Listen to: Planning Estate Administration – Part #4
This week on Hull on Estates and Succession Planning Ian Hull continues the discussion on estate administration. Specifically, he examines liabilities and accounting obligations.
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Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag. The podcast you’re listening to will provide information and insights into estate planning in Canada. From the offices of Hull & Hull in Toronto, here are Ian and Suzana.
Ian Hull: Hi and welcome to Hull on Estates and Succession Planning. You’re listening to, and possibly watching, episode 213.
Welcome back. I am doing another solo podcast without my compatriot, Suzana. But we wanted to continue with our ongoing theme of estate administration issues that can rise, bubble up and create tension and possibly litigation or the like. So we were talking about some of the things we’ve been doing. I just had my first tour of my old alma mater, North Toronto Collegiate. They tore it down, or they’re about to tear it down and they built a new school right beside it. And I was touring it last night, enjoyed that. It was a great thrill to be in the school. But I had a chance to, as I talked about in my last podcast, I had a chance to chat with my son’s accounting teacher. And we were talking about some of the basic accounting models and so on that they’re teaching a course at the high school level. And it really struck me as one of these things that it’s one of those life skills that carries on forever. And whether you’re balancing your own cheque book when you’re older and these are the sorts of issues that arise in the estate administration world.
And before we get into the second part of the equation, and that is liabilities or issues that arise out of liabilities when you’re doing an estate administration, I’m gonna talk a little bit about some of the accounting obligations too. Because when we sit down…and what we’re trying to do in this mini-series is talk a little bit about what is it…what’s it like to be an executor (a) and (b) where are the issues that can arise that may bring some criticism upon me as the executor or upon my clients. And the one area that we see time and time again is not bringing in all the assets. And we talked about that in my last podcast, that’s the credits. The credits aren’t all brought in or they’re not all identified like the teacup illustration that we used. Or you missed an account or so on. The other part of it is, is that once we start to bring in, how are we tracking it? Are we keeping vigilant, clear and unquestioned records, financial records? And, of course, depending on when we see our clients, that question can change and that answer can change. Because what we try to tell our clients is once you’ve been given the job…and one of the things, certainly in Ontario and throughout Canada is, is that you…once the person passes away, as executor named in the Will you have responsibility from that moment on. Now that’s important obviously because that executor has control of the body and has to deal with those sorts of funeral issues. But it also means right from the get go you’re required to produce and undertake comprehensive accounting.
So when we go out and do our due diligence and we go and flip through every piece of paper that we think we need to look at to determine all the credits, we need to track that. And we need to identify, once we get that bank account, we need to put that bank account into a separate estate account. And once it’s in that account, identify the entry, the journal entry that we learned in high school accounting. Make sure that journal entry is identified each time with the supporting document behind. Now this is sort of 101 accounting but it is crucial that whenever an executor takes on that business role, that the accounting obligation is paramount because that is where your Achilles heel can come at the other end of the day when criticisms arise of your work. And it’s not always gonna happen but it always diffuses it if you can put together even informal accounts for the beneficiaries from time to time. We’ve talked about in the past on lots of these podcasts the need to keep the beneficiaries up-to-date and identify what’s going on in the estate administration. And one of the easy ways to do it is, of course, just do an informal accounting. You’re doing it anyway and produce it maybe once a month or every few months to the beneficiaries so they see where the money is coming and of course where it’s going.
So I’m not gonna focus too much on the estate accounting issues other than the harsh reality of if you don’t do it right from the get go, you will create tremendous stress on your own administration and ultimately you may well get criticized and you may well have to go to Court to defend your actions.
Alright, so that’s the three-part component. We’ve got the assets, bringing them in. We’ve got the accounting obligations throughout. And the other part of it, concurrent with all this of course is what are the liabilities? What is the debit side of estate accounting? And it’s not just paying the Visa bill. Not just paying the lease payments off or those sorts of things, obvious things on the date of death. Someone dies, they’ve accumulated liabilities. It’s also looking at in real detail what’s gonna happen in this estate? And what I tell my clients often is I say look, start, sit down and make sure you’ve got enough credits and you’ve got not enough debts so that you’ve got a solvent estate. Determine right from the outset if that is even going to be an issue. I take a deep breath and I think easy question to ask – hard question to answer because lots of time you don’t have that information at the outset. And lots of times unfortunately you find out that the estate is gonna be under water and it is not gonna be able to fulfill all of its obligations, both its current obligations like paying Visa and so on, and secondly, the obligations under the Will.
So I call that sort of the grey area administrations. And, of course, we have to be very mindful of that. And as executors I tell my clients we have to make sure that everybody understands that. Again, just be transparent. The case law actually insists that if you’re gonna be an executor to the extent…and we won’t get into all the detail…but basically the case law says make sure you’ve identified all your creditors as soon as possible that you are not solvent. Or that you may have trouble paying all of the creditors’ bills. And the same goes to the beneficiaries. Say the estate has $100 and the bills are $80 and there’s only $20 left. Well you’ve only got $20 to pay out whatever the Will has asked you to pay out. So the sooner we tell the beneficiaries hey, here are the fixed credits, here are the liabilities fixed, and here’s what’s gonna be our profit so to speak at the end of the day, here’s our capital that’s gonna be left to be distributed in accordance with the Will. I like to tell my clients to push that information out as soon as possible. And certainly when you’re in a grey area administration, when you can see right from the outset that this is gonna be close, it’s so important to disclose and communicate that status. Not just the detail but the reality that although they’re named in a Will, it’s a fantasy. They’re not gonna get the kind of distributions they thought they would get under that Will because there simply isn’t enough money, after we pay off the debts.
So the liabilities identifying is crucial. And so when we get an executor’s role, sometimes we get a little fixated on well, what’s the credits? What’s out there? What are the assets? Well we need to be…I tell my clients we need to be just as vigilant to take out the debts and look at where we’re going with the debt side. And as I say, lots of estate administrations aren’t in the grey area. We’re not always sort of bumping around zero or plus one in terms of the net assets. But sometimes we’re surprised. And we’ve been involved in this office many times with multi-million dollar estates that turn out to be below zero. And so we just try to assess that as we can, going along as early as we can. So particulars of the liabilities again is something that is a paramount obligation of the executor and we need to…I tell my clients we need to pull that together as fast as we can.
So we’ve got the three part components here of the credits, the accounting obligations, the journal entry work that you’re gonna have to do and the debits. That gives us a little bit of background in terms of…and maybe it’s an economic analysis…in terms of our business role as executors. So thanks again. We miss Suzana for this podcast again but we know she’ll be back soon. And we appreciate always you watching and listening. Thanks very much.
You have been listening to Hull on Estate and Succession Planning by Ian
Hull and Suzana Popovic-Montag. The podcast that you have been listening
to has been provided as an information service. It is a summary of current
issues in estates and estate planning. It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance.
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