Accountants as executor: Will I or won't I?

This article was current at the time of publication.

Accountants are often the professional services provider many clients approach to appoint as the executor to their estate.

This is due to their superior knowledge of a client's assets, tax position, ongoing relationship, and the ethical standards all practitioners are obliged to honour.

Such appointments speak volumes about the trust many clients place in their accountant to handle their most intimate financial matters and the bearing they may have on beneficiaries.

However, with the role often burdensome and time-consuming, Ian Raspin FCPA, managing director of BNR Partners, urges accountants to think seriously about whether they have the specialist knowledge and skills to successfully handle the demands of the role.

The offer to handle a client's will should allow the accountant-client relationship to flourish, but it can also lead into unchartered waters, Raspin says. Practitioners unaware of what is required to fully discharge their legal obligations as an executor can easily come unstuck.

A minefield of risks

Before accepting executorships, Drew Fenton CPA, managing director of Fenton Green, which specialises in insurance products and services for CPA Australia members, advises accountants to question who is engaging who.

If in doubt, Fenton says it is important to ask exactly where the fees for handling an executorship will go — to the practice or the individual?

While professional indemnity insurance (PII) covers accountants when working officially, that is not the case should they accept an executorship privately. If a partner says they want to sit on the estate of a client as a trustee, Fenton recommends denying the request because assimilating the additional risk profile for limited fees could lead to an unwanted claim.

"Accountants must understand the game before they start playing it," he says. "Even an estate that simply involves selling a nursing home bond or family home and distributing a few dollars left in the bank can be fraught with hidden complications and the bigger the estate, the greater the risks."

Raspin says that one of the myriad risks associated with acting as an executor is being saddled with unpaid debt. Section 254 of the Income Tax Assessment Act 1936 provides the commissioner with the right to recover any remaining tax liability from a legal representative (including an executor).

He cites an example where the principal of a firm ended up personally having to pay $68,000 for an unaccounted capital gains tax (CGT) liability that arrived after all distributions were completed. According to Fenton, this would have to be treated as a trading loss, as it is unlikely to be recoverable via PII.

Don't give up your day job

Another risk, Raspin adds, is that the amount of work will not be commensurate with adequate remuneration. He cites a case where years spent working on an executorship for a single family, which — when including work done for adult children represented 40 per cent of the firm's total business — almost finished the practice.

"When acting as the executor of the surviving parent's estate, the accountant ended up losing the entire family as clients, as the estate became very complex and litigious," Raspin says.

"The loss of non-coverable estate administration time and small-to-medium business clients brought the practice to its knees."

While it is not unusual for executors to spend up to 30 hours a week over the first four months after a death administering a standard estate, there could easily be another 15 hours a week over the next three to six months.

With more complex estates — where there are trading entities, unusual or non-local assets or estate litigation by beneficiaries — Raspin says time demands can become even more onerous.

Greater complexity and uncertainty around remuneration

To ensure executorships start on the right footing, Hall & Wilcox partner William Moore says it is critical to address upfront how fees and remuneration will be handled. For starters, acting as executor will require delegating the probate work to a lawyer and the accounting firm to undertake the lion's share of what else needs doing.

In response to the colossus of case law in every jurisdiction about how accounting (and legal) executors unintentionally incur the wrath of courts for improper charging or charging without basis, there have been changes to the Administration and Probate Act 1958 (Vic).

Effective 1 November 2017, the changes empowered the court to scrutinise how executors and administrators of estates charge fees and commissions. For professional service providers, Moore says it means claims to commission/fees have become more complex and less certain.

To reduce complications, certain processes also need to be completed by the will-maker via a remuneration clause before it is executed. Where a partner (who is the executor) spends hundreds of hours working with the family, they may choose to be awarded some level of commission.

If no such provision has been allowed by the maker of the will, Moore says an executor will need to seek consent for remuneration from all residuary beneficiaries.

The alternative is to apply to the court for a commission payment in recompense for "pains and trouble" incurred in executing their duties. While an executor can claim up to 5 per cent of an estate in commission, Moore says courts seldom grant more than 3 per cent.

When things become convoluted

Before committing to an executorship, Moore recommends assessing the client's will and beneficiaries of the estate to gauge how easy it will be to understand and implement. He says alarm bells should sound if the will includes complex language and structures (such as trusts or difficult family relationships), that could easily result in litigation.

Because of the potential complexity involved in administering an estate, Moore suggests accountants keep clear and current records to explain charges, especially given beneficiaries' right to have fees adjusted. This is vitally important when accepting an executorship that also entails taking on directorship of companies or trusteeship of trusts or self-managed superannuation funds.

"As an accountant, you're likely to be held to higher standards, so any decisions you make [as an executor] to either appropriate or realise assets will be scrutinised by beneficiaries," he says.

He says it's equally important to remain independent of any conflicts of interest. He urges accountants to assess the risk of damaging existing client relationships (for example, multiple generations within a family) due to decisions made as executor, or any legal battles among beneficiaries.

"In light of their obligations, accountants should seek legal advice both before acting as an executor and throughout the process to ensure they're discharging their executorial and trustee duties faithfully," Moore says.