Misappropriation of Estate Funds by Executor
There are significant penalties for misappropriation of estate funds. The court can discharge the executor and replace them with someone else, force them to return the money and take away their commissions. There can also be criminal a penalty, but most estate theft allegations do not escalate to criminal prosecution.
Civil Penalties for Misappropriation of Estate Funds
Surcharge. Beneficiaries will ask the court to surcharge the executor who they are claiming took more than they are entitled to. If the executor is one of the beneficiaries, then the court can surcharge the executor’s share of the estate, giving some or all of the executor’s share to the other beneficiaries.
Turnover. Beneficiaries can bring a proceeding for Discovery and Turnover. If the court grants the turnover, then it will force the executor to return property that he wrongfully transferred.
Discharge of executor. If the person caught with misappropriation of funds from a estate is the, the judge of the court can discharge them from their position, taking away their power to manage the estate. The judge can discharge and remove the executor “by reason of his having wasted or improperly applied the assets of the estate.”[1] The court can appoint someone else as the executor instead, typically one of the beneficiaries who brought the proceeding to remove the misbehaving executor.
Attorneys’ fees. Executors use estate funds for their defense. If the court finds that the executor improperly took funds from the estate, the court can order the executor to reimburse the estate for their attorneys’ fees. In some rare cases, the court can even order the executor to pay the beneficiaries’ attorneys’ fees.
Waiver of commission. An executor is entitled to a commission for their services. As a penalty for misappropriation of estate funds, the court can take away the executor’s right to receive the commission.
Criminal Penalties for Misappropriation of Estate Funds
It is not common for an executor of a estate to be criminally prosecuted, but it does happen. An executor or anyone else improperly taking money from a estate can be subject to criminal prosecution for theft from the estate, even if they are one of the beneficiaries. Taking more than you are entitled to by law can be interpreted as misappropriation of estate funds.
Everyone has their side of the story, and it could be that the beneficiaries’ allegations of theft are unfounded. But if the District Attorney’s office decides to bring charges, then the potential penalties can be significant.
The alleged thief’s side of the story. Executors or others who are accused of misappropriation of estate funds have their own side of the story. They say that they are paying for estate expenses, taking their legal fees, taking their share as a beneficiary, or comingling funds by mistake. Whether the executor is caught with misappropriation of estate funds and is now making an excuse or the executor did have a valid reason to transfer estate property to themselves is up to the court to decide, unless the executor makes a plea agreement with the District Attorney’s office.
The Penal Law. The estate is the owner of the property. When an executor is committing misappropriation of estate funds, he commits larceny. New York’s Penal Law (the Criminal Law) states that “A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.” [2] New York Penal Law continues to say that “Larceny includes a wrongful taking, obtaining or withholding of another’s property, with the intent prescribed in subdivision one of this section, committed … by conduct heretofore defined or known as common law larceny by trespassory taking, common-law larceny by trick, embezzlement, or obtaining property by false pretenses.” [3]
Sentencing guidelines. New York Penal Law 155 describes the sentencing guidelines for someone misappropriation of estate funds. The sentence depends on the amount that the executor steals. An executor convicted of larceny can incur a sentence of up to twenty-five years in prison.
| Amount Stolen | Type of Grand Larceny | Section of Penal Code | Felony Class | Penalty |
|---|---|---|---|---|
| In excess of $1,000 but not more than $3,000 | Fourth Degree | PL 155.30(1) | Class E Felony | up to 4 years in prison |
| In excess of $3,000 but not greater than $50,000 | Third Degree | PL 155.35 | Class D Felony | up to 7 years in prison |
| In excess of $50,000 but is not more than $1 million | Second Degree | PL 155.40(1) | Class C Felony | up to 15 years in prison |
| In excess of $1 million | First Degree | PL 155.42 | Class B Felony | up to 25 years in prison |
Restitution. The court can force the executor to return the property to the estate and pay restitution to the beneficiaries.
Although we talk about an executor, the same rules apply to an administrator and an executor, as well as a preliminary executor, administrator d.b.n., administrator c.t.a.d.b.n., administrator c.t.a., ancillary executor, ancillary administrator, and ancillary administrator c.t.a. [4] Executors are not the only ones who can be accused of misappropriation of estate funds. Anyone who has access to funds of the estate could potentially be a thief, such as the attorney, real esate broker, financial advisor, caretakers and others.
How an Executor Can Avoid Penalties
Do not take more funds that you are entitled to. Don’t steal from the estate. It can be tempting for an executor to take some extra cookies from the cookie jar. You have access to estate funds and the power to take some funds out. You don’t see anyone looking over your shoulder. But that sense of safety is false. Banks and courts have systems in place to detect fraud. Beneficiaries can get suspicious and hire a estate attorney or report the suspect to the police and hire a estate attorney to get the inheritance that they are entitled to.
Avoid self-dealing. The executor cannot transfer estate property to himself because the property belongs to someone else unless he pays the full price for it. As explained above, doing so can be interpreted as misappropriation of estate funds and can lead to an array of legal woes. A smart executor would want to avoid transferring estate assets to himself, even if paying fair and market value. If beneficiaries are getting more money than they would have, if not for the executor buying them out, the executor should explain it to the beneficiaries. For example, the executor can explain the savings on transaction costs, such as not having to pay a broker. There must be a feeling that the executor fulfilled his responsibilities to the beneficiaries.
Communicate with the beneficiaries. The executor should communicate with the beneficiaries, be transparent about the money he is taking from the estate, explain the reasoning behind it and try to get on the same page with the beneficiaries.
Do not commingle funds. The executor should place all estate funds into a estate account and not into his personal account, unless he wants to be accused of misappropriation of estate funds. New York Consolidated Laws, Estates, Powers and Estates Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property. He shall not invest or deposit such property with any corporation or other person doing business under the banking law, or with any other person or institution, in his own name, but all transactions by him affecting such property shall be in his name as fiduciary.” [4] Surrogate’s Court Procedure Act – SCP § 719 states that the court can take away a person’s power to manage the estate “where he mingles the funds of the estate with his own or deposits them with any person, association or corporation authorized to do business under the banking law in an account other than as fiduciary.”[5]
Do not use estate funds for personal expenses. The executor can only use estate funds to pay the legitimate expenses of the estate, taxes and legal fees.
Do not distribute any property without getting signed releases from beneficiaries. Once the executor collects the assets of the estate and pays out its debts, it’s time for the executor or administrator of a New York estate to disburse the funds to the beneficiaries. But before the executor does that, it is important to get a written release from the beneficiaries. The release states that the beneficiaries are satisfied with what they are getting and are never going to sue the executor. The best release comes with an informal accounting, which provides a summary of what property went into the estates, what the expenses were, and what is the share of inheritance for each beneficiary.
Having your New York estate lawyer get a release from beneficiaries is especially crucial when the executor is one of the beneficiaries. For example, if the executor is transferring a share of the decedent’s business, house, or other property to themselves, the executor should obtain a written release from the beneficiaries, or at least get them to approve it in writing, to avoid the possibility of the authorized transfer being misconstrued as self-dealing or commingling of funds.
If you feel things like “my family stole my inheritance,” or “my inheritance is being stolen,” it’s time to speak to an attorney.
Whether you are a beneficiary and you are claiming that the executor is committing misappropriation of estate funds or if you are an executor and you insist that the transfer of money or property was proper, you can speak with New York estate attorney Albert Goodwin, Esq. at (212) 233-1233.
[1] SCP § 711 – Suspension, modification or revocation of letters or removal for disqualification or misconduct
[5] SCP § 719 – In what cases letters may be suspended, modified or revoked, or a lifetime executor removed or his powers suspended or modified, without process
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