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Tuesday, July 31, 2018

Part III of IV Parts: Five Keys CPA’s Should Know to Avoid Probate (and Trust) Problems & Litigation

Fees – Executor, Attorney, CPA and Investment Advisors

Nothing seems to quite focus the mind like a discussion of professional fees. From the client’s perspective administering an estate can be an exercise in drudgery for the fiduciary and the decedent’s family members or beneficiaries.  There are often long periods of time when nothing much seems to be happening, yet sometimes the clients and the family perceive that substantial fees are being incurred.  Often, significant taxes must be paid or set aside. Plus, there is real work to be done by the fiduciary. Countless phone calls, emails, meetings, review of documents, tax returns, dealing with banks, brokerages, vehicles, tangible personal property, life insurance companies, etc.  Not to mention dealing with sometimes difficult beneficiary demands and on and on, and on!  Moreover, the executor and sometimes the family will see bills being incurred for professional services and they may not perceive the value received relative to the costs of the services. This is another area where the CPA and the other professionals involved in the estate can either do a good job or drop the ball.

First, we suggest that all the professionals have discussions and make disclosures as to their billing process and the expectation as to timeframe and costs for the administration of the estate at the outset of the process.  Of course, this is not always easy to do.  From the attorney’s perspective, we’ve seen some cases that looked like they should be relatively straight forward and thought the timeline would be 6 to 8 months, but it turned out to be more complicated than first understood and it took 18 months to finalize.  In other cases, from the facts and circumstances we could see at the outset our expectation was 2 years and the administration was closed in a little over one year. Nonetheless, some effort should be made to estimate the time and costs associated with the complexities of the administration with the clear expectation explained to the client that adjustments may be necessary as the process unfolds. The discussion of the various aspects of the estate administration should be helpful for all stakeholders as it requires early identification of potential issues which help the fiduciary and beneficiaries to see the outlines of a plan.  Everyone should know and agree that as the estate administration unfolds, things sometimes change and evolve and that can impact not only timelines but fees as well.  Typically, the longer the administration, the more work being done and the administration fees will be incurred to pay for that work.

With that framework in mind, let’s start with executor fees.  Florida Statute §733.617 provides a guideline for what the Florida Probate Code and Florida Courts consider presumed reasonable fees for the personal representative. I won’t go into exhaustive detail here but generally it works out to approximately 2.5% to 3% of the estate Inventory value for most estates of moderate size. This is a sliding scale that reduces as the estate assets grow, but for general discussion purposes, consider that for an estate of approximately $2M to $4M it can typically be somewhere in the area of 3%.  If there are extraordinary circumstances it can go up from there. Examples of extraordinary circumstances would be things like real estate transactions (buying or selling), the necessity of an estate tax return, dealing with a business, or litigation, etc. In addition to the statutory personal representative fee, the will can provide for a fee that the decedent considered fair or perhaps pre-negotiated with the executor. If a fee is provided in the will, that fee will prevail, however a court may always consider the appropriateness of the fee and adjust either up or down.

Trustee fees can be a bit more difficult to quantify.  The Florida Trust Code provides that Trustees’ fees shall be as provided in the trust document, but a court can always increase or lower that amount based upon the actual work that was required in the administration.  If there is no set fee in the trust, the Trust Code provides that the Trustee is entitled to a reasonable fee. If the Trustee is a corporate fiduciary, they typically have published compensation rates which will typically be afforded deference by the court.  Again, the court can always review the reasonableness of the fees.  If the Trustee is not a corporate fiduciary, and there is no written fee agreement or provision in the trust, the best practice is to review the published rates of a couple of trust companies in the area, take the average of those published rates, then reduce that number by some small percentage amount due to the fact that the trust companies typically include some services that the individual fiduciary will have to “farm out.” When the Trustee fee is arrived at in this manner there should be no issue regarding the appropriateness of the fiduciary fee of the non-corporate Trustee.

CPA fees are in my experience typically not a significant issue in estate administrations. Based on the rates typically charged by CPAs for the work that they do, as long as the rates are market rates, the fees should not be a contentious matter.  However, there should be a discussion with regard to estate tax and gift tax return fees.  Whether the attorney handles these returns or the CPA, the costs associated with the preparation of the estate tax return should be quoted and discussed and agreed upon at the outset of the administration in order to avoid objections or discord after the work is complete.  In many cases, the fiduciary or beneficiary will not have prior experience with these types of returns, so they have no idea as to the complexity of the return and they therefore often have little appreciation for the fees that are typically charged for such work.

Investment advisor fees should be discussed and disclosed as well. If the advisor is a representative of a major brokerage firm the fees may well be typical and customary, but there are also some cases where alternate fee structures are utilized, or certain investments may allow for significant or unusually large investment fees.  If that is the case, it should be clearly spelled out and agreed up from the outset.

The fiduciary should always be aware of the duties he or she may owe to the beneficiaries of the estate or the qualified beneficiaries of the trust. The identity of the beneficiaries of the estate should be carefully determined at the outset of the administration of the estate. One of many possible quirky situations comes up when there is an estate administration along with a (formerly revocable) trust administration of the decedent. Remember this rule: under Florida law, if the executor and the Trustee are one in the same, or in the case where there are multiple fiduciaries, if all the executors are the same as all the Trustees, all of the qualified beneficiaries of the trust are beneficiaries of the estate. Also, qualified beneficiaries are a defined term in the Florida Probate Code, and careful review should be undertaken to ensure all qualified beneficiaries are identified at the outset of the administration.  This requires a careful reading of the definition of qualified beneficiaries in the Florida Probate Code along with a careful reading of the trust agreement and or the facts of the will and the decedent’s family in order to properly determine all the individuals who qualify as qualified beneficiaries of the estate or trust. In cases where the personal representative is different than the Trustee of a formerly revocable trust, the Trustee will be the beneficiary of the estate for purposes of the estate administration.

# 5 Fiduciary Traps

Of course, there are too many potential fiduciary traps to include in this brief discussion, trust me when I say we could (and perhaps one day will) write a book discussing the many different potential fiduciary traps.  However, we’ll try to provide you with a few of the key traps and a few with the greatest potential exposures to a lawsuit that fiduciaries in Florida face. 

  1. Investments – this is clearly an area fraught with potential issues which might motivate or cause a beneficiary to complain or even file a lawsuit seeking damages. A few of the issues that arise in this context: Should the fiduciary sell securities, realize gains or losses, or offset the two, reposition assets, rebalance the portfolio, avoid excessive concentrations in one or a few stocks? Frankly, there is no one answer which fits all in the category of investments.For example, in the case where there are substantial assets in market securities, and the single beneficiary is a charity, should the executor or Trustee hold the securities until time for distribution?What if the administration takes several months or a year or more?Should the charity be exposed to potential downside market fluctuations? If the fiduciary sells in order to convert from market securities to cash, what happens if the market goes up? Should the charity be denied the potential gains? Many of these questions are fact specific, but a quick point on the charity sole beneficiary conundrum; one may suggest that the best answer is to consult with the representatives of the charity and confirm with them their choice as to sell or hold. Many charities will wish to sell in order to lock in the value of the charitable gift and eliminate the potential for loss. With the written confirmation of the beneficiary prior to the sale, the fiduciary should be protected from criticism in the event the market was to move up after a sale.
  2. Real estate – real property brings with it a host of challenges for the fiduciary. Again, there are too many variations to deal with here, but some key points are as follows: the fiduciary should confirm title to be certain the title issues are identified from the outset.In most cases this will be straight forward, check the public records, confirm the titleholder of record, and that’s that.In some cases, it may not be straight forward at all. For example, homestead. Perhaps the decedent died holding title to homestead, which qualified for protected homestead status, and possibly the decedent’s testamentary documents made an improper devise, prohibited under the Florida Constitution or Florida Statutes (sometimes referred to as a “blown homestead devise.”) In such a case, the legal title could be vested in one or more persons not listed in the public records.Careful legal work should be done to answer these questions before any actions are taken to sell, repair, insure, or maintain the property. With Florida homestead, it is quite possible that the real property is not an asset subject to the probate or trust administration.Therefore, proceed with caution before using estate assets to repair or preserve the homestead. Even if there are no obvious probate issues, care should be taken prior to taking actions to sell real property. A similar analysis to the investments comes into play.Should the fiduciary sell the real property and the market declines, most beneficiaries (although perhaps not all) would be happy and therefore risk of criticism of the fiduciary may not be great.But, if the executor sells the real property and the market moves up, or if the beneficiaries think they know the market better than the executor, there may be an attack on the sale based upon improper setting of the price of the sale. This may be avoided by obtaining the consent of the beneficiaries prior to sale, and or, after proper notice to interested beneficiaries, obtaining a court order approving the sale.

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