Just the FAQs, Ma'am (Vol. 2)

As part of getting back to basics for people searching to basic estate planning answers, I’m continuing to cover some basic questions that come from Henry W. Abts III’s book The Living Trust in its Appendix G. While the questions are coming from the book, the answers are coming from my own knowledge and experience. Here is the second installment of some bite sized nuggets of what is really going on with some of the most common estate planning questions.

Do I do I need to tell my attorney that replaced my Will? You don’t need to tell your old attorney that you are doing a new Will or a revocable living trust. If it's a Will-based plan, some of the initial language right at the very top is language about declaring that the document is your Last Will and Testament “revoking all previous wills” or similar language. Basically, one of the first things your new Will does is cancel your old Will. That's very standard across the board, and even if the new Will didn't state that, most state laws declare that if there are two Wills but one was executed later, then that's the one that is controlling the estate. So you just check the dates.

You also don't have to tell those attorneys. But what is important is to make sure that the people you have handling things for you, such as the trustee of the revocable trust and the executor of the pour-over Will that they know of the correct version. If by some chance the old law firm gets word that you have passed on, then they will have the old, revoked Will, but your executor and the new law firm has the new Will and Revocable Living Trust.

My accountant tells me that, since my estate is worth less than $13 million, I don’t need a Living Trust. Is this statement really true? OK, I used to hear that all the time when the exemptions were lower. Telling someone they don’t need a revocable living trust because they don’t have a taxable estate is like telling someone they don't need to change the oil in your car because your gas tank is full. One thing has absolutely nothing to do with the other. The fact is a Revocable Living Trust is going to help your estate avoid probate, and a Last Will and Testament takes your estate through probate, regardless of what the estate tax situation is.

If you have less than 13 million federally, you don't have to worry about estate taxes. Your state may have a lower tax threshold, but federally you don't have to worry about estate taxes unless your estate is above that limit, with or without a Revocable Living Trust. Is there a way that a revocable living trust helps with estate taxes for a married couple? Absolutely, because if it contains the right provisions then it doubles up the estate tax exemptions for a married couple, so it could be up to about $26 million federally in 2023. So, yes, there is a way for a Revocable Living Trust to help avoid estate taxes, but in a lot of case a trust is worth it on its own just for the probate avoidance downsides.

What kind of downsides are we talking about? Probate costs a lot, typically 4-10% of an estate. It's also time consuming and frustrating to take an estate through the probate court, typically six months to a year and a half. Having a revocable trust can avoid those downsides.

Is an attorney required to charge statutory fees regarding probate? This is not a very strict question, because in all of the states that I've seen there is a mechanism for attorneys exceeding whatever the statutory percentage fee. If the attorney can justify a larger fee, then they can typically petition a court to approve it. This does vary from state to state, and even from judge to judge,. They may have a bit more leniency or they might be pretty strict on limiting attorney’s fees for probate work. The way North Carolina handles probate fees are it is essentially assumed the fees are 5% of the estate, but it's not mandatory. California has statutory fees of 5%, and they do charge that amount. How do I know this? Because we were working with an estate, there was a bank account in California. Under the state’s rules, the bank didn’t accept the authorization papers from North Carolina and made us go through the California probate court, and therefore we had to hire a California licensed attorney handle ancillary probate. The account ended up being almost $700,000, and for doing paperwork for that one account, that attorney got nearly $35,000. They didn't argue for more, but they got that 5%.

How can attorneys justify their exorbitant fees? Because everybody does it, and it's that's what's usual and customary for that type of work. And believe me, there's some heavy work that has to go into a probate estate. It's very exacting, there's lots of forms you have to put together, and there is a lot of supporting paperwork and justifications to file with the court. The thing is, the process can be avoided for all assets inside a revocable living trust. So why not avoid probate? This is especially true if what the attorney is going to charge is based on what assets are in probate. If you keep most of the estate out of probate with a revocable living trust, then the fees aren't going to be applied to those assets.

I don't have a problem with attorneys making the kind of money that they do handling probate. Where I have an issue is when these same attorneys are telling their clients certain things at the planning stage, such as

• “Oh probate’s no big deal, don't worry about it.”
• “Probate is not that much of a problem, just go ahead and do Wills.”
• “You don't need a trust to avoid probate, don't worry about that stuff.”
• Don't listen to what that Plain English Attorney did on his video, you're fine with just a Will.”

That's where I've got a problem with some of my fellow attorneys because you can set things up to avoid probate, and a revocable living trust can be very beneficial for even smaller estates. We had one probate case where the woman had about 12 different bank accounts spread out amongst a whole lot of banks because she didn't trust that the banks weren't going to go under. It doesn’t happen often, but occasionally banks do close, and she wanted to make sure that she was covered by FDIC insurance. So she spread her accounts with a little over $100,000 across about 12 bank accounts. And it definitely ended up costing close to 10% just because there was so much work involved in gathering and compiling the documentation across those twelve different banks.

What if it were instead $1,000,000 at one bank? It probably would have ended up costing a lot less because it's just the one asset, there isn't nearly as much work that has to go into the probate estate as 12 bank accounts, so the fees would be lower even though the total value was ten times as much as the first estate.

As I said, I don't have a problem with attorneys that are doing probate work getting paid for what they do. It's when at the planning phase and they're telling clients don't worry about avoiding probate. That's where I've got an issue.

We will cover more in next week’s blog, but if you want to get the full version with more questions, then check out the YouTube video here.