Those serving as fiduciaries, such as the executor of a will or trustee of a trust, assume significant legal and ethical responsibilities when they agree to serve. Those obligations take on increased significance in times of uncertainty and change. Now more than ever, in light of the COVID-19 pandemic, executors and trustees have a responsibility to their beneficiaries to give immediate attention to particular issues that may arise over the course of an estate's or trust's administration. Below are examples of issues fiduciaries must navigate during these difficult times.
Fiduciary Duties
Executors, administrators and trustees must act in the best interest of the estate or trust and its beneficiaries. Specifically, a fiduciary must:
- Act prudently
- Treat all beneficiaries fairly
- Refrain from acting in one's own interest.
Perhaps most importantly, a fiduciary has a duty to preserve the assets of the estate or trust and can be held liable for actions (or inaction) that jeopardize estate or trust assets. Therefore, it is important that estate and trust fiduciaries continue to exercise due diligence and act prudently in every decision they make. Furthermore, while the fiduciary is responsible for preserving the assets, he or she should retain trusted professionals, such as attorneys, certified appraisers, investment advisors, and CPAs.
Asset Preservation: Act Now
Given recent economic uncertainty, drastic daily swings in the stock market, and large changes in interest rates, it is imperative that a fiduciary have the ability to control the estate or trust property that he or she is charged with preserving.
Guidance for Estate Executors and Administrators
- A recently appointed executor or administrator should act expeditiously to collect estate assets, so that he or she has the ability to make prudent decisions regarding the estate's investments and protect the estate's assets.
- For investment accounts, this includes contacting the financial institutions where the decedent held accounts, providing proof of authorization to act, and moving the assets to accounts in the name of the estate.
- For real estate, this includes securing the property, inventorying its contents, ensuring it is properly insured, properly checking on lessees to assess continued rental income, maintaining the property so it does not lose value, and preparing it for sale (if necessary).
- One of the most critical fiduciary duties is to safeguard estate assets. The failure to do so may cause the fiduciary to be surcharged for losses. For instance, as an executor's responsibility is to preserve assets for the persons and entities interested in the estate (i.e., beneficiaries and creditors, including the IRS or state taxing authorities), an executor who decides to "time the market" rather than liquidate all investments upon being appointed may be found personally liable for any further losses incurred.
Guidance for Trustees
- Trustees are held to strict standards with respect to how they manage and invest trust assets. Many jurisdictions, including New York, have adopted the Prudent Investor Rule, which requires trustees to act with reasonable care to implement an overall investment strategy that is in the best interest of all trust beneficiaries and in line with the purposes and terms of the trust. This is not a results-based model, however; if the trustee exercises reasonable care with an appropriate investment strategy that is reviewed prudently, poor investment performance alone may not give rise to trustee liability.
- Given the current extreme market volatility, a trustee should act expeditiously to carefully reevaluate the trust's investment strategy. Coordination with a trusted financial advisor may be a factor in showing reasonable care exhibited by a trustee.
Tax Returns
Fiduciaries have a duty to ensure that all required tax returns are filed timely.
Income Tax Returns
- Executors have until July 15, 2020 to file a decedent's 2019 federal income tax return, and can request an extension until October 15, 2020. The July 15, 2020 date reflects the IRS's recent postponement of the tax deadline.
- Executors and trustees have until July 15, 2020 to file federal fiduciary income tax returns and can request an extension until October 15, 2020. The July 15, 2020 date reflects the IRS's recent postponement of the tax deadline.
- Similarly, New York has postponed the deadline for income tax returns and fiduciary income tax returns. However, some state income tax return deadlines are still being updated. Therefore, fiduciaries should check with their tax advisors for the latest applicable deadlines.
Gift Tax Returns
- Executors and administrators of the estates of decedents who made gifts in 2019 have until July 15, 2020 to file a 2019 federal gift tax return.
- Similarly, Connecticut has postponed the deadline for state gift tax returns. New York and New Jersey do not impose a gift tax.
Estate Tax Returns
- Federal estate tax returns due between April 1, 2020 and July 15, 2020 need not be filed until July 15, 2020. While original state filing deadlines remain in effect, in light of the federal extension, it is possible that states will follow suit. Fiduciaries should confirm state estate tax deadlines with their tax advisors.
- Alternate valuation rules permit an estate tax return to be filed using the value of assets 6 months after the date of death (or, if the asset is sold within 6 months after death, on the date of sale), rather than the date of death value. For decedents who died in or after September 2019, using the alternate valuation date may result in significant federal (and state) estate tax savings given recent market changes. Executors should consult with their tax advisors to determine whether an alternate valuation provides a tax benefit.
For any questions or concerns, feel free to reach out to your wealth planning counsel at Venable to discuss further. For further reading, please refer to our prior alerts.