Imposing a Surety Bond On Your Fiduciary? Consider these Pros and Cons
When drafting your NYC Last Will and Testament or Trust, it is important to consider whether you want to waive the issuance of a surety bond. A bond is the equivalent of insurance for the beneficiaries of your estate. In the event your fiduciary steals or in the event there is malfeasance, the bonding company will pay your beneficiaries and then seek to recoup their loss, typically from your executor. Typically a testator will appoint a person they trust to be the executor. Typically a trusted person will not steal or engage in malfeasance. Therefore, it follows, that typically, the Will provides that the testator waives the requirement of a bond. The provisions typically states that “no Executor or successor Executor under your will is required to furnish a bond.”
Although testators often waive the bonding requirement in their Wills, this step should be carefully considered as there are both advantages and disadvantages to a bond.
Advantages to Having a Surety Bond:
The biggest reason to require your Executor to post a probate bond is that it protects the estate’s beneficiaries and creditors in the event that the Executor breaches his fiduciary duties by stealing from the estate.
To illustrate, consider the following example. A testator drafts a Will and waives the issuance of a bond. He names an Executor to administer his estate and names several different beneficiaries who will receive his property after his death. After the testator dies, the nominated Executor offers the will for probate. The Will is contested. The Court issues Preliminary Letters Testamentary to the nominated Executor but orders that the bond be dispensed with, meaning that the Executor is not required to post a bond. The Executor then steals all of the testator’s assets, leaving nothing for the beneficiaries. What will the beneficiaries do?
If there was a bond, the beneficiaries could collect against the bond and allow the bonding company to deal with the stealing executor. In the absence of this bond, the estate beneficiaries have to commence proceedings to remove the fiduciary, compel an accounting, surcharge the fiduciary, and institute discover and turnover proceedings (for example, a SCPA 2103 turnover proceeding, in which the Petitioner requests that the Court order the individual who stole funds from the estate to turn over the stolen funds). These proceedings can be costly and can take time to resolve. In addition, there is no guarantee that the money can be returned to the estate as the executor may have already spent the money, wrongfully distributed them to third parties who were not entitled to receive them, or left the country with the assets.
If a bond was secured, however, the surety company that issued the bond will be required to pay the estate a certain amount in the event that the Executor breached his fiduciary duties. The surety will then institute proceedings against the fiduciary on their own.
While it can cost the estate a few hundred to a few thousand dollars to secure a bond (bonds are generally calculated at a small percentage of the amount of the estate that the executor is responsible for), this may be a small price to pay for avoiding estate loss or avoiding expenditure of additional legal fees to recover the funds.
Disadvantages to a Bond:
Many testators do decide to waive the bond in their will, especially where they are nominating a relative or close friend as their Executor. Testators might decide to waive the bond for many reasons – they may trust that their Executor will properly administer the estate, they might fear insulting their Executor, who might believe that the testator does not trust him to responsibly administer the estate, or they may simply want to save the Executor the time and stress involved in getting bonded.
Securing a bond does cause an extra burden on the Executor. In order to secure the bond, the Executor must contact a bonding company and apply for the bond. The Executor will complete an application, undergo a credit check, submit any required court documents, such as the Letters Testamentary, provide information about his finances, and may even be required to grant the bonding company permission to obtain his credit report. Some Executors may not qualify for a bond. For example, an executor has had previous estate bonding issues, has limited to no net worth, has previously declared bankruptcy, has a criminal record, or has discord with the beneficiaries may have a more difficult time qualifying for a bond.
Once the Executor finishes administering the estate, he must contact the bonding company in order to release the bond. Different bonding companies have different procedures for releasing the bond, but generally, they require that the Executor prepare and file an accounting with the Surrogate’s Court, that the Court judicially settle the accounting, and that the Executor make the final distributions of the estate assets. Alternatively, instead of requiring judicial settlement of the account, the bonding company might require that the Executor settle the account with an informal accounting or simply obtain signed releases from all beneficiaries of the decedent’s estate. The bonding company might request documentary evidence showing that the Executor’s account was settled, such as the decree from the Surrogate’s Court settling the account.
Because of this additional work and the time it takes to secure and release the bond, testators often waive the bond. Waiving the bond, however, can result in even more work and stress on the part of the Executor and the beneficiaries, and testators should really think twice before they waive the bond in their NYC Will.
Estate planning can be complicated. RK Law Can Help.
Additional resources provided by the author
For more information, please contact probate and estate planning attorney Regina Kiperman:
Phone: 917-261-4514
Email: rkiperman@rklawny.com
Or visit her at her new location:
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Suite 304
New York, NY 10038
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