Why and When a Surety Bond is Necessary – Part 3
In this third post of three I once again discuss surety bonds. Last week I explained the types of situations where a court would require one. The cost of a bond is the premium – an annual fee that must be paid each year the bond remains in place.
How long is that exactly? Basically until the fiduciary’s job is done. If, for example, we are talking about an administrator of an estate, the bond must remain in place until the estate administration process is complete. The administrator must gather the assets, pay the debts and taxes if any, and then disburse the remaining net estate to the rightful heirs.
Before disbursement the administrator must provide an accounting to all heirs showing what was spent and how the administrator arrived at the amount to be distributed. This is called an accounting. It can be done informally or formally. An informal accounting does not require court participation. It is less time consuming and expensive. The accounting is submitted to all the heirs for their approval before final distribution.
A formal accounting is one in which the accounting is submitted to the court for its approval. Court rules and procedures must be followed with notice given to all interested parties. A judge reviews the accounting and then signs a court order approving the accounting before final distribution. As with any court involvement, this type of accounting is more expensive and time consuming which is why in most cases an informal accounting is the preferred option.
In either case, however, once final distributions are made, the bond must be cancelled. People often make the mistake of assuming the bond automatically terminates. It does not.
In the case of an informal accounting, releases by each heir should be filed with the Surrogate with copies provided to the surety. Where a formal accounting has been done the court order approving the accounting should be provided. Only then will the bond be canceled. Keep in mind that the failure to cancel the bond means the premium will be owed each year until the bond is canceled.