A common and very reasonable question to ask in any estate and/or trust administration is “How much will this cost?” There will likely be a number of professionals involved in the estate/trust administration, including attorneys, accountants, and financial advisors. It is not uncommon to have a real property appraiser required to determine the value of real estate and the appropriate “step-up” in tax basis so as to minimize capital gains taxes.
In more complicated administrations, there may also be appraisers for business interests and personal effects if the assets of the estate so warrant, as well as auctioneers, surveyors, and a variety of other professionals.
In most circumstances, the professional and the personal representative/trustee will have a formal written engagement outlining the scope of responsibilities, as well as the fee for those responsibilities. Normal estate/trust administrative services are divided into two categories.
The first category is for “ordinary” or “normal” services. Many probate and trust administrations have common ordinary elements. As I’m sure you appreciate now that you have finished this book, the attorney will guide the personal representative/trustee through the choices that must be made, as well as make sure that the personal representative/trustee has satisfied all legal requirements prior to making distribution of the estate/trust. This serves to minimize the chances that the personal representative/trustee will violate one of his or her fiduciary obligations and therefore end up with personal liability.
How much of a “reasonable” attorney’s fee associated with the ordinary services of a probate administration is actually provided for under Florida law (See Florida Statute §733.6171). It works out to a percentage of the assets subject to the administration. Just because Florida law says a fee is reasonable does not mean that the personal representative or the trustee have to agree to the fee.
In general, the attorney will review the known facts and circumstances of a probate administration and base the fee upon the statute and other factors that are present. Sometimes circumstances warrant a discount from the statutory fee. This may be true when the administration has very few beneficiaries who all get along well and few, easily managed asset accounts.
The statutory based fee is known as a “closed ended” fee, meaning that for the ordinary services associated with the probate, the fee is fixed, regardless of the amount of time that the file takes to completion.
Some clients ask about an hourly fee being associated with a given file. If the attorney is willing to work under an hourly fee basis for a given file, this would be an “open ended” fee, meaning that however many hours the file takes to complete is what will be billed. The personal representative/trustee is not in control of the hourly fee, as the attorney will bill for any and all time associated with his work in the file. When the CPA calls with a question, or the financial advisor needs a new taxpayer identification number for the file, these are calls that come in and are part of the hourly calculation.
For this reason, it’s been my experience that most of the personal representative/trustees prefer the closed ended fixed fee.
Attorneys’ fees for the ordinary services associated with a trust administration are also governed in Florida by a statute, (see Florida Statute §736.1007) which calls for the fee determined in §733.6171 to be discounted by 25%. Where revocable living trusts are involved and where the assets of the trust have been fully funded into the trust, a trust administration statute will govern as opposed to a probate fee statute.
In addition to the normal ordinary work that is involved in an estate/trust administration, there may also be extraordinary services that are billed separately and in addition to the ordinary fees. Although rare, extraordinary services may include:
- Beneficiary disputes;
- Will/Trust court determination of ambiguities;
- Disputes with tax authorities such as the IRS or state departments of revenue;
- Court hearings and
- Creditor disputes
That is but to name but a few. Extraordinary services are usually billed at an hourly rate when required, but the personal representative and/or trustee is usually advised of the reason for extraordinary services before they are performed (unless they are needed in an emergency basis, which is rare), and the consent of the personal representative/trustee is generally obtained before such services are provided.
Accounting fees associated with income tax returns are usually a facts and circumstances question. Some tax returns are obviously more complicated than others, and most individuals have had experience with this on an annual basis. Florida does also have a law as to a reasonable fee for the preparation of an estate tax return, which is based upon the assets subject to the administration. Federal Estate Tax Return Form 706 preparation is a different animal altogether than income tax preparation. Most estates do not require the filing of that return, but should one be necessary, the tax return preparer will generally follow the state statute.
Trustee and personal representative fees may be charged. When a bank or trust company serves in this capacity, a normal schedule of fees applies. Moreover, when a family member serves, they may also refer to Florida law governing the personal representative fees (See Florida Statute §733.617). Curiously, there is no such statute on trustees’ fees, although many trustees charge in accordance with the probate fee statute since the liability and responsibilities are so similar.
When a family member takes a personal representative or trustee’s fee, they should know that this is taxable income that will be reported on their 1040 at the end of the year. Some family members will serve in this role without taking a fee, although I would say that until one sees the amount of work involved, my recommendation is not to promise that a fee won’t be taken unless and until one understands the scope of work, the responsibility, and the liability involved.
Reimbursement of Expenses
A common question that I’m asked involves which expenses the estate can and should pay when a loved one dies. The question sounds something like this: “My father just died and I’m his personal representative. I’m flying in my wife and children; my sister and her family are all coming too. Can I pay for all of the travel, hotel, food, and other expenses from Dad’s checking account? That’s what he would have wanted.”
Sounds reasonable, but unfortunately one has to be careful when paying for family travel expenses to attend a loved one’s funeral. First, let’s discuss what expenses are properly paid from the estate. Any reasonable travel expenses incurred by the representative/trustee are proper tax deductions from the estate, and so long as the will and/or trust does not conflict, these can be paid from estate funds.
Cleaning up the deceased’s home, costs associated with taking care of the remains, paying clergy for the service, and other such expenses are also all valid items that can be paid from the estate. The same goes for costs associated with a reasonable reception for those attending the funeral or related services. This is true even in situations where there is a service in two different locations, which may be common for those who maintain two residences.
Paying for other family members’ travel expenses, however, is generally not a valid charge against the estate and is therefore not a valid tax deduction item either. Many times, this result strikes the family as unfair. In these situations, I suggest that the beneficiaries can agree to use part of their beneficial interest to pay for these types of expenses, although it should be agreed upon in writing beforehand. The agreement should lay out specifically whose beneficial interest will pay for which travel expenses. Everyone should understand that the payment of these expenses for anyone other than a personal representative or trustee is not tax deductible. Each beneficiary would be paying for these items with “after tax” dollars.
Can a will or trust be drafted to include a provision to pay for travel expenses of family members? It can. If you want such a provision, I would suggest a cap on the expenses be put in place. Even if such a provision exists, the dollars would still be “after tax” expenses. In other words, the provision does not make these amounts tax deductible.
Allow me to elaborate on the payment of expenses for a reception or a wake. The IRS generally does not challenge “reasonable” expenses for these items. What’s reasonable is subject to interpretation. One would rightfully expect Walter Cronkite’s funeral reception to be more expensive than, let’s say, mine. Therefore, his family would likely be able to deduct a greater amount for a reception (so long as they could document the amounts spent) than my family would be able to. But one should always exercise conservative discretion to make sure that you don’t arouse IRS scrutiny.