Executors are responsible for handling the administration of an estate until it is “settled” or closed. Once the assets have been marshaled, bills have been paid, specific bequests distributed, and any outstanding issues resolved, the fiduciary (the executor or administrator) must prepare an “accounting.” An accounting must be done before the estate’s remaining assets (called the “residuary”) can be distributed to beneficiaries and before the executor will be released from all claims regarding the administration of the estate.
The accounting must itemize the financial transactions of the estate, such as principal received, sales and liquidations, expenses and payments, cash reconciliation, etc. This is intended to hold a fiduciary accountable for his/her actions, by confirming that all funds are accounted for properly and resolving any challenges that the beneficiaries may have with respect to actions taken by the fiduciary.
There are two ways to do an accounting: judicial or informal.
- Judicial. In a judicial accounting, the Surrogate’s Court determines whether the fiduciary has properly accounted for all his/her actions. Beneficiaries can file objections, in which case the Court can order discovery, motion practice and a trial in order to decide whether the executor acted properly.
Typically, residuary beneficiaries are the only interested parties to a judicial accounting since the composition of their distribution is not fixed by the will. Specific beneficiaries (those who were given specific property in the will) are not generally required parties to a judicial accounting provided that the executor has obtained a “receipt and release” from these beneficiaries acknowledging that they have received their bequest. Where a specific beneficiary is a minor and a trustee, parent or guardian received their bequest, the person who received the bequest can sign a receipt and release on the minor’s behalf.
Judicial accountings take time and can be expensive. They can eat away at estate assets, which is a particular concern for smaller estates. As a result, most executors and beneficiaries like to avoid a judicial accounting if possible.
In some cases, an executor may have previously been directed to provide interim accountings based on a court petition by an interested party. In that situation, the marginal cost and effort of a final judicial accounting may not be so burdensome.
- In an informal accounting, the beneficiaries sign an agreement that provides the following:
- They approve the accounting of all of the executor’s actions and transactions, including payment of commissions to the executor;
- They confirm that they have received or are receiving (upon signing of the agreement) all that they are due under the will;
- They release the executor from any liability.
Informal accountings can often be undertaken even before a formal accounting could be pursued, allowing residuary beneficiaries to receive their distributions sooner. For example, for estates that filed or paid estate taxes, a closing letter or some other letter discharging the estate for liability for further estate taxes must be submitted with the judicial accounting. In an informal accounting, waiting for such closure from the taxing authority is not necessary. Instead, the agreement settling the account can provide for the maintenance of a reserve by the fiduciary to pay any additionally assessed estate taxes and other necessary administrative costs.
However, some estates can’t take advantage of informal accountings. For example, in some cases, the will provides for distributions to a minor to be held in trust for the minor. However, if the executor and the trustee are the same individual(s), the trustee who receives the distribution cannot release himself, as executor, from liability. In such a case, a judicial accounting will likely be necessary and the court will appoint a guardian ad litem to represent the interests of the minor.
Best practices for accountings include the following:
- Consistently maintain a financial accounting and reconciliation from the beginning of the fiduciary’s administration of the estate. It is costly and time consuming to put together an accounting in one fell swoop, especially if the estate has been active for more than a year and/or is complicated.
- Use an attorney to draft the paperwork needed for the accounting. In the case of an informal accounting, the fiduciary must provide the accounting document to the beneficiaries, and the agreement settling the account, once signed, can be filed with the Court. The fiduciary can also request a decree from the Court on the basis of the agreement settling the account which formally releases the fiduciary from any liability.
- In order to minimize the need for a formal accounting, individuals who are engaged in estate planning should consider naming different people as trustees and executors in order to avoid the conflict prohibiting a fiduciary from accounting to himself. For example, if there is only one executor, two co-trustees (an executor and someone else) should be nominated. If there are co-executors, one of the trustees nominated should not be an executor.
An accounting is an important last step in settling an estate and fiduciaries should make sure they do it right.
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This post does not constitute legal advice or establish an attorney-client relationship.