Executor-Punishment for Breach of Duties

What happens if you do breach one of the duties? 

If you violate or do not perform any duty that you owe to the beneficiaries of the estate, and if that breach of duty is intentional or negligent, and you are personally at fault, you may be “surcharged” – that is, held personally and financially liable for damages resulting from that breach. In other words, a beneficiary can sue to recover those values that he or she would have enjoyed had there been no breach. Here are some examples:

a. If you sell an asset without authority to do so and the beneficiaries who are entitled to that asset lose their interest in that asset because of your action, you are liable for the full present value of the asset. In fact, if a beneficiary can show willful misconduct on your part, a court may grant them punitive damages as well. Of course, if the loss would have occurred even in the absence of your breach, you may not be chargeable with the loss.

b. If you unnecessarily spend estate money, courts may consider your actions negligent. Likewise, any action or omission that results in a loss can be considered “waste,” and you may be held liable. You must avoid speculation since your primary duty is to preserve and protect the estate’s assets. In this regard, undue delay in accomplishing your duties may be considered negligent. One method to safeguard against these problems is continually to inform – and consult with – the beneficiaries concerning strategic investment decisions or decisions with large assets, and keep those communications in writing. Litigation can often be avoided by combining prompt action with constant information and consulting with the other beneficiaries. For example, you should disclose your intent to liquidate or hold assets, and where appropriate give the beneficiaries the opportunity to decide whether to receive in kind or cash distributions.

c. When there is a conflict of interest or self-dealing, you will be held liable. When there is any question at all of a conflict of interest, seek court approval ahead of time before acting on any matter in which there is even the remotest possibility of a conflict of interest. d. As mentioned previously, at times it may be necessary to hire experts to advise or assist you. Keep in mind that you may only delegate so-called ministerial acts – acts that are administrative and do not involve major decisions requiring judgment and discretion. Certain decisions, such as whether or not to make certain tax elections, may be made only by you as executor.In many cases, beneficiaries have surcharged executors because estate assets have been depleted. The rules discussed above indicate how important it is to invest trust property prudently. Your most important job is to meticulously document what investment decisions you are making and why you are making them. If you can explain to the courts, and other beneficiaries, why you made these particular decisions, and also show that you reviewed your investment decisions periodically, you significantly reduce the potential for a successful lawsuit against you.

Diversification of Assets. You must be more concerned with  safety of the principal than in “making a fortune.” Diversification is the key to safety in this area. Even if the Will waives your obligation to diversify assets, I suggest you maintain records to show why you did not diversify. Virginia law imposes a duty to diversify, and if you ignore that rule you may be held liable for any loss that occurs.

Timeliness. If you are going to make any investment changes, timeliness is the key. This means that you must implement your plan as quickly as possible after prudent decisions have been made. Not surprisingly, a number of lawsuits involve an executor’s failure to file tax returns in a timely manner. Unless you have reasonable cause for not complying with the time requirement, you will be held personally liable for interest and possibly penalty charges if the tax is late or not paid. 

Tax Planning. You must also show that you have given consideration to tax planning. As executor, you can make a number of elections. You can and probably should hire a tax professional.

Regular Communication. Perhaps the key or single-most reason executors are sued is that they have failed to give personal attention to the beneficiaries. A close relationship with the other beneficiaries, fostered by constant and thorough communication, will help deter conflict. By taking the time to discuss estate transactions, you invite discussion and settlement rather than litigation. I suggest that in addition to corresponding with them, you keep beneficiaries informed by telephone, but keep written memos of your conversations and, whenever possible, keep written memos of your in-person conversations with them. Unfortunately, the very nature of probate and administration is time-consuming. But your fellow beneficiaries should be informed when certain things can be expected to occur, and it is your job to ensure that the process is not extended unduly. 

Obtaining Written Consent. If you are in the process of changing key investments or investment policies as mentioned earlier, you should obtain the written consent of all beneficiaries who are of legal age. The written consent given by individuals who have full knowledge of all relevant facts, and of their legal rights, protects you from the consequences of the act. In other words, if a competent adult beneficiary consents in writing to a new investment, assuming he or she was under no inducement to act, that beneficiary cannot later hold you liable for losses arising out of the change in investment. Of course, if that consent is withdrawn before you purchase the new asset, you are not protected by the original written consent. Although you do not have to obtain consent to make investments allowed by the terms of the will, a written consent from a competent adult beneficiary will protect you from a charge that you are acting outside the scope of your authority. With respect to the beneficiaries, each could consent to an act you are about to take. A beneficiary who does not consent has the right to question your action and is not bound by consents given by other beneficiaries. For instance, a consent you obtain from an income beneficiary – that is, one entitled to income, rents, or dividends produced by the property – does not protect you from remaindermen – that is, those beneficiaries entitled to principal at a later date – who question your actions.

Obtaining a Release. One of the most important techniques that protects you, as executor, from liability is the “release.” A release is a document signed by the beneficiaries where they discharge you from liability from actions, or omissions, of the past. By contrast, a consent is a written document exonerating you for what you are about to do. A release is what you obtain if you did not first get a consent. But a release is not effective unless the beneficiary had knowledge of all relevant facts, and you did not use any improper conduct to influence the beneficiary to consent to a transaction that has already taken place. 

Obtaining a Court Order. Another extremely important method to prevent a beneficiary from holding you liable for breach of your duties as executor is to obtain a court order. A court order authorizing a particular action will protect you from future liability. For instance, in Virginia an “accounting” is required before you can be formally released from your duties. You must account for what came in, what went out, and to whom it went. You must show that you have properly carried out the terms of the will under which you are acting. If the court accepts that accounting, after the beneficiaries have been given proper notice and opportunity to be heard, you will be protected from future liability for the acts you have disclosed in the accounting. One expeditious way to limit your liability, particularly where beneficiaries may be somewhat hostile, is to enter into a settlement agreement with all the beneficiaries. If there is a conflict between you and the beneficiaries, a private out-of-court settlement may be the most appropriate way to remove the conflict and deter liability.