FA Playbook

The other side of a will: Serving as executor to an estate

Shelly Schwartz, special to CNBC.com

So, you've been asked to serve as the executor of a friend or loved one's estate. It's an honor, no doubt, but it's also a significant burden.

Before you consent, said Erika Safran, a certified financial planner and founder of Safran Wealth Advisors, consider the commission with care. Educate yourself on how much work is involved (it can take up to two years to settle an estate) and honestly assess whether you're willing and able to handle the job.

Jupiterimages | Getty Images

"If you know that you are not financially astute and [are] completely disorganized, don't do it," said Safran. "An executor must be organized, diligent and able to execute tasks."

Indeed, failure to perform your duties effectively could leave the will-maker's assets vulnerable and, worse, expose you to legal risk. Executors can be sued for damages that result from acts of gross negligence, fraud or the perception of unethical actions taken in managing the estate, such as attempting to skew the wording of the will for personal gain.

But such lawsuits are hardly the norm. If you do decide to commit, you can insulate yourself from liability risk by exercising sound judgment, communicating openly with beneficiaries and refraining from seeking personal profit from your position above and beyond any compensation to which executors are entitled.

You can also minimize the administrative burden considerably by working closely with the will-maker (i.e., the person who named you executor) before he or she passes on to clarify any poorly defined requests and simplify the estate.

If you know that you are not financially astute ... don't do it. An executor must be organized, diligent and able to execute tasks.
Erika Safran
certified financial planner and founder of Safran Wealth Advisors

"Their will might say they wish to leave a certain amount of money to their school in Idaho, but ask them to clarify which school they mean," said Safran. "Those are the kind of nebulous requests that can get people into trouble."

Likewise, if they have 20 different mutual fund accounts, multiple individual retirement accounts, dozens of old savings bonds and a collection of stock certificates, ask them to consolidate those assets into as few accounts as possible while they're alive," said Safran, noting each financial institution will require a separate death certificate and a written letter of instruction once the will-maker has died.

The will-maker may not be willing to disclose details about his or her personal or financial affairs just yet, and doesn't have to, but they should at least notify you as to the location of the will and give you the information necessary to retrieve it when the time comes.

Read MoreGet a life-after-death game plan

It may sound simplistic, but if it is held in a vault at an attorney's office, you'll need the name and contact information for that office. If it is kept in a safe-deposit box, you'll need to know the name of the financial institution, box number and location of the key.

"When someone asks you to be their executor, you may not know what their financial lives look like and they may not want you to, but you want to at least ask if that person can compile an inventory of their assets," Safran said.

Along with a list of assets, she said, ask for (along with the will) a list of online passwords to both banking and social media sites and clear copies of life, homeowner's and auto insurance policies.

Finally, said Safran, secure contact information for the will-maker's tax accountant and attorney.

After death

The role of the executor, sometimes called a personal representative, is to distribute estate assets to the beneficiaries and settle any outstanding taxes and debt when the testator (will-maker) dies. That's when the real work begins.

Within the first few weeks, you will need to file a copy of the will with the probate court and notify all financial institutions, credit card companies and government agencies, including the Social Security Administration, of the decedent's death.

To do so, you will need to provide copies of the death certificate, typically distributed by the funeral home.

Most likely, you will also handle the funeral arrangements according to instructions in the will.

After the probate of the will and grant of letter of testamentary (a document granted by the court that states you are the legal executor), the clock starts ticking.

"Every state is different, but most have some form of notice provision to interested parties within a proscribed time frame," said Elizabeth Roberts, senior vice president and chief fiduciary officer at Bryn Mawr Trust, noting it is typically 90 days. "That time goes quickly."

Who needs life insurance the most now?
Who needs life insurance the most now?

Your state may also require executors to place an advertisement in the legal notices section of the newspaper, advising creditors that the deceased has passed away and providing contact information for making claims.

"You want to cut off the creditors within a year, but you need to follow procedures for doing that," said Roberts.

In the weeks immediately following the will-maker's death, you will also need to have all tangible assets professionally appraised, including houses, cars and artwork, so the value can be included in the final death income-tax return.

Read MoreWhy the rich sweat the 'inheritance talk'

As administrator of the estate, it is your responsibility to maintain the will-maker's home, continue making mortgage, utility and insurance payments, and protect all personal property held within so it can be distributed to the beneficiaries.

That's why it's a good idea to consider changing the locks on the door and putting any valuables into storage, Roberts explained.

At the same time, you will need to note the value of any appreciated financial securities (stocks and bonds) in brokerage accounts at the date of death, since beneficiaries enjoy a step-up in cost basis, which minimizes their capital gain.

That means when they eventually sell those assets, they will only be required to pay taxes based on the increase in value since the day they inherited it, not its value when they were originally bought.

Also on the to-do list: the disbursement of any cash bequests noted in the will. It's wise to have recipients sign a legal receipt acknowledging they received the asset and that they release the executor, said Roberts.

Next, you must contact the will-maker's accountant to have him or her prepare the final income and estate tax returns and pay any death taxes from the estate. (Executors can potentially be held liable for unpaid taxes on the estate.)

"Ask if you can get a copy of the last three years of income-tax returns," said Roberts. "That's a good way to trace back to make sure you didn't miss any assets and look for brokerage accounts."

Depending on the state in which the decedent died, the estate may also be required to pay inheritance or estate taxes, usually within nine months of the date of death. Some, including Pennsylvania, offer a 5 percent discount for paying within three months of the date of death, so it pays to perform your duties promptly.

The home front

The balance after all debts and administrative expenses are paid and bequests distributed is your "residue," or leftover assets, said Roberts, and it's wise to retain that cushion until you're sure all creditors are satisfied and all taxes have been paid.

One final cautionary note: Many homeowner's policies automatically cancel if a home is unoccupied for 30 days or more, so you may need to obtain a "vacancy permit" from the insurance company.

Read MoreDoes life insurance make sense?

Serving as the executor of a will is not a job to be taken lightly. To ensure you've covered all your bases and haven't left yourself exposed to risk, Safran suggests hiring a lawyer or financial planner with expertise in probating estates.

"Having a good advisor who is experienced in this process is invaluable," she said.

— By Shelly Schwartz, special to CNBC.com

More In FA Playbook

Op-ed: Investors need to wait it out before snatching up software stocks
Op-ed: Here are 6 stocks with excellent vital signs in the health-care sector