Managing investments in an estate comes with added risks in volatile markets

Executors often err on the side of caution when managing an estate’s financial assets to avoid losing heirs’ money. But simply selling investments and parking proceeds in cash comes with its own risks.

James Steele, an estate partner at Robertson Stromberg LLP in Saskatoon, says keeping the money liquid makes sense when dealing with routine estates that will be settled within a couple of years.

But he has seen numerous estates in which farmland sales bring in $2-million or more, and the executors just let those proceeds languish in a bank account for years.

“That cash just sits there and no one’s put it into any sort of investment product to earn a reasonable return,” Mr. Steele says. “If there’s going to be a significant multi-year delay, that is [when] you want to invest it under the guidance of a professional investment advisor.”

The consequences of not investing could mean heirs decide to sue the executor for failing to maximize the financial assets, he says.

Prior court decisions have found that it’s unreasonable to let estate proceeds languish for multiple years instead of investing it, he adds.

Mr. Steele says executors should notify beneficiaries ahead of time about the investment strategy for the estate.

He advises providing heirs with documentation on the investment strategy – the expected rate of return, risk profile, expected liquidity, tax considerations, overall asset allocation and how investments will be managed.

Then, the executor can ask for feedback, and beneficiaries can raise any serious concerns, he says.

“If you notify the beneficiaries about your investment strategy in writing and no one raises a concern, and then you act in the way you’ve outlined … it’s more difficult for beneficiaries to try and raise a complaint later,” he says.

Penny Stayropoulos, partner and portfolio manager at Treegrove Investment Management in Barrie, Ont., says maintaining detailed records of discussions with advisors about the portfolio management strategy is paramount.

“Keeping the statements – any kind of log of why certain transactions are happening – is helpful, and it keeps things transparent and clear to the beneficiaries if they have any questions, especially during a time when markets are so volatile,” she says.

But it’s not just a matter of delegating to an investment advisor or portfolio manager. Mr. Steele says executors are responsible for investment decisions and need to maintain rigorous oversight over the investment portfolio’s performance.

“Don’t just make a decision in one year to place proceeds in an investment, and then not even check the investment returns for three years,” he says.

Executors have what’s called “an executor’s year” to take care of an estate’s finances. They don’t have to sell the investments immediately after the person dies, says Alexandra Spinner, a partner in the tax and estate planning group at Crowe Soberman LLP in Toronto.

Once probate is received, some executors may look to settle the investments right away to ensure they have the funds to pay the final tax bill and make distributions to beneficiaries, she says. Others wait until closer to the end of the executor’s year.

Once the investments are sold, the money is moved into an estate account and usually put in conservative holdings such as money market funds, high-interest savings accounts or guaranteed investment certificates, she says.

Money in the estate account is used to pay debts and taxes. Once the executor receives a final tax clearance certificate from the Canada Revenue Agency, the money can be distributed to heirs, she adds.

Ms. Stayropoulos says executors need to do an accounting of expenses, debts and tax liabilities before selling investments to disburse to beneficiaries.

Typically, her executor clients liquidate assets gradually instead of in one big sell-off. They also look at the amount of capital gains and whether it’s worth spreading them over a couple of years. That occurs when it’s a complex estate with a multi year time horizon, she adds.

Some executors may be concerned about future market losses and look to sell assets as soon as possible, Ms. Spinner says.

“If they find themselves in a situation where the market drops unexpectedly and they hadn’t taken steps to safeguard the assets before, they may have to answer to some very unhappy beneficiaries,” she says.

But executors can use the tax losses realized in the first year after death to offset capital gains that the deceased had at death, Ms. Spinner explains. The adjusted cost base of investments resets at the date of death, so any capital losses realized in the first year after death can be carried back to recover taxes on gains accrued at the person’s death.

“While there might be less money to go to the beneficiaries, at least they’re not paying taxes on assets that have disappeared in value,” she says.