estate costs probate

Asset Reduction Ahead: The High Cost of Finalizing an Estate

“Many lawyers and banks offer will-writing as a loss leader and put themselves in as executors so they can make a fortune from the probate process after the death when the family is vulnerable.”
    — Adam Walker, director, Final Duties, a UK-based independent probate broker

Death does not mean you’ve escaped the power of banks and lawyers to rip you off. No sirree! Our colleague Rick Randall, CEO of the National Network of Estate Planning Attorneys, LLC, says the fees associated with closing an estate are way higher than the public thinks they are. And we have to admit: Now that we’ve investigated, even we are surprised.

Estates incur these costs whether or not there are inheritance taxes, so this affects a wide range of people. So without further ado, let’s examine these costs.

But first, let’s review a couple of definitions. Probate, of course, is the legal process that takes place after someone’s death. It includes the following tasks:

  • Verifying the validity of the will
  • Officially appointing the executor
  • Identifying and appraising the deceased person’s property
  • Paying off any of that person’s remaining debts, as well as any inheritance taxes
  • And finally, distributing the property based on the will’s instructions.

The executor (or executrix, if it’s a woman) is the person or institution (sometimes a bank) charged with the legal duty of carrying this out. The executor is named in the will. If there are mistakes, the executor is personally liable. Due to this high potential liability, he or she has the right to decline the role.

The process includes four categories of costs: court fees, fees for the so-called personal representative (or executor), attorney fees, and appraisal and business valuation fees. In general, the highest fees pertain to the executor and attorney. Let’s review these costs one by one.

Probate Court Costs  

Actual court costs vary by state. In some states, fees are based on the value of the estate; in others, they are a fixed cost. This category of costs also includes filing fees, docket fees, and costs of notices and publication. Historically, these costs have totaled between a few hundred dollars to several thousand dollars—a small percentage of the cost of closing an estate.

But that may be changing. In July 2015, Bill Rafferty, an analyst with the National Center for State Courts, told Investment News that state legislators (who determine the fees probate courts can charge estates seeking settlement) have had to raise fees in order to keep the courthouse doors open.

The highest in the nation: Connecticut (.5% of the estate’s value, for estates of $2 million or more), New Jersey (.4% of the estate’s value) and Delaware (.4% of the estate’s value, but capped at $6000.) Effective July 2015, Connecticut removed its $12,500 cap, meaning the court cost for a $10 million estate quadrupled overnight–from $12,500 to a whopping $50,000.

Appraisal and business valuation fees

Date of death appraisals are required for any real estate, other investments, business interests and personal property including antiques, jewelry, artwork, boats, etc. This is necessary to determine:

  • Federal and/or state estate taxes due at death
  • How much is available to pay creditors
  • To properly divide property among heirs
  • The “step up in basis” that heirs must use as their cost basis for tax purposes going forward.

Not surprisingly, the cost of appraisal varies based on the number and types of assets. It’s easy to assess a stock price on a particular day, harder to value a piece of real estate or a stake in a business or limited partnership investment. In general, it may cost between a few hundred dollars to a few thousand dollars to appraise personal property. Business valuations, on the other hand, can cost several thousand dollars.

It’s worth mentioning a potential conflict of interest, which will become more clear when we review executor and legal fees. If these fees are based on the value of the estate, the person choosing the appraiser or appraisers may be prone to influence. That’s because their fees may rise as the value of the estate is appraised at a higher value.

Attorney fees 

The largest probate fees are attorney fees. State statute, and local courts, to a certain extent, govern how attorneys may charge. In general, there are two methods:

  1. Statutory percentage fees based on the gross value of the estate, or
  2. Hourly or fixed fees based on what’s referred to as “reasonable compensation.”

From the perspective of the estate, the worst way to pay a probate attorney is generally a percentage of the estate’s value. That’s because the charge can be extremely high relative to the amount of work they have to do. In fact, only seven states still allow the percentage fee: Arkansas, Missouri, California, Montana, Florida, Wyoming, and Iowa. Even in these states, however, lawyers are not required to charge a percentage fee, it’s just an option.

It’s worth noting that not all states calculate percentage fees the same way. In California (a state we will return to in a moment), the fee is based on the gross value of the probate assets. But in some states, the percentage is taken on certain assets–whether these assets are subject to probate or not.

So what kind of percentages are we talking about? In California, as is usually the case, it’s a sliding scale:

  • 4% of the first $100,000
  • 3% of the next $100,000
  • 2% of the next $800,000
  • 1% of the next $9 million
  • 0.5% of the next $15 million, and
  • a “reasonable fee” over $25 million.

Using this system, a typical California estate with a gross value of $500,000 would cost $13,000 in legal fees—a “very large amount given the amount of legal work,” a contributor at Bogleheads.org noted. The fee for an estate with a gross value of $1 million would be $23,000, and the fee for a $1,500,000 estate would be $28,000.

But this is not the entire story, for two reasons. To begin with, these statutory percentages are based on the gross value of the estate—not the estate’s net worth.

Example: If your California estate includes a modest house with a market value of $1 million (very possible in California), but has a $600,000 mortgage, the probate lawyer’s fee is based on the $1 million market value rather than the $400,000 equity, or net worth. Bottom line: His statutory take of this portion of the estate alone is $23,000 rather than $11,000, as a reading of the sliding scale rate might suggest.

Secondly, while this fee is described as the maximum that a probate attorney may charge, it does not include 17 different so-called “extraordinary” services these lawyers may need to provide.  These services include (but are not limited to) the following:

  • Sale of real estate or other personal property
  • Preparation of estate, inheritance, income, sales or other tax returns
  • Litigation
  • Lawsuit to collect assets
  • Will contest
  • Carrying on the business of the decedent, including terminating it.

As mentioned earlier, however, the statutes in most states regarding probate attorney fees stipulate “reasonable compensation.” In these states, unfortunately, there is no certainty what an attorney might charge.

According to our colleague Rick Randall, attorneys will tell you they charge an hourly rate (which people don’t like)—but they won’t tell you how many hours or what the hourly rate is. He says that even when they have charged on an hourly basis, the total fee has been a predetermined amount they know the court will approve. And while there have not been any recent studies on probate attorney compensation, the 1992 studies that he shared with us included published data on a percentage of estate basis—even for “reasonable” compensation states.

The bottom line: In general, regardless of HOW the fees were determined, the studies indicated that attorney fees are usually 3% or more of an estate’s gross value.

Randall explains this seemingly odd coincidence thus. In the l980s, the bar associations set minimum fee schedules, and if new attorneys tried to compete with the established firms by cutting fees, they were subject to discipline for violating the minimum fee schedules. Eventually, there was a lawsuit, and the Supreme Court said that was price-fixing.

“Up popped maximum fee schedules,” he says, “and the numbers didn’t seem to change. What used to be the minimum fee became the maximum fee. And states divided into statutory (maximum) fees, or reasonable compensation fee schedules, or a combination of both.”

As we’ve already mentioned, though, the “maximum” fees don’t include “extraordinary” services associated with an estate. An AARP study found that in one third of the California cases studies, attorneys charged for extraordinary services.

So much for maximum fees.

In general, Randall says, attorney fees for living trusts are about 75% of what the fees are for an estate that is probated.

Executor fees

Although it’s actually the executor’s job to administer an estate, the attorney for the executor often ends up doing a lot of the work, and it’s not easy to differentiate between the two of them. Sometimes, in fact, the attorney is also the executor, and, as a consequence, can end up collecting two fees for one function. If the attorney serves both functions, some states cap the fee at an amount higher than one fee but less than two fees.

Even so, the executor’s compensation in many states is the same as that for the attorney, and is calculated the same way, as either a statutory percentage of the estate’s value, or as reasonable compensation. For states with statutory percentages, fees for extraordinary services conducted by executors are also permitted.

The “net net” effect: Even though it is difficult to compare fees state to state since they are calculated in so many different ways, you can count on the total cost for the executor and the attorney at 6% of the estate’s gross value—or more.

Of course, it’s not uncommon for a family member—or members—to be appointed executor. The job indeed requires a lot of time, and paid compensation is taxable. In contrast, Randall says, many families choose to split the work among heirs, who perform services for “free” and choose to inherit the funds instead, tax-free (probably).

Sticker shock

That said, most people still get sticker shock when they realize that the total costs of closing an estate can easily cost an average 8% of the estate’s gross value. In fact, Randall says, it’s quite possible for fees to wipe out the entire estate altogether, depending on circumstances, such as highly leveraged real estate, large debts owed by the estate, etc.

And of course, estate taxes that impact larger estates—stealing 40% beyond the $5.45 million exemption—are over and above these costs!

A Cost Reduction Strategy

Life insurance proceeds circumvent the probate process and should not be considered part of the estate. (They “shouldn’t” unless the estate has been named as the beneficiary, a costly mistake we help our clients avoid!) A life insurance policy can also be used to pay the estate costs. And unlike some other types of assets, proceeds pass to beneficiaries income-tax free. (Estate taxes will still apply for estates exceeding the exemption.)

Simply put, there is no asset that passes more quickly, easily or efficiently to a beneficiary than life insurance! That’s because it was designed for the purpose of providing financial support for “widows and orphans” at a time of loss.

Want to know more about passing generational wealth?

Soon we’re releasing The Family Banking Book, you can sign up to receive a free ebook copy when it’s ready!

And if we can help you put permanent life insurance in place that can benefit both you (while you’re alive) and your heirs, contact us for a no-hassle, no obligation policy illustration. We’ll also be happy to answer any questions you have about life insurance. (No sales presentations, just information!) We specialize in high cash value whole life policies (although we can also design for maximum death benefit), also we offer single premium whole life and convertible term policies.

For more information on whole life insurance, check out Kim’s books on Amazon.com: Live Your Life Insurance and Busting the Life Insurance Lies.

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