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Part Two: Executors Must Verify That They Have The Right Document

Dave Frees: I would say one of the things that executors do quite often and early in an administration is to make distributions too early and without protecting himself or herself from liability for that distribution.

And this is something all of you listening in that who are executors or expect to be executors or trustees, put a big star by this one because this can cost you money. You can be personally liable for this. When you are an executor or a trustee and you get money, there is some common wisdom out there, especially if you have a trust, that you just get the money and give it out, and that you do not need to worry about any probate, you do not need to worry about any court process, and you do not need to worry about taxes.

But that is wrong, when executors or trustees make distributions before they have done all the other things they are supposed to do, these are legally known as “at risk distributions”, and guess who is at risk? The executor or the trustee is personally at risk. So I will give you a real world example. You find out that Aunt Susan has passed away. You gather together all of her assets. You sell her house and find out you have a pool of $400,000 and you and your sister are the beneficiaries. You give your sister and yourself the money. Then you find out that you owe an inheritance tax liability, and you thought because you were a trustee, and it was not subject to probate, that you did not know the inheritance tax, but you now do.

You go to your sister, and say “Hey, I need $50,000 of that money back,” and she says “Forget about it.” What are you going to do because you’re liable to the state and you’re liable to those creditors? So you have to go through the process meticulously and you have to make sure you have paid all the creditors that can assert claim, you have to make sure you have done everything right before you give the money out.

Also, that does not mean that you cannot give some money out in the mean time, but you better have a document that makes that person promise to give it back and you better make darned sure that you are distributing under the right document to the right person and not so much that you are going to be stuck without the money to pay off expenses that may occur.

Ray Deering: David, is there a name for that document that you, if you want someone, if you make the distribution and you want the money to come back?

Dave Frees: Sometimes you see them called refund agreements, sometimes you see them called receipt release and indemnification agreements or preliminary family settlement agreements.

Basically this is another way that we can make distributions without having to go to court. We can sit down as a family and say, everybody’s getting $50,000, everybody’s getting $100,000, everybody’s getting $200,000, whatever the number is, and I as an executor am willing to make a distribution to you of half or a third, and you’re willing to take that, but in return for that, everyone’s going to agree that if we’ve miscalculated something, you are going to pay your pro-rata share back.

Now I always caution executors, that there is a big difference between having the right to get it back and getting it back, because the people take their inheritance and they buy boats. So when you try to get the money back it might be hard. It is certainly better than not having that kind of arrangement.

So I would say first, failure to probate the correct document, second, giving the money out immediately or way to early before you have found out all of the other things you have got to do in this case. That could get you into big, big trouble.

David M. Frees III Esq.

610-933-8069

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2009-02-162009-02-16

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