E336 Risks of Being an Executor

What are the risks of being an executor? An executor has a lot of power and responsibility during probate, but is correspondingly accountable for everything that happens within the estate.

We’ll cover how an executor has risk of even personal liability, how long that risk lasts, and how an executor can protect himself from these risks.

Executor personally liable for debts and taxes

The executor has personal liability for debts, taxes, and anything wrong with the estate. If an executor makes an error, the court’s first reaction is to deny payment of the executor's commission. If the commission is not enough to cover the court-determined error, the executor’s PERSONAL assets (home, bank accounts, etc.) are legally at risk if court rules that the executor screwed up.

When someone chooses an executor and that person accepts the role, it's very possible that neither party is aware of the risks. The risks can be more than the executor forgetting to pay a tax bill and becoming personally liable for it. Some scenarios are a bit more nuanced. For example, the executor sells the real estate, but at the closing a few months later, the heirs dispute the sale price. The heirs might seek the difference in the price from the executor's commission or from him personally. Another example is when the executor fails to pay a “knowable” debt or tax or fails to take the steps to find out if debts exist.

How long is an executor liable for debts?

Theoretically, the executor can be liable forever. There are some limits, but practically an aggressive lawsuit can get around those limits

Many states have laws that give creditors 7 months (or similar time limit) to submit verified claims. There is a specific legal procedure to become an official creditor or else the executor is not personally liable for that debt. However, even in absence of a formal claim, the executor can be held to have constructively known about the debt, or even should have known!

The best practice when closing an estate is to ask heirs to sign a receipt and release, which says the heirs accept their check as full and final settlement, and agree not to try to sue the executor later. Theoretically, the release is iron-clad protection for the executor. But practically, the heirs can get around it. An heir could claim that she signed the receipt and release because the executor failed to disclose information, otherwise she wouldn’t have signed it, etc.

How executors can protect themselves

The good news is that there are ways to protect yourself if you are an executor.

First, get the tax clearance. Don’t distribute estate funds until the IRS and state have confirmed you’re good to go. Although painfully slow, they have procedures to formally release an executor from personal liability. If you fail to get the tax clearance (or even fail to search for tax that is owed), the taxing authorities have and will slap you with large and completely unexpected tax bills.

Second, when closing an estate,