Reader question: Several weeks ago you wrote an article about estate planning. What is the cost of preparation of a return for an estate of a million dollars (just a ball park)? F.W.
Answer: This is a very important question and the correct answer is ‘it depends’. Before you accuse me of using a ‘Bill Clintonism’ (“…it depends on what your definition of ‘is’ is…), let me explain. Alabama law allows the executor of an estate to file with the court a request for an executor fee of up to 5% of the value of the estate being probated. A prominent estate attorney recently told me that any such request is often ‘rubber stamped’ by the court. So theoretically, the executor of a $1 million estate could charge $50,000. The executor (often called a personal representative), can be anyone you choose such as a family member, friend, professional such as an attorney or CPA or a financial institution such as a bank or trust company. In my experience, the executor is most often a trusted family member or friend who serves as the personal representative without compensation. They will then hire an attorney and/or an accountant to probate the estate, which is a court process, and file the final tax return for the estate, if required. The personal representative will negotiate fees directly with the professional and the fees are paid from the estate proceeds. For an estate of $1 million with no complications, you can expect fees to be under $10,000. We’ve seen a number of estate cases in the $3-5 million range with probate fees totaling $25-30 thousand.
While all professionals are bound by a code of ethics which includes confidentiality, it’s important to understand that probate is a public process. The will of the deceased is filed at the probate court and anyone may retrieve and view a copy. In fact, there are web sites devoted to displaying the wills of famous people (go to the Resource Center at www.WelchGroup.com; click on ‘Links’, then ‘Wills of Famous People’). If, in your will, you have named a professional or institution as your personal representative, you may want to ask them (in writing) what their customary fees would be for probating an estate like yours (you’ll need to provide a financial statement showing the types of assets that you own). I had one case many years ago where a local bank was the personal representative of a $12 million estate and their fee was $750,000!
One solution that we are using more and more is a revocable living trust. With this strategy you form a trust and move all of your assets into the trust now, before your death. Typically, you are your own trustee and since the trust is revocable you maintain the flexibility to make changes to your trust as you please. At death, assets held by the trust are not subject to probate so the time and cost of probate is avoided. This strategy also maintains your privacy.
Reader question: At maturity, I am planning to transfer several CDs to my son. In other words, I’m giving him approximately $100,000. Is there any paperwork I need to do? I don’t want to get in trouble with the IRS! M.H.
Answer: On an annual basis, the IRS allows you to give up to $13,000 to whomever and to as many people as you choose without taxes. Gifts of more than $13,000 are potentially subject to a federal gift tax of 35%. In order to avoid the tax, you’ll need to file a gift tax return and use part of your lifetime gift tax exclusion ($5 million for 2012 dropping to $1 million beginning January 1, 2013).