Part 2
David Patkin
You’re on the hook. You get sued. And again, it’s not you personally, it’s you as the representative of the estate. So if you get sued, your house and your assets aren’t on the table. It’s only the assets of the estate that are on the table. But again, if you get sued, your lawyer is going to give you advice about whether to fight that claim, settle that claim. You know what you should do about the claim. And not only that, but any claim that you settle has to have the agreement of the other beneficiaries. So if you’re the executor, the beneficiaries are fighting. One beneficiary sues saying, I should get more than that. If you, if you’re trying to settle the claim, it requires the other beneficiary to agree. If the other beneficiary doesn’t agree on, we go to the big court case. Okay.
There’s nothing you can really do about it because it’s the beneficiaries that have to agree. So again, yeah, you’re definitely in the, you’ll definitely be in the crossfire, but you’ll be shielded, definitely personally, because you’re only in the crossfire to the extent that you represent the estate and you’ll have your exit. Your lawyer there advising you about what to do and what not to do. Yeah. I mean, I can’t hide the fact that you are ultimately responsible, but again, it’s, it’s not you personally. And that’s, sometimes that concept is hard for people to grasp.
Jordan Vaka
Something I’d love to unpack because I think there’s some taxation elements as well, that they come into play as well. So when we talk about the risks and the obligations a little bit. But I’m curious, with the executive’s role itself, what are some of the really big tasks they have to make sure they’re ticking off as they work through that process?
David Patkin
Okay. So they’ve got to find all the assets. Okay. So sometimes that’ll be easy because it’s a sea, had great records and sometimes that’ll be a nightmare because they don’t keep any records. They don’t.
Jordan Vaka
In a shoebox.
David Patkin
Yeah. Or they’re, they delete all their emails. So and again, I’ve got a client at the moment who I, I can actually do a lot of the work and, or your lawyer can do a lot of the work by engaging with the banks. But, but if you have no records, then I’ve got to contact every single bank and say, do you have any accounts in Barker’s name? You know, what’s and just do a massive search which can take a long time and will be very expensive, obviously. You know, when you ring up all these organizations and.
Same with shares sometimes if you haven’t got the SRN or the hin number or you haven’t got a broker to contact who’s managing all the shares if the deceased was doing it all themselves, that can be quite a lengthy and tiresome process. So that’s a responsibility of the executor to get all the assets in. It’s not to say that if you miss an asset, it’s gone. You can never get it. But again, if you’re dealing with beneficiaries and you’re missing assets left, right and center, they’re not going to be very happy. They could, they could. Executors can be removed. It does require a court application, and the executor has to be doing a pretty terrible job to be removed.
You know, the oversight of one or two assets is not so bad, but mismanagement, which could be failing to deal with assets over over many years. And I’ve had, I’ve got this at the moment, I’ve got a property that’s still in the late father’s name who died 1010 years ago. So that can happen. Assets can slip through or people can just not deal with it because there’s no probate police or people who come knocking on your door saying, hey, why haven’t you done this? A lot of it is. If the, a lot of the people who will scrutinize what you’re doing are beneficiaries. And for this property that was still in the late husband’s name, the only, the sole beneficiary was a wife. So she just kept living in it, didn’t do anything about it.
And so it just remains in that deceased person’s name.
Jordan Vaka
That inertia kicks in and you just keep going along. I’m an executor. I’ve assumed the role. So I need to check the records at home. For instance, if it’s. If it’s my wife, check the records at home to see what bank records there are. If there’s any scary information about a bank account that was once held, then I send off a notification to the bank with the debt certificate, presumably, and the probate.
David Patkin
Yep. And then as soon as you do that, this is the other fear. As soon as you do that account gets frozen. And again, this goes back to those jointly held bank accounts, because if that was a joint bank account, wouldn’t get frozen, nothing would happen. Now, obviously, if you’ve got direct debits coming out of that account, they all stop. Okay. It doesn’t affect money going into the account. Okay. Once an accounts frozen, it will be able to accept deposits, but any direct debits will stop. So it’s not a. People are very forgiving, organizations are very forgiving when they’re just dealing with a deceased estate. Even. Even mortgages and those sort of things, there’ll be no penalties. That’ll all get waived. Everyone waives penalties and things like that. But of course, the bank will be keen to know what’s going on.
And as long as they’re able to get their repayments, which are usually done by direct debit or an offset account or something like that, as long as there’s funds in there to continue to fund that. But even if there’s not, or even if things get frozen, they’ll. They’ll be very understanding. They know it takes time for a grant of probate to come in. They know these processes. So again, you don’t have to panic about all of that, but it’s more about. Yeah, as you said, finding those statements and getting. For the. For the purposes of the grant of probate, there is in Victoria, and it is state, different state to state. But in Victoria, part of your application for probate requires a inventory of assets and liabilities.
So you’ve got to itemize every single bank account, every single shareholding, every property. Not necessarily super, unless it’s paid into the estate. Super is usually outside of the estate. But you’ve got to itemize all of these things and they’ve got to be the correct value as at the date of death. So you need statements from the bank that say what the balance was at the date of death. That’s a critical time at that. And we know that things change. And so those assets, the values might have increased or decreased over time, but it’s critical the probate office wants the value of the estate at that time.
Jordan Vaka
So not only is the probate process, once the form’s in, potentially lengthy, that data collection piece could also be a very prolonged period. So probate could take a very long time, regardless of the stage you’re at, just to get it through. Okay, so bank account sorted. You mentioned mortgages. We notify the lender. How interested is the lender going to be with maybe the security of the house or the ongoing repayments? How do they normally handle that?
David Patkin
So they are not going to simply say, oh, yeah, okay, we’ll transfer that loan over to you surviving spouse. That’s all good. They can’t do that. They’ve got responsible lending practices. And if the deceased was the breadwinner and earning the money and the survivor hasn’t got an income, then I’m sorry, but unless there are other assets in the estate to pay out that loan, such as the proceeds from super life insurance if there’s not a big fat sum coming in to knock out that loan, or we can’t refinance in the survivor’s name, we’ve got to sell. We’ve got to sell the property, and no one wants that. And again, this goes back to the estate plan and actually goes back to my time at ANZ and Nab, because in that environment, I wasn’t a lawyer working with other lawyers.
I was a lawyer working with financial planners, with insurance advisors. And so were able to identify that possible weak spot in the estate because we sort of basically role played. Okay, how do things look like for the survivor? You know, are they going to be able to keep that investment property that provides that income and the principal place? Of course. And is life going to be as comfortable as possible when they exit? And if they’re mortgaged to the hilt and they haven’t got these super or other assets that are going to be released on the death to knock out all those debts, we’re gonna have to. We’re gonna have to sell some assets here.
So that plan is really important because the last thing you want to see is the surviving spouse not only again, having to deal with the grief, but having to sell the principal place with all those memories and with all those cherished feelings.
Jordan Vaka
About, worried about how that period of time before you make the realization you have to sell it, there’s still that period of uncertainty. Can I keep the house? Can I stay here. Where am I gonna live? That all feeds into it as well. And like you’re saying, the planning is one piece, funding. It is the other part. And I suspect some of the people listening, they may have inherited some really big estates, but there’s a lot of debt in there and becomes very complex to untangle and makes it very difficult. But. So at some stage, they may, or they will. If that loan can’t be extinguished, the sale of the house will be required in order to balance things. Other assets. I’m just thinking of other assets. So shares, one that can pop up.
Shares are always a bit of a headache for us when it comes to working through an estate. What’s the process the executor should be following with a share portfolio.
David Patkin
So shares can either be, what we say, transferred in specie, which just basically means you don’t sell the share, you just transfer the ownership of the share to the beneficiary. There’s no trigger on CGT or anything like that. It doesn’t mean you get away scot free. You know, CDT would transfer with that, but you can actually transfer the share itself, or if the beneficiaries aren’t interested in the shares, you can liquidate them, and then the estate will pay those cgts and any expenses around that, and then the liquid funds will be released into the estate. You know, you’ve got time. It’s not as I said often I’ll get people who ring me a few days after the death and even before they’ve done a funeral sort of thing. What are we going to do about these shares?
What are you going to do about these bank accounts? You know, and again, I just say, don’t worry, you’ve got, not only have you got to wait for the death certificate, but the application. So the death certificate takes a couple of weeks, at least two to four weeks for that, the actual application. You know, if you had all of the assets, complete records, and you’re able to get your application in very quickly, it’s still going to take about another month for that. So already we’re about two months out of the date of death before we can even get the application the grant. And then from that point, as I mentioned before, the six month rule where you don’t. Your. The six month rule is, is not. You don’t have to follow it. Okay?
So the wording around this is you can deal with the estate within those six months, but if you do, mister executor, this is a sing in the tail. If you distribute assets before that six month period elapses and there is a claim on the estate, and that claim is successful and you’ve already dished out all the assets, then you are per, this is when it becomes personal, okay? You would then be personally liable if you can’t recover those assets. So if you’ve distributed half a million dollars to a beneficiary, that beneficiary then goes to the pokies or whatever and blows the lot and they don’t have any money, there’s a successful claim. And you turn around to that beneficiary and say, oh, look, I’m sorry, there’s been a claim, I need some of that money back. And they say, I’m sorry, I’ve blown it.
Then you, mister executor, misses executor, you are personally liable. So you have to dig into your own personal savings to meet that claim. So that’s why we say, that’s why we’ve got this six months rule. Because what the court says to the executor is, if no claims have been made in that six month period, we want to give you certainty to deal with the estate without worrying about any claims. Okay? So they say that you got this time period. If no one’s made a claim within that period, then go ahead and distribute. Now, if you’ve distributed after eight months and then there is a claim, that claim may still be able to be made because the court might say, yeah, yeah, that’s all right. You were overseas, you didn’t know they died.
Yes, we’ll accept you bring in the claim, but because you’re outside of that six months, the executor is no longer personally liable because they did everything correct. If you haven’t distributed, and this is what sometimes we say to executives, we say, if you’re worried about a claim and the six month has passed, get your skates on, get rid of it. Because, because if you’ve gotten rid of it and then there is a claim, it’s bad luck, you know. Yeah, yeah. So it’s really weird. Like we’ll say, no, relax. You know, six months once, and I have had some estates where on the stroke of midnight, they’ve started transferring funds I mean, obviously that’s where you’ve got concerns about claims, where you haven’t got concerns about claims.
And you, none of that really is a worry, but it just depends on the situation.
Jordan Vaka
And I can see the pressure for the executor in that moment you mentioned earlier, the beneficiaries are kind of clamoring for that money. They’re going to auctions, they’ve made commitments when they shouldn’t have. And the executor’s going, well, no, it’s six months. I will not be on the hook for this. There’s a tension there. You know, families love a bit of conflict when it comes to estates, so that would be a very difficult role to play as the executor, I think. But I guess the lesson is stay strong, wait at the six months and make sure that you.
David Patkin
And communicate if you communicate from the get go you’ve read the will and you can see some pretty big distributions to beneficiaries. Let them know that there is a process that I have to follow. You know, I’ve been advised by my lawyer or get the lawyer to send it out directly to the beneficiaries. But even if you’re doing it yourself advise the beneficiaries that I have to go through this process. I can’t distribute. I’m legally not allowed to distribute even though you technically are, but you can say for six months. So please just be mindful that you’re not really going to see anything for at least six months up to a year. So just keep that in mind. Yeah.
Jordan Vaka
Whether they’re distributing. So they’ve found all the assets, they’ve all been listed. There’s obviously going to be debts attached quite often. Credit cards, personal loans, car loans, things like that. Loans to businesses, which businesses will be a different topic because it’s such a big kind of headache. Is the executor responsible for making sure those loans are repaid before distributing?
David Patkin
Absolutely. Absolutely. They can only deal with the net value of the estate. So that also includes expenses that they personally have incurred. So if the executor’s paid all the because all the accounts are frozen, the executors way paid funeral costs, the flowers, the headstone this can be 1020 grand worth of expenses. Sometimes they can, if they’re really tight and the executive personally doesn’t have the money to pay for that, they can take those receipts to the bank and say, this is an estate expense, and the bank will actually pay that for them. But if they’ve just gone ahead and paid for it, they are a debt to the estate. So pay yourself first and. And definitely pay the credit cards, refinances the bank just won’t.
Again, the bank just won’t be happy to sit on that debt. The bank will want to either refinance it or have that debt cleared. So. Yeah, do that. And then you’re. Yeah, the estate is only the net value of everything, which includes for super. If super is paid into the estate, sometimes there can be some pretty big taxes on super. We’re talking hundred thousands of dollars. You know, that would need to be cleared as well, because sometimes super funds, they’ll pay you the whole lot and it’ll be the accountant that will discover, hang on, you’ve got a hundred thousand dollar tax liability on this super. Sometimes they’ll remove the tax before they pay the balance. So you’ve got to be mindful of that. And that’s where an accountant again, there’s, there’ll be tax liabilities potentially on the deceased personally.
So they obviously might not have done their final tax return of the year that they died in. And for a lot of deceased, they haven’t done the previous five years either. So there might be actually returns, money. I’ve had plenty of money coming back from the ATO into the deceased name. Yeah.
Jordan Vaka
And then shares, and there’s franking credits that haven’t been claimed and there’s a lot of that.
David Patkin
So it can be a worthwhile exercise. And then also for the estate, for every financial year that the estate is on foot and there are income earning assets, they’ll have to do a return. And they’re just like another individual. If the income that the estate earns is below the thresholds, no tax will be payable. So. But again, rather than the executor worrying about this always engage an accountant. Yeah. Preferably one that’s done a bit of estate work and then just have them clear it up. And then again, you’re being an executor is enough of a obligation. You don’t want to take on the obligations of tax and some legal things. You want to keep it as simple and act on advice, and as long as you’re acting on good advice, you’re protected as well.
Yeah.
Jordan Vaka
And you mentioned earlier, the executor can incur costs and claim that back against the estate. How are executors compensated for the work that goes through managing an estate?
David Patkin
Technically they’re not. It’s a bit of a labor of love. However, the court will recognize for a more complicated estate that they should be paid. Now, then, the question is, what should they be paid? And there’s two ways to go around this. Firstly, where I’ve got, again, this goes back to the estate plan, where I’ve got a complex estate, and you’re appointing someone, especially if you’re appointing someone as an executor who is not a beneficiary. I’ll always flag with a will maker, just to put you in the picture here, your executor here, who is not going to benefit from the estate, is going to have to deal with all of these assets, all of these institutions, and if they’re a busy person at work anyway there’s no benefit for them.
So often I’ll encourage the executor to put a gift in there for the will, make a. Sorry. I’ll encourage the will maker to put a gift for the executor. That can be a lump sum. You could put a percentage of the estate if you really want to, but most of the time it’ll be a lump sum. There’s probably index to inflation, that sort of thing. But if there is not that gift there, that doesn’t mean the executor can’t ask for money. There’s two ways the executor can do it. They can get the consent of all the beneficiaries. So they’ll say to all the beneficiaries, look, I’ve got to do all this work. I think it’s appropriate that I get paid, and this is what I. I should get paid. All the beneficiaries sign off on that’s job done. That’s good.
If the beneficiaries don’t agree to that, but the executor still thinks they’re entitled. They actually have to make an application to the court, and then the court will assess that and then grant them usually a percentage, and it’s usually a couple of percent. It’s usually not that much, but it should be enough to cover their time. So. Yeah, again, absolutely. They’re their costs. So they. They engage a lawyer, an accountant, if they’ve even got expenses of taxis or. Or things like that, they could. They could claim that as part of it, but their hourly rate, their time is not. They can’t really put that in. And, yeah, they’re not allowed to. It’s really a labor of love, by definition.
Jordan Vaka
Makes sense. It’s not a small job, which I think is something that’s coming through really clearly. But it’s. You’re right. It’s a labor of love for the person that’s gone.
David Patkin
Yeah.
Jordan Vaka
Question I have about the estate. What happens when the debts exceed the assets?
David Patkin
Oh, bankrupt the state. Yes. And this is, if that’s the case, then it’s bad luck for those institutions that are not going to get full repayment of their loans. They sell the property. Yeah. It’s not enough to cover the loan. They just got to take a hit. And one critical thing here for executors is if life insurance and superannuation gets paid into the estate, it’s not always required to pay for a bankrupt estate. So wills really should have a clause in there setting out that any proceeds from super life insurance should be kept separate so that we can let the estate go bankrupt and we can keep those proceeds for the beneficiaries. Okay. So that’s if the executor mixes those super and life insurance with the. With the estate to pay a bankrupt estate, then obviously those proceeds have gone.
So again, the executor must be mindful to keep those proceeds separate if they come into the estate. Often you mentioned before that the super fund, the super death benefit nomination, can be the LPR, and that’s the executor. If you’ve nominated that, then they will flow into the estate. And again, going back to the estate plan, if we don’t want that, if we want certain super or life insurance to go to a specific beneficiary or number of beneficiaries, then we can nominate them as long as they are allowed to be nominated. That being you can only nominate a spouse, a child, or someone who is financially dependent. So let’s assume they fit within that. We can short circuit the process and just go directly to them.
So estate goes bankrupt, but all of these assets go straight to our beneficiaries and are not there to pay back the debts of a bankrupt estate.
Jordan Vaka
Yeah. Okay. That point about not mingling the assets, that’s so critical. I think it speaks to as well, make sure you have advice, like, as soon as your executorship is being triggered, bring in advice and make sure you don’t make any of these mistakes, and we’ll talk about some of the big mistakes that you see people make. Make it a little bit, because I think it’s. It’s good to know what to avoid as you’re going through this process.
David Patkin
Yeah.
