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Dear Senior Living Adviser,

I am an executor for a trust. The trust clearly lists all the assets it covers. One of the assets is an individual retirement account, which is held at a financial services firm. The IRA has 2 beneficiaries: Mark and Nancy.

The trust explains that after all debts and taxes are paid, the remaining assets are to be distributed 50/50 to Mark and Nancy. The IRA is currently frozen, as we are waiting for letters testamentary, which we expect in a week or so.

Here is my question: The financial adviser at the financial services firm said that as soon as the letters are available, he will distribute the IRA from the trust into separate IRAs that he is setting up for the beneficiaries.

As executor of the trust, it is my responsibility to make sure all estate debts are paid, using the assets of the trust. For at least 6 months, I won’t know whether the estate will have enough financial assets to cover all its debts or not.

Paying estate bills

During this time I will be paying estate bills — first with a non-qualified asset. However, if the non-qualified asset is used up and there are more debts to pay, I want to be able to tap into the IRA. Then, any assets remaining will be distributed 50/50 to Mark and Nancy.

I understand that there would be a penalty and taxes associated with using an IRA before retirement, but that may be the only trust asset available, if needed. However, if the financial adviser distributes the IRA before, as described, I may not have the funds to cover estate debts.

My questions are:

  1. If that happens, am I liable?
  2. Does the financial adviser have the right or authority to make a decision on when to distribute the IRA from the trust for which I am the executor?

— Steve Stipulates

ADVISER SEARCH: Find a financial adviser today.

Dear Steve,

Since I’m not an attorney, I asked Linda Anderson of Anderson Elder Law to help me reply to your questions. Both she and I agree that the trust should be working with an estate planning attorney on these issues and not trying to solve them in an advice column. That said, here are some issues to consider.

Anderson told me that, “A more complete answer would require a bit more information. Even if we assume that the living trust owns the IRA, presumably the living trust is not named as the beneficiary of the IRA.

“If there are individuals who are named, then those individuals work with the custodian to make their decisions as to the structure of their inheritance. A note of warning: The individuals should not decide to cash out their account until they have met with their own financial adviser.”

How expenses are paid

She also said, “With regard to the expenses of the estate (which include creditor claims, administrative expenses and death taxes), each state has its own statute, which sets the source of payments from assets, including non-probate assets such as an IRA. In addition, the terms of the living trust and will may have specific provisions that decide how these expenses are allocated (such as whether non-probate assets pay their own tax bill or whether residuary assets should be used). This is where the advice of a good lawyer is important to sort through all of these issues.”

Finally, Anderson said, “A personal representative that distributes assets that do not meet the legal requirements for priority and timeliness runs the risk of having personal liability! So, the first check of the estate should be to a qualified lawyer who is well-versed in estate administration.”

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