Many people are unaware of the expenses involved when you are the Executor in an estate and are required to administer and/or defend an estate against a claim contesting the Will. The costs and usual expenses of an estate extend further than arranging the funeral, and in most cases need to be paid upfront by the Executor. Estate Litigation Associate, April Kennedy, breaks down some of the costs an Executor may be confronted with.
What costs are involved when administering an Estate?
- Bills of the Deceased (Rates, utilities, insurance, internet, phone etc.)
The first out-of-pocket expense, which can also be the most stressful for an Executor, is the deceased’s bills. These can include council and water rates, electricity and phone bills, body corporate or strata fees and insurance. There’s generally no grace period with the institutions who require payment, and they are still required to be paid on time. The deceased’s bank accounts are usually frozen, so the Executor must find a solution to pay all bills.
- Funeral Costs
A funeral can cost anywhere between $5,000 to $15,000 which has to be arranged immediately after the person has died. This expense is usually paid by the estate from the bank account of the deceased; however, the Executor still needs to approach the bank and ensure there is enough money available to cover these costs. There may also be the cost of a wake for friends and relatives.
- Legal Fees
If there is a Will, engaging lawyers and obtaining a grant of probate comes at a cost. Administering the estate involves dealing with the assets, closing accounts, distributing assets to beneficiaries, obtaining a grant of probate or administration which includes court filing fees ranging from $600 to $2,000. All these tasks can accumulate legal fees, which in most cases come out of the estate, but funds aren’t usually available until after probate has been granted (which can take up to three months after someone has died). The Executor must consider how legal fees will be paid. A solicitor can defer these fees until the funds become available and can be paid out of the estate, but many law firms don’t agree to carrying this cost. In these circumstances, the Executor is required to pay these fees up front and get reimbursed later.
- Ongoing Costs and Fees
Other fees that may need to be dealt with include property fees, such as ongoing property maintenance and repairs, or cleaning costs to ensure a property is appropriately prepared for sale or rent, depending on what will happen to this asset.
If the Executor is working, they will likely need to take time off from their usual work to complete their duties, which may mean taking annual leave, personal leave or even unpaid leave. It can be very time-consuming organising the funeral, clearing out or maintaining someone’s property, or cleaning up the deceased’s personal and financial affairs.
Transit costs may also have to be factored in if the Executor lives elsewhere and needs to commute in order to fulfil their duties. This may involve airfares, the need for public transport or car and petrol expenses. COVID-19 restrictions may also complicate matters.
Other costs to consider may be if there is a property that is going to be sold, fees for conveyancing, contract preparation, agent’s commissions and marketing costs.
- Tax and the ATO
The Executor is required to finalise the deceased’s tax affairs. This means that they will need to liaise with the ATO and usually engage an accountant to prepare and lodge tax returns for both the deceased and the estate. An Executor can become personally liable for any outstanding tax debts or unidentified tax liabilities if they have distributed all the assets of the estate to the beneficiaries without completing their tax obligations.
What costs are involved if a Will is contested?
If a Will is contested and there are no funds in the estate, it is the Executor’s responsibility to meet this financial commitment. Will contests can be a costly process. If the deceased’s estate allows for it, these funds may be paid from the estate, but there are many cases where there is no available cash, and in some cases the Executor has to pay these expenses out of their own pocket when defending a claim against an estate.
Executors may need to consider what options are available to cover these costs, including:
- Sell estate assets
- Liquidate shares
- Call in investments
- Sell property
- Obtain a loan themselves
The Executor is usually indemnified for their costs, which means they will be paid from the estate one way or another.
The Duties of an Executor
The level of work performed by an Executor will vary for each case. An Executor may need to sort through the deceased’s paperwork, or they may physically clean out the deceased’s house and maintain their property, or setup trust accounts, and liaise with solicitors and other professional service providers in order to administer an estate.
Are there legal mechanisms in place to assist Executors?
In each state, the Succession Laws prioritise the payment of debts. This may include any of the deceased’s liabilities such as their mortgage or credit card, the funeral and legal costs. These expenses will be paid from the estate before the beneficiaries receive any entitlements.
Executors are entitled to charge a reasonable commission, which means they are essentially charging for the work they perform in administering the assets of the deceased’s estate. Many people are not aware that an Executor can charge commission. This scheme is in place to remunerate the Executor for the work that they have completed; but it must be authorised by the Supreme Court.
An Executor’s Commission will depend on the size of the estate. There are guidelines in case law which sets out percentages, as oppose to a lump sum payment. These are based on different types of assets. For assets that are transferred to beneficiaries, it can be anywhere from 0.25% to 1.25% of those assets. For income, there’s a percentage range based on these types of assets, and a percentage range on capital realisations which may include calling in a bank account or investment. It’s based on a category of assets.
Other factors that weigh on how much commission an Executor can charge depends on the size of the estate, and how diligently they carry out their duties. For a larger estate, the percentage may be a bit lower. An estate that may only consist of a house and a bank account would be treated differently to an estate with a large share portfolio or multiple properties, investments and superannuation. It also depends on if the deceased had companies and trusts or if there are testamentary trusts in their Will.
It is necessary to obtain legal advice as to whether a claim for Executor’s commission is appropriate in the circumstances.
How does an Executor make a claim for commission?
A claim for commission can be a costly affair. Many Executors avoid claiming commission because the application process is not straightforward. To apply for commission, an Executor needs to make an application to the Supreme Court. This means all the beneficiaries need to be put on notice, they must go before the Court and a Judge.
The Executor will need to:
- compile a schedule of everything they have done in administering the estate;
- provide all estate asset information;
- provide information on the income and interest derived on the assets.
Alternatively, an Executive can also come to an agreement with the beneficiaries regarding the amount the Executor will receive for their commission. This option tends to be more favoured, less expensive, and will appeal to all parties as the beneficiaries can agree on an amount they are comfortable with the Executor receiving.
How can someone making a Will reduce the burden for their nominated Executor?
Estate planning is key to ensuring you have enough assets or cash in your estate to be able to cover expenses once you have died. A pre-paid funeral plan, or funeral insurance, may be another option to reduce the impact and costs for the Executor, or family members, who will be organising your funeral and wrapping up your affairs.
Having your Will drafted by someone who has expertise in this area of law can minimise the risk of a claim against your estate later on and ensure you are distributing your estate so that there is money available to pay ongoing expenses.
What’s the difference between a pre-paid funeral and funeral insurance?
A pre-paid funeral involves you meeting with a funeral director and essentially organising your funeral before you die. You choose your preferred casket, whether you wish to be cremated or buried, and any extra details surrounding your funeral. The cost will vary depending on your inclusions, and once paid in full there is no more to pay. You have the choice to pay in one lump sum upfront or pay in instalments. Organising a pre-paid funeral is a relatively simply process which does not require extensive paperwork or health checks.
Funeral insurance is where you will pay monthly or fortnightly premiums (ongoing payments) for a fixed amount of cover. You can choose which level of cover you wish to be paid to your family when you die. You are not paying for your exact funeral costs with funeral insurance. You are simply buying a policy to meet those expected costs come the time it is needed. It is important to understand any exclusions that may apply to funeral insurance and obtain independent advice on any policy you may be considering.
How can Attwood Marshall Lawyers help?
If you have been appointed as an Executor, you should be aware of the role, the costs and what is expected of you. It is recommended that you seek legal advice as soon as possible from lawyers who specialise in this area. Many Executors make the mistake of using whatever law firm holds the Will. Quite often these firms have little or no experience in Estate Litigation or giving proper advice to Executors in the administration of estates. This could cost you and the estate a lot of money! Attwood Marshall Lawyers have one of the largest Wills and Estates team of lawyers in Australia who specialise exclusively in this area of law and can help you understand your duties and perform your role. We provide a free initial consultation in approved matters.