There is a lot of mystery surrounding the costs of probate and trust administration that many of my clients may be overlooking when they create their estate plans, or lack of estate plan. Additionally, the ways to avoid some of these costs are unfathomable to most people. So what are these costs?
Probate: Generally, the most expensive method of trust administration is probate. The California statutory fee schedule that applies to both attorneys and executors is based on the gross value of your estate assets. Often, people think that since their house is under water or their estate is insolvent, probate will not be necessary because their estate value is too small. However, the fact is that the need and the fees are determined on the basis of the value of your house without a mortgage, for example, or the value of your bank accounts without consideration for your outstanding bills. As a result, if your house is worth $500,000, but your mortgage is $600,000, the attorney and executor will be paid as if your estate is worth $500,000. Whether one would actually go through the Probate process on this type of estate or simply walk away is a totally different question.
Additionally, increases to the estate during administration are added to its value. For example, if a rental property is included, the gross rent is added to the value of the estate, but the estate’s liabilities and expenses are not subtracted from the gross value of the estate.
Trust Administration: Trust administration is frequently an expensive process as well, although typically less than probate. Trust administration expenses tend to increase when the trust is a more involved trust, such as an A-B trust, which involves many tax related issues. Whether the attorney charges an hourly rate or a flat fee, it will often take a considerable amount of effort to determine what assets exist, where the beneficiaries are, provide accountings (financial reports) to the beneficiaries, and file tax returns. In an ongoing trust administration, such as where a B trust is required or where the beneficiaries’ inheritances are held in trust for an extended period of time, annual accountings and tax returns may be necessary and can increase costs over time.
If your trust hasn’t been reviewed in many years, especially if it has been since the 1990s, you should have it reviewed immediately. When the estate tax exclusion was lower ($600,000 for most of the 1990s), many more people had reason to take advantage of A-B or A-B-C trusts. However, with skyrocketing exclusion amounts (currently $5.12 million) throughout the last decade, the same trust may be a burden to the surviving spouse that is as unnecessary as it is onerous.
Estate Tax: As I just mentioned, the estate tax is less burdensome than it once was. Additionally, it is determined on the net estate and allows for estate expenses. Currently it affects less than 1% of the nation’s population. In 2013, the estate tax exclusion amount is scheduled to drop to $1 million, which will still only reach a small percentage of the population. For those affected, especially if the estate does not contain many liquid assets, the estate tax can be a significant burden to heirs and may force the sale of non-liquid assets. Strategic gifting and complex estate plans are still necessary for those who should expect an estate tax liability.
A quick note about life insurance: Life insurance is exempt from income tax, but it is included in your estate for estate tax purposes without proper planning. In certain cases, it is smart to purchase a life insurance policy that can pay the liabilities and taxes that you leave behind. However, if your estate will already be subject to the estate tax, it may be worthwhile to carefully consider your plan options, beneficiaries, and method of holding the policy.
The price of death can be offset by proper planning during life. Considering all the possible costs with your attorney to determine which expenses are worth incurring now in the planning process, and which are better left to your estate is the best way to preserve the bulk of your wealth.
Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things…
FREE REPORT: This complimentary report, focused on Estate Planning, is comprised of many of Mr. Miller’s articles from his long running column for the largest regional newspaper in San Diego County. This report will guide you through the questions surrounding getting your estate planning in order.