Tips for Managing Liability

In Closing An Estate Administration 1

Fiduciaries use labels in different legal instruments . Thus, the fiduciary of a

will is a personal representative or executor, the fiduciary of a trust is the
trustee, in a power of attorney, the agent and so forth. Central to all
fiduciaries is the responsibility to faithfully employ and administer the legal
instrument. The underlying policy is typically the fiduciary is making
financial or health decisions for another. To enhance the fiduciaries‟
performance, the fiduciary, absent indemnification, bears personal liability
for its decisions and actions.

Tip-The first step in limiting liability for a fiduciary is to retain

knowledgeable and experienced counsel. The second step is to read, and then
re-read, the will or trust or other legal instrument. The will or trust is the
roadmap the fiduciary is obligated to follow, absent court intervention, to
closing an estate administration. The third is to limit third part claims
against the estate for which the fiduciary is responsible by running the
Statute of Limitations.

Statute of limitations bars bar stale clams. However, death tolls the statute
of limitation for causes of action accruing both before and after death. Va.
Code Section 8.01-229.B 1 encourages swift qualification of the fiduciary to
restart the statute.

1 " Tips for Managing Liability in Closing an Estate" prepared and presented to NBI
seminar Probate-Beyond the Basics for lawyers and accountants by Dick Mayberry, Trusts
and Estates attorney in McLean, Virginia. Email Mayberry@MayberryLawFirm.com or
call 703.915.1488 to contact Dick.

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The Commissioner of Accounts Manual provides a short synopsis of the
statute, Va. Code § 8.01-229.B, which the author and most lawyers find
difficult to apply with certainty:

"If the cause of action accrued before death, the action must be brought
within the , applicable limitations period, or within one year after the
qualification of the fiduciary, whichever occurs later. If the cause of
action accrues after death, the action is commenced against the fiduciary
before the expiration of the applicable limitation period or within two
years after the qualification of the decedent‟s fiduciary, whiche ver occurs
later.
If there is a delay in the qualification of the fiduciary, and the delay is
more than two years after the date of death and before the qualif ication,
for the purposes of the statute of limitations, the fiduciary shall be deemed
to have qualified on the last day of the two -year period.”
Tip-When appointed fiduciary, file a written notice with the IRS using. Form
56 identifies your self as fiduciary when the EIN is secure identifying the
estate as a separate taxpayer..

It notifies the IRS that, as the fiduciary, you are assuming the powers,
rights, duties and privileges of the decedent, and allows the IRS to mail to
you all tax notices concerning the person (or estate) you represent. The
notice remains in effect until you notify the appropriate IRS office that your
relationship to the estate has terminated.

A. Final Accounting and Distributions 2

Since the fiduciary may bear personal responsibility if there are not
sufficient estate assets to cover its debts, especially taxes, a challenging
aspect of estate administration is to ensure all debts are covered prior to
final distribution of estate assets.

Known and unknown claims may exist against the estate in its closing.
The fiduciary can bring more certainty to risk ex posure by requesting a
proceeding before the Commissioner of Accounts [the "Commissioner"

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or "Commissioner of Accounts"] for a final accounting and distribution
to secure its „blessing.‟ . Standing is conferred upon the fiduciary of
the decedent, any creditor, legatee or distributee of a decedent . Va.
Code § 64.1-1713. In assessing use of the procedure, the fiduciary
should realize it is a dual edged sword for the Commissioner of
Accounts may direct the fiduciary or the claimant or either of them to
institute a proceeding at law or in equity to establish the validity or
invalidity of any claim or demand - irrespective of what is otherwise
proved at the hearing. This mean additional costs and uncertainty of
ultimate disposition.

Tip-consider tactical and strategic factors prior to commencement of a

final accounting and distribution.

Prior to the final accounting and distribution hearing, the Commissioner

of Accounts publishes notice once in a newspaper of general circulation
in the county or city wherein the fiduciary qualified . At least ten days
before the date fixed for the hearing the Commissioner of Accounts
posts a notice of the time and place at the front door of the co urthouse
of the court. The content of the notice informs claimants of the right to
attend and present their case at the proceeding, the right to obtain
another date if the Commissioner of Accounts finds the initial date
inappropriate, and the consequence that those with claims will be bound
by an adverse ruling. The fiduciary shall also provide notice to known
claimants to extinguish their claim. right to file exceptions with the
court in the event of an adverse ruling

At the hearing, the fiduciary proffers evidence to show payment of the

debt of the estate, which are called “Vouchers" and a statement of cash
on hand or in a bank and all investments . Va. Code § 26-17.9.

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A copy of the endorsed check with corresponding bank statements is the
most common voucher even though a receipted bill is the best evidence.

The Commissioner of Accounts Manual identifies vouchers for various

estate assets-

: 1 Real Estate .If a sale of real estate is made, a copy of the signed
HUD-1 or other settlement statement, and a copy of the appraisal
(or, in the absence of an appraisal, the current local real estate tax
assessment);

2. Securities If a sale of securities is made through a securities dealer

who provides a confirmation statement, the original st atement;2

3. Business If a sale of a closely held entity is made, the sales price

must be justified by adequate documentation.

4. With regard to distributions to beneficiaries:

a. Original receipts executed by legatees or distributees for

tangible personal property;

b. Original receipts for payment of money except as waived by

Va. Code § 26-17.9, in which case the requirements of
that § must be met."

5. Debt, tax and expenses paid. Copies of " a properly endorsed

cancelled check, bill marked paid or receipt for each debt, tax, and
expense paid except as waived by Va. Code § 26-17.9.D for
corporate fiduciaries. The front side of the check and the periodic
statement from the financial institution, showing check number and
amount, if the copy was made in the regular course of business are
preferred to the commissioner.

6. Note If a promissory note of a decedent is paid off, the signed note

marked “paid.” If payment is made pursuant to the guaranty of a
decedent, ward or beneficiary, a copy of the guaranty and the
beneficiary;

7. Reimbursements If a party is reimbursed for any proper charge

against an estate or trust, the underlying vouchers –copies of
cancelled checks or receipted bills to support payment;
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 8. If a check or receipt submitted as a voucher is endorsed by an
attorney-in-fact, the original or a certified copy of the executed
power of attorney;

9 .If payments are made to the fiduciary or guardian for a legatee or

distributee, a copy of the payee‟s certificate of qualification;

10-.If payment is made pursuant to a court order, an attested copy of

the order;

11. If payment or distribution is made pursuant to an assignment, a

copy of the executed assignment document;

12. If an estate settlement agreement has been reached between those

having an interest in an estate, a copy of the agreement;

13. If requested by the Commissioner:

a. Copies of 1099 form for each security and interest bearing

account;

b. Copies of 1041 and 706 forms filed;

c. Copies of monthly or periodic statements issued by banks or

other depositories of estate funds for the period of the
account;

d. Copies of memoranda or computations of distribution shares

and funding under marital deduction formulas;

e. Any relevant documents that relate to assets, income,

liabilities, claims against or assets of an estate or trust.

14. A memorandum setting forth a calculation of the fiduciary‟s fees

and a justification for attorney‟s fees paid.

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B. Compensation and Discharge

The fiduciary may be paid "reasonable" compensation, unless

prohibited in the legal instrument, for services rendered. Va. Code §
26-30. A commission of five percent of receipts was reasonable
compensation for an executor in Grandberry‟s Ex‟r v. Grandberry, (1
Va. (1 Wash.) 246 (1793). The law has not substantially changed since
1793 although the court clearly has discretion to adjust the percent
depending upon various factors, such as complexity of the matter.. A
substantial change occurred in 2004 when the Judicial Council of
Virginia in issued its Fiduciary Fee Guidelines which are reproduced in
their entirety for fiduciary fees for both estates 4 and trusts5
Tip-payment of fiduciaries encourages focus on estate administration as
a job rather than family moral obligation.

C. Red Flags in Preparing Final Year of Income Tax

A fiduciary (fiduciary) is responsible for filing certain tax returns for a
person who has died, and for the decedent's estate. The fiduciary may
be required to file the final income tax return and any returns not filed
for preceding years. They also may have to file the income tax return
for the estate, and the estate tax return. Consequently, the fiduciary
needs to ensure the final year of the administration all tax returns have
been filed with the federal government and commonwealth of Virginia.

The fiduciary is responsible for filing the federal income tax return and
is personally liable for payment of the tax. Treas. Reg. § 1.641(b)-2.

Tip-File a Termination notice with the IRS when the estate closes.

When you are relieved of your responsibilities as fiduciary, you must

advise the IRS office where you filed the written notice (or Form 56)
either that the estate has been terminated or that your successor has

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been appointed. Use Form 56 for the termination notice by completing
the appropriate part on the form. If another person has been appointed
to succeed you as the fiduciary, you should give the name and address
of your successor

Tip-.Request for discharge from personal liability for tax. An executor

can make a written request for discharge from personal liability for a
decedent's income and gift taxes. The request must be made after the
returns for those taxes are filed. It must clearly indicate that the request
is for discharge from personal liability under § 6905 of the Internal
Revenue Code. ...an executor is an executor or administrator that is
appointed, qualified, and acting within the United States.

Within 9 months after receipt of the request, the IRS will notify the
executor of the amount of taxes due. If this amount is paid, the executor
will be discharged from personal liability for any future deficiencies. If
the IRS has not notified the executor, he or she will be discharge d from
personal liability at the end of the 9 -month period.

Even if the executor is discharged from personal liability, the IRS

will still be able to assess tax deficiencies against the executor to the
extent that he or she still has any of the deceden t's property.

D. Requirements for Federal and State Tax Returns 6

The Virginia Foundation‟s Manual Estate Administration in Virginia
sets for the in § 3.8 the tax filing requirements--

“The fiduciary must file federal and state income tax returns for the
decedent for any year in which the decedent had taxable income and for
which a tax return has not been filed. This duty may require
consultation with a decedent is surviving spouse to obtain necessary
information and to determine whether the spouse wishes to file a joint
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return for the year of death. Demands for delinquent taxes based on
audits of the decedent‟s prior tax returns may also be directed to the
fiduciary.

Estate Tax. For the year in which the decedent died, the fiduciary must
file an estate tax return (IRS Form 706) if the value of the gross estate
(less allowable deductions) exceeds the applicable exclusion amount.
The applicable exclusion amount is $1,000,000 for decedents dying in
the year 2002 or 2003 and is scheduled to be increased in subsequent
years.

Estate Income Tax A decedent‟s estate is a separate taxable entity that

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comes into being automatically upon the individual‟s death. A
fiduciary income tax return, IRS Form 1041, must be filed for income
that exceeds $600 earned by the estate for each year of the estate‟s
existence. This tax is distinct from the estate tax mentioned in
paragraph 3.802 above, which is a “transfer tax,” generally based on the
value of assets owned by an individual at death. For income tax
purposes, an estate lasts as long as the period of administration or
settlement actually required by the fiduciary to perform ordinary duties,
such as collecting assets and paying taxes, legacies, and bequests. ”

Tip-retain a CPA to handle all tax filings unless you have the capability
to do so yourself.

E. The Insolvent Estate under the Uniform Trust Act in Virginia

Generally, if a decedent's estate is insufficient to pay all the decedent's
debts, the debts due the Unit ed States must be paid first, such as the
decedent's federal income tax liabilities at the time of death and the
estate's income tax liability.

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The fiduciary of an insolvent estate is personally responsible for any
tax liability of the decedent or of the estate if he or she had notice of
such tax obligations or had failed to exercise due care in determining if
such obligations existed before distribution of the estate's assets and
before being discharged from duties.

The extent of such personal responsib ility is the amount of any other
payments made before paying the debts due the United States, except
where such other debt paid has priority over the debts due the United
States. The income tax liabilities need not be formally assessed for the
fiduciary to be liable if he or she was aware or should have been aware
of its existence. Virginia‟s Uniform Trust Code, Va. Code Section 55 -
541.01 et seq.

F. Terminating the Representation with Closing letters

The fiduciary secure closing letters for the estate and the IRS when
transfer tax liability.

Tip-The fiduciary‟s counsel sends a letter terminating the

representation upon receipt of the closing letters. and copy all
beneficiaries.

In Keller v. Denny, the Virginia Supreme Court address the statute of

limitations for legal services

“[W]hen malpractice is claimed to have occurred during the

representation of a client by an attorney with respect to a particular
undertaking or transaction, the breach of contract or duty occurs and
the statute of limitations begins to run when the attorney‟s services
rendered in connection with that particular undertaking or transaction
have terminated, notwithstanding the continuation of a general

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 attorney-client relationship, and irrespective of the attorney‟s work on
other undertakings or transactions for the same client. Keller v. Denny,
232 Va. 512, 517-18, 352 S.E.2d 327, 330 (1987).”

Tip-In your engagement letter includes provisions addressing effective

dates of representations and responsibility for estate files. The author
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includes his language in the last endnote.

End Notes
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B. Effect of death of a party. - The death of a person entitled to bring an
action or of a person against whom an action may be brought shall toll the
statute of limitations as follows:

1. Death of person entitled to bring a personal action. - If a person entitled

to bring a personal action dies with no such action pending before the
expiration of the limitation period for commencement thereof, then an action
may be commenced by the decedent's personal rep resentative before the
expiration of the limitation period including the limitation period as provided
by subdivision E 3 or within one year after his qualification as personal
representative, whichever occurs later.

2. Death of person against whom person al action may be brought. - a. If a

person against whom a personal action may be brought dies before the
commencement of such action and before the expiration of the limitation
period for commencement thereof then a claim may be filed against the
decedent's estate or an action may be commenced against the decedent's
personal representative before the expiration of the applicable limitation

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period or within one year after the qualification of such personal
representative, whichever occurs later.

b. If a person against whom a personal action may be brought dies before suit
papers naming such person as defendant have been filed with the court, then
such suit papers may be amended to substitute the decedent's personal
representative as party defendant before th e expiration of the applicable
limitation period or within two years after the date such suit papers were
filed with the court, whichever occurs later, and such suit papers shall be
taken as properly filed.

3. Effect of death on actions for recovery of realty, or a proceeding for

enforcement of certain liens relating to realty. - Upon the death of any person
in whose favor or against whom an action for recovery of realty, or a
proceeding for enforcement of certain liens relating to realty, may be
brought, such right of action shall accrue to or against his successors in
interest as provided in Article 2 (§ 8.01-236 et seq.) of this chapter.

4. Accrual of a personal cause of action against the estate of any person

subsequent to such person's death. - If a personal cause of action against a
decedent accrues subsequent to his death, an action may be brought against
the decedent's personal representative or a claim thereon may be filed against
the estate of such decedent before the expiration of the applicable limitation
period or within two years after the qualification of the decedent's personal
representative, whichever occurs later.

5. Accrual of a personal cause of action in favor of decedent. - If a person

dies before a personal cause of action, which survives, would have accrued to
him, if he had continued to live, then an action may be commenced by such
decedent's personal representative before the expiration of the applicable

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limitation period or within one year after the qualification of such personal
representative, whichever occurs later.

6. Delayed qualification of personal representative. - If there is an interval of

more than two years between the death of any person in whose favor or
against whom a cause of action has accrued or shall subsequently accrue and
the qualification of such person's personal representative, such personal
representative shall, for the purposes of this chapter, be deemed to have
qualified on the last day of such two-year period.

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See generally .Estate Administration in Virginia© [EAV] and the
Commissioner of Accounts Manual © [COAM], and Estate Planning in
Virginia© [EPV]Manuals may be purchased from the Virginia Law
Foundation

For Virginia Supreme Court estate administration forms, go to

www.courts.state.va.us.

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§ 64.1-171. Proceedings for receiving proof of debts by commissioner s.

Any commissioner of accounts who has for settlement the accounts of a

personal representative of a decedent shall when requested to so do by a
personal representative or any creditor, legatee or distributee of a decedent,
or may at any other time determined by the commissioner, even though no
accounting is pending, appoint a time and place for receiving proof of debts
and demands against the decedent or his estate. The commissioner s hall
publish notice thereof once in some newspaper of general circulation in the
county or city wherein the fiduciary qualified at least ten days before the date
set for the hearing. At least ten days before the date fixed for the hearing the

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commissioner shall also post a notice of the time and place at the front door
of the courthouse of the court of the county or city wherein the fiduciary
qualified.

The fiduciary, shall give notice, in writing, to any claimant of a disputed

claim known to the fiduciary at the last address of the claimant known to the
fiduciary. The notice may be by regular, certified or registered mail, or by
personal service at least ten days prior to the date set for hearing. The notice
shall inform the claimant of his right to attend and present his case, of his
right to obtain another date if the commissioner of accounts finds the initial
date inappropriate, and of the fact that he will be bound by any adverse
ruling. The fiduciary shall also inform the claimant of his right to file
exceptions with the judge in the event of an adverse ruling.

Evidence of any mailing of notice by the fiduciary shall be filed with the
commissioner. The commissioner may in a case deemed appropriate to him
direct the fiduciary or the claimant or either o f them to institute a proceeding
at law or in equity to establish the validity or invalidity of any claim or
demand, which he deems not otherwise sufficiently proved.

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GUIDELINES FOR FIDUCIARY COMPENSATION

INTRODUCTION

The Judicial Council of Virginia, in establishing the Standing Committee on

Commissioners of Accounts in 1993, charged the Standing Committee with
promoting uniformity of practice among commissioners of accounts. Mindful
of the Supreme Court‟s consistent holdings that the circumstances in e ach
case determine the allowance of fiduciary compensation, the Standing
Committee recommended to the Council for approval the following
Guidelines for Fiduciary Compensation in order to promote a degree of
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uniformity among the Commissioners of Accounts in Virginia in their task of
determining compensation to be allowed fiduciaries. The guidelines are not
intended as a substitute for the analysis the Commissioner must do to
determine the statutory “reasonable

compensation” in each case. The Judicial Council approved the Guidelines in

December 2004.

DECEDENTS‟ ESTATES

1. Where the will clearly sets out compensation in a specific dollar amount or
a specific percentage that the Executor is to receive, the will controls, and
the Executor is entitled to the amount set out.

2.Where the will states that the Executor shall receive for services the
compensation set out in a referenced published fee schedule in effect at the
time such services are rendered, fees as set out in the fee schedule shall be
presumed to be reasonable, as that term is used in §26 -30. The burden of
persuading the Commissioner that fiduciary compensation taken according to
such a fee schedule is not reasonable would be on an objecting party . The
ultimate responsibility of determining the reason ableness of the
compensation rests with the Commissioner.

3. Paragraph 2. above does not apply in the case where the will is silent as to
the Executor‟s compensation. In such a case, if the Executor (corporate or
otherwise) uses a published fee schedule to determine compensation, the
other guidelines set out herein apply. There is, however, no presumption that
such a published fee schedule is not reasonable.

4. Where all parties affected by the amount of the compensation are (i)
competent to contract (ii) understand the issues involved (i.e., can give

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“informed consent”) and (iii) agree in writing as to the amount of the
compensation to be paid, then the agreement should be honored by the
Commissioner.

5. Unless determined as set out in paragraphs 1., 2 . or 4. above, the fee to be

allowed the Executor on all property in the decedent‟s probate estate
(calculated on the inventory value, including amended inventories) is as
follows:

(a)5% of first $400,000.

4% of next $300,000.

3% of next $300,000.

2% over $1,000,000.

Over $10,000,000. -by agreement with the Commissioner

(prior consultation is required).

AND

(b)5% of income receipts (not including capital gains).

6.The value of real estate will be included as property in the decedent‟s

probate estate for fee purposes only if the Executor is given the power to sell
real estate and (i) is instructed to sell real estate in the will, or (ii) is
requested to sell real estate by all affected beneficiaries or devisees, or (iii)
is required to sell real estate to pay taxes or other charges against the estate,
or (iv) the Commissioner determines that such sale is clearly in the best
interest of the estate and the devisees or beneficiaries as a whole.

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7.If the Executor employs an attorney or accountant to perform duties that
should be performed by the Executor, the fees of those persons should be
deducted from the compensation due the Executor . Note that this does not
apply to reasonable fees paid to attorneys or accountants for tax work or
litigation or other legal services reasonably necessary for the orderly
administration of the estate.

8.If the Executor employs an investment advisor, the advisor‟s fees, if

reasonable, should generally not be deducted from the Executor‟s
compensation.

9.The Commissioner may also incre ase or decrease the otherwise allowable
compensation in exceptional circumstances . Factors to be considered in
determining the compensation include the nature of the assets, the character
of the work, the difficulties encountered, the time and expertise r equired, the
responsibilities assumed, the risks incurred and the results obtained. A
consideration of these factors could result in a decrease or an increase of the
compensation that would otherwise be determined using the standards set out
elsewhere in these guidelines.

10.As a general rule, an Executor is not allowed compensation based on the

value of assets not includable in the probate estate. The Commissioner may
allow such compensation in circumstances where it is necessary for the
Executor to assume some responsibility for the asset. The Executor is advised
to make separate fee arrangements with the beneficial owners of non -probate
assets.

11.If, after examining these “Guidelines,” the Executor has any questions
about the fee to be taken in a specifi c estate he or she should be encouraged
to consult with the Commissioner in advance of taking any fee. NOTE: The

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use of the word Executor above includes all fiduciaries charged with
administering decedent‟s estates. The words “fee” and “compensation” are
used interchangeably.

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B. TRUSTS

With respect to Trusts, the specific guidelines for compensation are:

1. Compensation should be taken on an annual basis based on the fair market

value of the trust assets (i.e., principal and undistributed income) at the
beginning of the accounting period. Previously distributed income, of
course, is not to be counted in determining compensation. Where the
required accounting is for a period of less than one full year (see, for
example, § 26-17.6.A.), the compensation should be pro-rated.

2.Paragraphs A. 1. through A. 4. apply as well to trusts.

3.Undistributed income and principal should be treated alike in determining

the fair market value of the trust assets at the beginning of the accounting
period. The fee schedule set out below applies to undistributed income and
principal combined, with no compensation to be calculated on income
received and distributed during the year.

4.The schedule of fees is as follows:

1% of the first $500,000. (.01)

¾ of 1% of the next $500,000. (.0075)

½ of 1% over $1,000,000. (.005)

$10,000,000. or more -by agreement with the Commissioner

(prior consultation is required).

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5.The guidelines set out in A. 7., 8., 9. and 11. above also apply to Trustees.
In addition, the Commissioner may reduce th e allowable compensation in
certain circumstances, such as where the Trustee has delegated total
investment responsibility to professionals or is not making any discretionary
distributions.

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see generally, Publication 559 (2007), Survivors, Executors, and
Administrators, at http://www.irs.gov/publications/p559/index.html

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Effective Dates of our Representation My representation as your attorney
for your estate planning begins when we receive your first payment of the fee
and terminates the date the plan is signed by you, or is ready to be signed by
you if the plan is not signed at the delivery meeting.

Retention of your Legal Files Unless you direct us otherwise today, or in

writing within 3 years, we shall destroy the copy of your estate plan and
other documents we prepared for you three [3] years from the date on this
retainer.

We shall maintain a copy of your estate plan for updating uses, provided you
contact me to update your estate plan within 3 years of this retainer. To the
extent we have a copy of a document and you request it in the future, we
charge my prevailing hourly rate to retrieve copies of doc uments not involved
in a future engagement.

You are provided the signed original of your estate plan and returned all
original documents you provided to us for the planning process. We do not
maintain a signed original or a conforming signed copy of the in struments in
your estate plan.

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You should assume any copies we may have are inadmissible or un -usable in
a court of law or for any other purposes if your original estate planning
instruments are lost, destroyed or otherwise unavailable when you or your
family needs them at any time, including disability, medical emergency or
death.

We counsel you instead on safe storage techniques with a bank safe deposit
box and secure file boxes to avoid lost or destroyed documents; and the use
of locator lists so that fiduciaries and family members know where you stored
your signed estate plan.

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