Death and taxes: 5 tax and money issues you should know about before agreeing to become an executor
What is an executor?
An executor is the person responsible for administering the assets and liabilities of a deceased estate. They must pay the deceased’s creditors (and the creditors of the deceased estate) and then distribute assets to beneficiaries in accordance with the deceased’s Will.
Here are the top 5 things, from a purely financial perspective, that you should consider before signing on to be an executor.
1. Find and protect assets
In order to obtain probate, which allows the executor to begin distributing assets, you’ll need to first gather an inventory of the deceased’s assets and liabilities. This includes obtaining approximate market valuations of shares and other property. You’ll need to notify banks and government agencies too. There may be unforeseen liabilities, such as where the deceased received a government pension, some of it may need to be paid back where the date of death and the timing of the last payment don’t align.
The executor is duty bound to deal with the assets to provide the best outcome for beneficiaries. Once you notify the bank of the deceased’s passing, they are required to transfer the accounts to a deceased estate account. This account will not earn any interest. As soon as probate is granted you will be able to transfer the funds to an interest earning account. You may need to consider longer term investing if the administration of the estate is going to take a long time such as where there is a testamentary trust. You’ll also need to notify insurance companies to obtain refunds and ensure that the real estate and personal property of the estate is adequately covered.
2. Complete tax returns and pay tax obligations
You’ll be responsible for completing the tax returns
- Date of death return (from the beginning of the financial year to the DOD)
- Any outstanding tax returns from prior years
- Annual tax returns for the deceased estate throughout the period of administration of the estate
Sometimes you won’t need to lodge a date of death return if there is no income tax liability. For instance, those with very low incomes such as those in receipt of various government support pensions. However, you’ll still need to close off their tax file number (TFN) by processing non-lodgement forms.
If the estate has income, you’ll also need to get a new TFN for the estate (different to the deceased’s).
The estate returns can be tricky because you’ll need to know if the beneficiaries are presently entitled to the income of the deceased estate (dividends, rent interest etc). It may be best to engage professionals to do this as present entitlement depends on a range of factors.
3. Dispose of assets – Main residence, shares and other property
Depending on the Will, you may need to sell assets in order to make distributions to beneficiaries (instead of simply transferring ownership). Often the assets of the highest value in a deceased estate are the deceased’s main residence and shares.
As you probably know, if you sell your main residence you don’t have to pay any tax on any gains, this is also true if the executor sells the deceased main residence, however there are a few rules that limit the concession. Generally, you have two years to dispose of the main residence to avoid any capital gains tax liability. However, it’s only that straightforward where the deceased owned 100% of the property and used it as his or her main residence up until they died.
If you sell shares, the estate may make a taxable capital gain (or loss). To determine this, you need to know the shares’ cost base, which means you’ll need to gather all the information about the purchase of the shares: when they were purchased and for how much. You’ll also need to check if there have been any events which could affect the cost base such as takeovers, mergers, demergers and capital returns. This can be one of the most time consuming and confusing things you’ll need to do as executor and you should definitely engage the help of a professional if you feel out of your depth.
This can be super tricky (pun intended). Superannuation isn’t automatically an asset of the deceased estate. The trustee of the superfund will usually pay the super and any life insurance in accordance with the deceased’s death nomination (if there is one). If a valid nomination is in place the executor must abide by it, even if its contrary to the deceased intentions, such as where a former spouse was nominated. However, unless the deceased has selected a dependant (e.g. child, spouse, financial dependant/interdependent) or the executor, a dependant could apply directly to the trustee of the superfund for a payout.
5. More taxing issues
You may need to withhold tax on payments made to beneficiaries. So be careful that you don’t distribute to beneficiaries without being clear about your obligations. Common examples of payments that may require withholding tax are super, superannuation death benefits and employment termination payments.
Lastly, before probate is obtained anyone who believes they have an entitlement to the deceased’s assets can challenge the Will, and once probate is granted it can still be challenged for up to 3 months. It can get messy, so best practice is to hold onto the assets until this period has passed.
So, should you agree to be an executor?
As you can see, the responsibilities of an executor can become complicated and are quite time consuming. If you’ve been named as an executor in someone’s Will you’re under no legal obligation to take on the burden; as well as the above you may also like to consider the following:
- Do you have sufficient time to manage the estate, keeping in mind some estates aren’t wound up for years?
- Are you comfortable dealing with the deceased person’s belongings and delving into their personal affairs?
- Do you have all the necessary financial and legal knowledge required or can you confidently rely on others to help you? If not, you may want to consider engaging professional assistance with some or all aspects of the estate.
- Are you able to amicably (or at least professionally) communicate with all the beneficiaries and are you able to act in an impartial manner toward them?
- Would you be still be able to handle the task if the Will were challenged in the Courts by the deceased’s family members or beneficiaries?