income earned by the estate, and a care and management fee.
However, Mr. Fazzari warns that even for those who choose a corporate executor, complicated situations can call for additional expert help.
When estates "are easy, liquid and the issues surrounding an estate or the assets under administration are not complicated," it is straightforward for the executor. If, for example, the estate has $100-million in cash that needs to be invested in a diverse pool of liquid assets for some minors or adults, then it is relatively easy to do so.
"This is no different than administering assets for a hospital foundation or a pooled fund with stringent investment criteria. They create and monitor from an investment policy to meet the needs for which the estate or assets are under administration," he says.
However, "if, for example, the assets are real estate that may require long-term holds or are in the middle of development, then it may be difficult for an inexperienced random corporate executor to realize all the true value of the assets," he says. Or, if there are minors involved or there are conflicting beneficiaries, then a more "tailored" executor may be required.
"A corporate executor will have more difficulty dealing with conflicting objectives than a knowledgeable, experienced professional," he says, so experts such as investment or real estate professionals may also be required.
When to hire a corporate executor
Some things to consider when deciding whether to use a corporate executor:
– Can offer an impartial, unemotional and objective approach to estate administration, while managing conflicting interests such as blended families, previous marriages and difficult personalities.
– Is readily available. Eliminates worries about a faraway executor, or an executor dying or becoming incapacitated or otherwise being unable to execute the will.
– Can provide continuity, especially when there is a need for long-term trusts and financial care in certain family situations, such as an ill spouse or minor or disabled children.
– Corporate executors and personal executors generally are given the same fee, sometimes waived by personal executors, especially if they are beneficiaries. But a fee agreement can also be negotiated with a corporate executor at the time the will is drawn.
– When hiring a corporate executor, there is often no need to hire additional outside experts, meaning no extra cost to the estate.
– A corporate executor may not be able to offer the personal touch of a relative or friend who knows the will maker.
– An individual should add to his/her will a clause saying that a personal executor who is inexperienced may be authorized to appoint a trust company to perform more difficult duties such as arranging trust funds, and that an alternative executor should be named in case the first choice is unable to act or dies before the will is executed. Both executors and alternatives should also have copies of the will.
Special to The Globe and Mail