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Real Life | Managing an estate can be complex, costly

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Onward toward your expert estate administrator diploma: Let’s explore two inescapable facts of estate administration life — long time lines and complexity, and multiple high costs.

Time and complexity

In our advanced society, administering most estates can’t be a quick or simple process. Estates of moderate or high complexity normally take several years to administer, even though everyone wants closure right away, and fiduciaries are accused of dragging the process out unnecessarily and performing superfluous, unneeded, on-the-meter work.

Here’s why and how to live in peace with it:

It’s advisable to explain to everyone, especially legatees, that our society’s legal system makes the process of working through all except the simplest estates meticulous and complex, requiring a great deal of detail work and time. But, at the end of the day, this get-it-right process is desirable for the benefit and protection of all affected parties.

Many procedures must await the completion of the preceding ones before they even can be started. For example, final residual distributions can’t be calculated until income tax returns are filed and accepted for the year of the estate’s closing. They, in turn, can’t be started until the previous years’ tax work is completed, and that can’t even be started until it is confirmed that all prior years’ tax returns have been filed and settled. Many income tax returns cannot be completed before most of the following year has passed because of delays awaiting the arrival of vital reporting documents, such as IRS Forms K-l and 1099.

Nor can the year of the estate’s closing be determined with any degree of certainty until estate-tax filings, discovery, outstanding disputes, accounts receivable and payable, and the re-titling of assets being transferred or distributed all are worked through, approved and settled. Sometimes, it takes months, even years, to obtain action or information from a government agency, custodial-bank or former employer, just in order to calculate a supportable valuation for an asset, or to be reasonably certain that a tax return or a value won’t be challenged.

Much heavy time is consumed in researching regulations, rulings, precedents, laws of various jurisdictions and even having to petition a slow-acting court or an agency for a ruling about how to treat an item. If foreign (other states and countries) interests are involved, the processes are agonizingly complicated by their laws, procedures and bureaucracies.

The fiduciary can’t even legally begin work before receiving documentary court-appointed authority, and can’t even petition for that before receiving certified copies of the death certificate from the state of death.

These are just a few of the frustrations.

No wonder specific legatees and creditors have to wait months and years before the fiduciaries prudently can release a distribution, and residual legatees have to wait even longer! No wonder the creditors and legatees become anxious, impatient and even hostile as a result of their seemingly endless and unjustified waiting. How wise the fiduciaries are to keep the estate transparent to them, informing them about all of the activities, encouraging their helpful support instead of disruptive antagonism.

Costs

Costs vary widely, depending on the processes, the amount of work and the level and needed amount of expert professional involvement.

Fiduciary fees:

Professional fiduciaries, trustees and support-team professionals, such as attorneys, accountants, bankers, appraisers and the like, must work through all the processes, and they charge either flat or hourly rate fees for their service. They really do earn them, by working diligently in the client’s best interests and under the strictest rules of responsibility, compliance, reporting, ethics and performance. When foreign jurisdictions are involved, the complicated processes translate into additional fees and charges.

In some cases, the fees are regulated by a probate court, and some are set by law. Most professionals’ fees are monitored and governed by the ethical practice committees of their professional associations, to comply with standards that are fair and reasonable, both to clients and to themselves. In fairness, practitioners’ fees must be sufficient to cover their office rent, employees, professional liability insurance, equipment, education and all the other costs of doing business that any business incurs, with enough left over to yield the paychecks that they certainly deserve after their many years’ and hundreds of thousands of dollars’ training investment.

Taxes:

Estates, trusts and businesses are taxpayers, just like individuals are: income, property, excise, estate and inheritance, federal, state and local. Tax returns must be prepared, filed and the taxes paid.

Income and estate taxes can seriously reduce poorly tax-planned estates. In many states. there are transfer taxes when assets are transferred out to certain legatees. Further, some states impose an inheritance tax, not to be confused with an estate tax, on estate beneficiaries. In addition to the taxes themselves, such complex tax work almost always requires fee-paid professionals.

Filing fees:

States have found a way to boost their tax revenue, ostensibly “without increasing taxes,” by sharply increasing filing fees for various transactions, or inventing new ones.

Valuations:

Appraisers charge flat or hourly fees for their work. Specialist accountants and consultants usually charge hourly rates for working out supportable valuations for hard-to-value property (for example, a minority share in a joint venture that owns a unique, specialized commercial building that stands on leased land).

“Papering”:

A seemingly peripheral function, this in reality is a major and necessary function. It involves the drafting, production of, printing and distribution of the numerous and massive reports and exhibits, documents and more documents, and in multiple copies, supervised by a paraprofessional on the payroll.

Partial relief, statutory fee limits:

The justifiable cost of processing a moderate or large-sized estate, especially one that wasn’t cost-consciously planned, can be painfully high, even though governed by statutory PR or trustee fee limits. Typical statutory fee limits for estates (some trusts and corporations aren’t affected by these limits) are:

▪ No limit for “small” estates

▪ For moderate-sized estates, 1 percent of the first $20,000 value, plus 3.6 percent of the balance, unless a judge allows more for justifiable reasons

▪ For large estates, fees often are negotiated within limits, but are subject to tough judicial scrutiny and approval.

Add all of this to the unpredictable and uncontrolled cost of the final illness, plus the (typically) $6,000 to $15,000 funeral, cemetery and monument bills — no wonder most survivors are both amazed and appalled by the cost of dying!

Limits for trustee fees are less common and less restrictive. Besides, grantors of well-conceived trust instruments specify their own trustees’ fee schedules.

It’s worth saying again and again: A great deal of expense can be avoided in so many ways by smart, competent planning during life, long before death, and also by expert, diligent fiduciary and helper work after death during the estate’s administration. Professionals do it best.

At the end of the day, the cost of a professionally, well-designed, well-documented estate plan, even when professionally administered at death or incapacity, can be far less than the cost of a deficient, inadequate, vulnerable one that isn’t. Professional help from the beginning is a wise investment.

Contact GARY NEWMAN at gary@gnewman.org. Your ideas and comments are always welcome.

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