If a fiduciary (in NY it’s an “Administrator” if no Will and “Executor” if there is) has to file an Accounting, where should they start?  What should they do?

The Answer is to know what you should have been doing all along, and if you haven’t been, get caught up as much and as quickly as possible.   Here’s what you should have been doing:

  • Collecting the decedent’s assets and depositing into an Estate bank account.
  • Addressing any creditor claims.
  • Filing tax returns when due and paying any taxes that might be owed.
  • Communicating to the interested parties about what is going on.

Does everyone do all these things perfectly?  Not always.  But if you have to account it should not be difficult to start catching up.  Not only that, if catching us is going to take some time, I’d suggest being open about it by disclosing to the beneficiaries exactly what is going on and how you are addressing it.

I have been using an expression lately that fits here:  “The fact that I should have already done something is no reason not to do it”.  Start doing it.  Collecting assets, dealing with creditors, dealing with taxes and communicating with beneficiaries IS the job.  It takes time and some persistence to do these things.  Just do what needs to be done.  If you need help, get help.  But get it done and communicate.  It’s way worse for everyone when you don’t.

Will some people second guess you?  Maybe, but that’s part of the job too.

For all these things to do, you should have your records and back-up.  If you got a little disorganized, or don’t have all the records, it just takes some time and effort to get what is missing and then organize it.  For many reasons, assets are sometimes hard to locate or difficult to collect.  Most beneficiaries understand this, and most of these problems ARE solvable.  I suggest fiduciaries try to solve these problems, but many times I do get involved as an attorney.  If this costs the estate a few bucks, beneficiaries understand this.

Creditor claims can be tricky and time consuming, but a fiduciary should not ignore them.  Every case is unique when it comes to creditor claims.  You have to factor in the nature and size of the claims, the number of claims, the known assets in the Estate, and know your settlement leverage, whatever it may be.  At the very least, I like to review this issue with the fiduciaries and have a strategy.

Most accountants do a fine job with filing income and estate tax returns for Estates. Common sense says avoid tax season for this if you can.  Accountants are happy to work on these estates when they are less busy.  If you don’t know an accountant, or don’t want to use your own, ask your attorney to refer one.  As a fiduciary, what you never want to do is have tax returns filed late.  When this happens, it’s your fault and you could be liable for any penalties an interest.  One of the reasons to collect assets quickly is have the Estate liquid enough to pay estimated taxes and avoid penalties.  I’d rather a fiduciary over pay an estimated tax and get a refund, than to incur penalties and interest later and be personally on the hook.

This brings up an important point.  When I am an attorney for a fiduciary, who is my client?  Am I the “attorney for the Estate”, as is often said?  I never refer to myself that way.  I consider myself the attorney for the fiduciary, in that capacity. That’s why I give the advice referred to above – I view my role as advising the fiduciary to act correctly in their role.

Finally, when communicating with the other beneficiaries, one should be conscious of any appearance of a conflict of interest.  This becomes clear when, as is often the case, the fiduciary is also a partial beneficiary (ie – the Estate is to be split 4 ways and the fiduciary has a 1/4 interest).  Your communication should always make your role clear, and you should be blatantly non-preferential towards yourself.  You’ll be entitled to you Executor’s fee off the top, and reimbursement of your expenses, plus your beneficiary share.  I want to make sure you get all that if that’s what you want.  (Sometimes fiduciaries do reduce or waive their fee, but that is a personal decision)

It is often said that the best way to settle a possible lawsuit is to prepare as if you would have to prove everything at trial.

When you have the goods, and you show that you did it right, these things resolve.

And if they end up in Court despite this, you are ready.

When someone is a fiduciary (Executor or Administrator) of an Estate, they are accountable to the people who have an interest in the Estate.  This includes the beneficiaries.  When they are doing their job correctly, they are transparent, honest, and communicative.

What if they aren’t doing those things?  What if they are being secretive, or doing things that don’t seem right?  Or are doing nothing?

Sad to say, these things happen with some frequency.

The remedy in New York is filing a “Petition to Compel an Accounting”.

This is a Surrogate’s Court proceeding which causes a Citation to be issued to the Fiduciary, directing them to appear in Court and file a formal accounting (or otherwise explain why they haven’t yet).  As in any Surrogate’s Court proceeding, the person asking for relief (the Petitioner) files a Petition which explains what’s going on.  It’s a pretty simple Petition, “I am a beneficiary in the Estate of Smith. Joe  is the Administrator.  It has been more than 7 months since Joe was appointed, and he has not accounted.  Make him file an Accounting”.  The wording is a bit more legal, but essentially that’s what it says.

Why 7 months?  That’s the time period for creditors to file claims, so generally we don’t expect a fiduciary to account before that time.

The “Petition to Compel” is served on the Fiduciary.  When the Fiduciary appears in Court in response to the Citation, the Surrogate generally asks a few questions:

  • Have you filed an Accounting yet?  If so, the “Compel” proceeding is over.  If not, the next question is “why not?”…
  • There are all kinds of answers, but no matter the explanation, the next question is, “when can you get it done and filed?”
  • Depending on the response, the next question will be “Are you willing to consent to an Order directing you to Account?” The answer should be yes, and then…
  • How long will you need?  The choices are usually 30, 45 or 60 days.  People sometimes ask for longer, but they better have a good reason.

The Court will then note for the record what the Fiduciary has agreed to, and then ask the Petitioner (the one who asked for an Accounting) to “Settle an Order”.  This means the Petitioner (or their attorney) will submit an Order for the Judge to sign that directs the fiduciary to account by a certain date.  Submitting this order is an important step because the time doesn’t start to run until the Judge signs the Order. If it seems strange that the litigants (or attorneys) have to submit the Order for the Judge to sign, I’d say “Welcome to law practice”.

When the Fiduciary files their accounting, this is a new proceeding.  That means their Petition and Accounting gets filed with the Court, with Citations issuing to all interested parties.  This is its own proceeding, where objections can be filed and the REAL issues are addressed.  I will cover this in a future post.

One more thing about compelling an accounting.  What if the fiduciary agrees to account, consents to an Order, an order is signed, and they STILL don’t account. The next step is a Petition for Contempt of Court.  Why is it “contempt”?  Because the person has violated a Court order.  Are fiduciaries ever put in jail for such things?

YES!!!

When things reach that point, they usually do what they are supposed to do.  Sometimes that’s what it takes.

And, sometimes at the outset you suspect it will be that way.  That’s why you get to ball rolling with the “Petition to Compel”.

When I start representing someone who is about to become a Fiduciary (Executor or Administrator) of an Estate, I always talk about “how an Estate finishes”.  Like many things in life and business, if you know where you are trying to go it is much easier to make a good plan to get there.

Not every State handles “estate completion” the same way.  There are two basic approaches:  mandatory accounting vs non-mandatory accounting.

In a mandatory accounting State, there is some proceeding that must be filed so the the Court knows the Estate has been completed and the fiduciary has done what they are supposed to do.  This generally involves filing forms and paying a filing fee, and there are generally time constraints (so if it is not ready to be completed you have to explain why).  I’m not going into more detail because New York (where I practice) is NOT a mandatory accounting State.

In a non-mandatory accounting State, the fiduciary is not required to file anything with the Court to show that the Estate is completed.  This raises two logical questions:

  1. What SHOULD fiduciaries do to complete an Estate and protect themselves?
  2. What happens in New York if there is some issue or problem in completing the Estate?

What a fiduciary SHOULD do is keep good records, communicate regularly with the beneficiaries in a transparent way, file any tax returns that are required, and then….SEEK TO COMPLETE THE ESTATE WITH AN INFORMAL ACCOUNTING.

This is done by showing the beneficiaries what has been done.  This can be done with a letter, or on a spreadsheet, or in any way that shows a bottom line for a proposed final distribution.  With this informal accounting we would send a document called a “Receipt & Release”.  This document essentially says “I know what you did as Fiduciary and I agree it was correct and I agree with the bottom line and I release any claims I may have about this”.  The letter to the beneficiary makes clear that when the Receipt and Release is signed “then you will get your money”.

What if the beneficiaries don’t agree?  Or don’t respond?

While New York is not a mandatory accounting State, the Surrogate’s Courts have an Accounting Department, and there is plenty of law on how one CAN file a formal Accounting Proceeding.  Unfortunately, this happens a lot.  The Accounting Department is where the action is, and most of the really acrimonious disputes are there.

In a nutshell, when a Fiduciary wants approval for what he has done, or what he is proposing to do to complete the Estate, a formal accounting is filed with the Court.  The Court will then issue a Citation to the interested parties, which essentially says “Fiduciary has filed the attached accounting and is asking the Court to approve it.  Come to Court on (date) or a Decree will be issued approving the Accounting.”

If a beneficiary gets such a Citation and wants to dispute something, they come to Court and file Objections to the Accounting.  This then becomes a case, like any other civil litigation….discovery, motions, conferences, etc.

Generally, an expensive, nasty mess.

Which is why it’s better to do a good job as fiduciary and find a way to account informally.

Next post – what if you are the beneficiary and the Fiduciary doesn’t account (formally or informally)…. at that point it’s a “Petition to Compel an Accounting”