At some point you may have been asked if you’re agreeable to being named an executor of an estate. You may have forgotten all about it until a long-lost cousin or a friend you haven’t seen in years dies. Now what? The TaxLetter columnist Mark Goodfield offers suggestions to get you started on this potentially overwhelming responsibility.
I have been an executor for three estates. I have also advised numerous executors in my capacity as the tax advisor/accountant for the estates of deceased taxpayers. The responsibility of being named an estate executor is overwhelming for many, notwithstanding the inexcusable fact many individuals appointed as executors had no idea they were going to be named an executor of an estate. In my opinion, not discussing this appointment beforehand is a huge mistake. At a minimum, I would suggest that you should always ask a potential executor if they are willing to assume the job (before your will is drafted). But that is a topic for another day.
So, John Stiff dies and you are named an executor. What duties and responsibilities will you have? Immediately you may be charged with organizing the funeral, but in many cases, the immediate family will handle those arrangements, assuming there is an immediate family in town. What’s next? Well, a lot of work and frustration dealing with financial institutions, the family members and the beneficiaries.
Below is a laundry list of many of the duties and responsibilities of an executor:
■ Your first duty is to participate in a game of hide and seek to find the will and safety deposit box key(s). If you are lucky, someone can tell you who Mr. Stiff’s lawyer was and, if you can find him or her, you can get a copy of the will. Many people leave their will in their safety deposit box; so you may need to find the safety deposit key first so you can open the box to access the will.
■ You will then need to meet with the lawyer to co-coordinate responsibilities and understand your fiduciary duties from a legal perspective. The lawyer will also provide guidance in respect of obtaining a certificate of appointment of estate trustee with a will (“Letters Probate”), a very important step in Ontario and most other provinces.
■ You will then want to arrange a meeting with Mr. Stiff’s accountant (if he had one) to determine whether you will need his/her help in the administration of the estate or, at a minimum, for filing the required income tax returns. If the deceased does not have an accountant, you will probably want to engage one.
■ Next up may be attending the lawyer’s office for the reading of the will; however, this is not always necessary and is probably more a ‘Hollywood creation’ than a reality.
■ You will then want to notify all beneficiaries named in the will of their entitlement, and collect their personal information (address, social insurance number etc).
■ You will then start the laborious process of trying to piece together the deceased’s assets and liabilities.
■ The next task can sometimes prove to be extremely interesting. It is time to open the safety deposit box at the bank. I say extremely interesting because what if you find significant cash? If you do, you then have your first dilemma: Is this cash unreported, and what is your duty in that case?
■ It is strongly suggested that you attend the review of the contents of the safety deposit box with another executor. A bank representative will open the box for you and you need to make a list on the spot of the box’s contents, which must then be signed by all present.
■ While you are at the bank opening the safety deposit box, you will want to meet with a bank representative to open an estate bank account and find out what expenses the bank will let you pay from that account (assuming there are sufficient funds) until you obtain probate. Most banks will allow funds to be withdrawn from the deceased’s bank account to pay for the funeral expenses and the actual probate fees. However, they can be very restrictive initially, and each bank has its own set of rules.
■ As soon as possible you will want to change Mr. Stiff’s mailing address to your address and cancel credit cards, utilities, newspapers, fitness clubs, etc.
■ As soon as you have a handle on the assets and liabilities of the estate, you will want to file for letters of probate, as moving forward without probate is next to impossible in most cases.
■ You will need to advise the various institutions of the passing of Mr. Stiff and find out what documents will be required to access the funds they have on hand. In one estate I had about 10 different institutions to deal with, and I swear that not one seemed to have the exact same informational requirement.
■ If there is insurance, you will need to file claims and make claims for things such as the CPP benefit.
■ You will need to advertise in certain legal publications or newspapers to ensure there are no unknown creditors; your lawyer will advise what is necessary.
■ It is important that you either have the accountant track all monies flowing in and out of the estate or that you do it yourself in an accounting program or Excel. You may need to engage someone to summarize this information in a format acceptable to the courts if a ‘passing of accounts’ is required in your province to finalize the estate.
■ You will also need to arrange for the re-investment of funds with the various investment advisor(s) until the funds can be paid out. For real estate, you will need to ensure supervision and/or management of any properties and ensure insurance is renewed until the properties are sold.
■ A sometimes troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated and nothing can be taken.
■ You will need to arrange with the accountant to file the terminal return covering the period from January 1st to the date of death. Consider whether a special return for ‘rights and things’ should be filed. You may also be required to file an ‘executor’s year’ tax return for the period from the date of death to the one year anniversary of Mr. Stiff’s death. Once all the assets have been collected and the tax returns filed, you will need to obtain a clearance certificate to absolve yourself of any responsibility for the estate and create a plan of distribution for the remaining assets. (You may have paid out interim distributions during the year).
The above is just a brief list of some of the more important duties of an executor. For the sake of brevity I have ignored many others.
The job of an executor is demanding and draining. Should you wish to take executor fees for your efforts, there is a standard schedule for fees in most provinces. For example in Ontario, the fee is 2.5 per cent of the receipts of estate, and 2.5 per cent of the disbursements of the estate.
Finally, it is important to note that executor fees are taxable as the taxman gets you coming, going and even administering the going.
Additional information on the duties of an executor, such as below, is available on the Canada Revenue Agency website.
■ On what return do I report Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) death benefits for the estate of the deceased?
A CPP or QPP death benefit paid to the estate must be reported on the T3 Trust Income Tax and Information Return for the estate of the deceased in the year it is received by the estate. The estate will pay tax on that amount, unless the death benefit is payable to a beneficiary in the year it is received by the estate, in which case a T3 slip will be issued in the beneficiary’s name and the beneficiary will be required to include the amount on his or her T1 return. For deaths occurring after 2015, the resulting estate cannot elect to have the benefit taxed in the estate if it is actually income of the beneficiary in the year, and the estate otherwise has taxable income.
■ Where the CPP or QPP death benefit is the only income of the estate and a T3 return is not required to be filed, the death benefit can be reported directly on the T1 return of the beneficiary.
The amount of the CPP or QPP death benefit is shown in box 18 of Form T4A(P), Statement of Canada Pension Plan Benefits. Do not report this amount on the return for the deceased person. Unlike a death benefit that an employer may pay to the estate or to a named beneficiary, this benefit is not eligible for the $10,000 death benefit exemption. You have to report all other CPP or QPP benefits on the deceased’s return.
■ The deceased had investments in a tax-free savings account (TFSA). Who reports any income earned in the TFSA?
When the holder of a deposit or an annuity contract under a TFSA dies, the holder is considered to have received, immediately before death, an amount equal to the fair market value (FMV) of all the property held in the TFSA at the time of death. As a result, no income should be reported by the deceased on the final return or any optional returns. After the holder’s death, the annuity contract is no longer considered a TFSA, and all earnings after the holder’s death are taxable to the beneficiaries in the year they receive this income. For more information, see Guide RC4466, Tax-Free Savings Account (TFSA), Guide for Individuals.
This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.
This is an edited version of an article that was originally published for subscribers in the September 2017 issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.
The TaxLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846
The TaxLetter •10/29/17 •