The Danger Of Sweetheart Deals: Be An Executor, Not An Angel

Once you've been appointed executor of an estate, there's a fair amount of discipline that's required - one of the biggest challenges being that you can't let your emotions get the best of you and abuse your authority to help out someone who is down on their luck or use a lift from a financial standpoint.

The fact that you feel this way makes you a nice person. It's doesn't make you a good executor because, contrary to what many assume, assets aren't yours to do with whatever you please - including helping yourself out even temporarily.

Let's say you've been appointed executor of an estate and lately your funds have been a little tight. If you could just give yourself a loan for the next few days, you could actually pay off the mortgage. Besides, your payday is next Tuesday and you're going to put all the money back into the estate right away anyway, so what's the harm, right?

Big mistake.

You absolutely, positively cannot take money out of the estate to pay for your personal debts, even if you're going to pay it back the next day or the next minute. It just can't happen.

The moment you take finances out of an estate for your personal debts, you've breached your fiduciary duty. You can be removed as executor of the estate and are liable to the heirs and beneficiaries for any damages.

It doesn't matter if you're going through foreclosure or some other "worthy" cause you see for taking the money out. You still can't loan yourself money out of the estate.

Why "Sweetheart Deals" Aren't Sweet For Everyone

With this understanding of the disciplinary and ethical line you can't cross in mind, let's talk about a big problem area that executors can get themselves into if they aren't careful: Arranging to buy a home from the estate in a "sweetheart deal."

As an executor, you have a fiduciary duty, which means you have to preserve the value of the estate. If you are going to sell real estate out of the estate, you have to obtain a fair deal for it. If you don't, the beneficiaries can sue you and you have to make up the difference.

Does this mean that sweetheart deals are always bad? No, but you really need to make sure the right set of circumstances are in place beforehand.

For example, what if it turns out that you're not only the executor but also the only beneficiary of a solvent estate? In that case, there aren't any unpaid creditors or other beneficiaries who could object. You have a lot more freedom to do what you wish in regard to the estate.

In contrast, let's say that the solvent estate has multiple beneficiaries and not all of those beneficiaries get along. Imagine, in that environment, trying to arrange a sweetheart deal for just one of them to buy a home from the estate. Problematic? You could say that.

Taking another scenario, what if the estate is insolvent and it's necessary to sell the real estate in order to pay off debts? Setting up a sweetheart deal simply to keep the property in the family and avoid paying off the entire debt could be a serious misstep.

What if the sale is to a son or daughter who grew up in the home?

It's the home you've grown up in and raised your own kids in. Now retirement is on the near horizon. You don't need this big, giant home anymore, so you say to one of your sons (who lives nearby with his four kids and is exploding out of their house), "I'm going to sell you the house that you grew up in. Wouldn't that be nice? Plus, I'm going to give you a sweetheart deal. It won't cost you anything."

Just one problem: If this house is one that was inherited from your parents and it's still part of the estate, you can't do that.

However, if you wait a few months and you know the home is going to you anyway, there is a proper way to proceed, including:

  • Paying off all debts associated with the estate
  • Transferring the house to yourself
  • Closing the estate
  • Ensuring you are no longer executor

The home is then yours and you can do anything you want with it, including giving it to your child.

Let's say you've got a sister who's a lot older than you who has a family of her own. She's living in a house a little too small for her family. Meanwhile, you've been living with your mother, helping take care of her because she's been ill for a while.

You're the executor of the estate and you really want your older sister to have this house one day. It would be so perfect for her and her family. Unfortunately, right now, your mother's will says that the house goes to you. No problem, right? You're the executor, after all.

Under certain circumstances, you can sell the home, but you have to do it for market price. You can't give your sibling a sweetheart deal just because you think they should get it. You don't have that right.

What about a neighbor you've been close to all your life? Perhaps right now they have their own family in a small house. They'd really do great in your house and you'd love them to have it - but you can't give it to them in a sweetheart deal.

One path you could consider pursuing is an arrangement in which the home is still in the estate but you rent the home to a relative, friend or neighbor - provided it's for a fair rent. Once you've actually inherited the house and own it, you can sell the home for a fair deal - not a sweetheart deal.

Chances are, if you list a property for $100,000, you're probably not going to get in trouble if you sell it for $98,000. Selling it for $50,000, on the other hand, could be a far different story.

So much of performing your duties as an executor depends on ensuring that there is a proper distribution of assets to all the essential parties. It's when an heir has certain rights and was supposed to obtain assets - but didn't - that you can run into big problems.

How can you avoid the issues involved in a "sweetheart deal?" That's easy. If the estate is solvent but there are multiple beneficiaries, you can technically put a sweetheart deal relating to real estate in place as long as all of the beneficiaries sign off on it.

If you try to be an angel who helps one beneficiary into a home without consulting with all the other beneficiaries, it could spell big problems for you. It doesn't do a lot of good to help someone enter a home of their dreams while you're living a nightmare such as dealing with a host of heirs who are so upset with you that they're considering legal action.

Executors with good intentions can have a world of bad things happen to them if the proper legal precautions aren't taken in instances such as the sale of a home. So don't make a costly misstep. Talk to a probate attorney to help ensure that a pending real estate transaction minimizes your liability rather than raising a few red flags.