Estate
Planning and Probate: Part Five Final
Post
This is the fifth and final entry on this topic concerning experiences I had while dealing with the prospect of becoming my parents' executor. It deals primarily with costs that can be expected.
As I have mentioned, this discussion centers around Virginia law and
one should review laws in their own residences concerned. Yet, there is
general information that you can expect to deal with across all local
governments. This entry is a long one! There is lots of detail here.
Costs of Probate and Taxes on an
Estate
If the house and real estate property(s) have clearly defined living
beneficiaries they do not go to probate in Virginia unless there are of
extraordinary worth (millions in value).
If there is other property in the estate, in any state, as a general
rule the cost of probate ranges from about 2% to 7% of the value being probated? For example, if you are executor on a $300K
estate the probate expenses may be anywhere from $6K to $21K depending on where
you are and how easy or complex your estate is.
In addition to local probate costs, taxes will be paid. According to http://www.courts.state.va.us/courts/circuit/resources/probate_in_virginia.pdf
a)
At the time of filing the will the probate tax
must be paid. (Generally $1.00 state
probate tax and .33¢ local tax, if applicable, per $1,000.00 value of the
estate.)
b)
State taxes.
1)
The final income tax return of the deceased must
be filed.
2)
The final personal property tax return of the
deceased must be filed.
3)
An income tax return for the estate (income
coming to the estate after death) must be filed if there is sufficient income.
4)
A Virginia estate tax return must be filed if
required (generally only required if a federal estate tax return is necessary).
c)
Federal taxes.
The executor is also responsible for the filing of the
decedent's final state, federal an estate income tax return if required. Generally estate taxes (both federal and
state) are due only if the gross estate (includes life insurance and
survivorship property not handled by fiduciary) exceeds the threshold
established by federal and state statutes.
For example, if the life insurance beneficiaries cannot be found or are
dead this could be included in the estate value. Of course if the value of the estate exceeds
values most of us would never have to deal with such as $3,500,000, the
executor must also file an estate tax return within nine months of the date of
death, even if no estate tax is owed.
Distributing an Estate
The work of distributing an estate can be substantial, thus,
the executor responsible for the filing of the decedent's final state, federal
an estate income tax return should seriously consider having two financial
assistants. This is based of course on
the value of the estate. If the estate
is small or has been used up by health issues prior to passing, then one should
not consider paid assistants that can move the estate into negative territory.The most critical assistant is the accountant, agreed upon by all heirs, since doing the taxes may result in forms the heirs themselves will have to file and that requires coordination so all can get taxes filed in a timely fashion. Generally estate taxes (both federal and state) are due only if the gross estate (includes life insurance and survivorship property not handled by fiduciary) exceeds the threshold established by federal and state statutes. For example, if the life insurance beneficiaries cannot be found or are dead the value may be transferred into the estate value. Of course if the value of the estate exceeds values most of us would never have to deal with such as $3,500,000, the Virginia executor must file an estate tax return within nine months of the date of death, even if no estate tax is owed.
The second advisor to consider, when the value of an estate warrants
(I.e. Involving tens of thousands of dollars and up) will be a financial estate
and/or insurance/brokerage expert. These
are commonly referred to as Financial Advisors or Certified Financial Planners
(CFPs). You should look for a fee based Certified Financial Planner
(CFP) and not one who is looking for a commission off of the estate. One type to definitely stay away from is any
institution or advisor that wants 10% (weather one time or annually) of the estate
for their services. This is true whether
or not it is an estate in probate or the owner is alive.
Some fee based CFPs provide the service at low cost or even gratis when
distributing financial accounts to the heirs and charge the estate a nominal onetime
commission/fee after setting up the estate.
Heirs may later move the accounts, but many retain them and pay the fee
based CFP a yearly fee to manage and rebalance the assets. Fee based CFPs will guide the access to the
best investments for you and not to what makes them the most money like commission
based financial planners do.
The accountant could act as both if qualified, though you may wish to
separate the two jobs. The reason being
is that this person will advise on not only on tax issues but investments
during estate distribution, like a stock broker, and may be used as a
distributor of assets, thus creating a legal buffer between executor and heir
distribution tasks that can be used in court in the event of
disagreements. The Advisor will only
distribute estate assets as the will requires, helping isolate the executor
from accusations of malfeasance. Costs
for these can vary widely. And finding
trust worthy ones is paramount.
One more point, visit the bank with proof of death and
executorship and either have your name added to any existing accounts and
checking account especially. You may
have to close the existing accounts and open new ones in the estate name. The bank will work you through this if you go
in person. Keep the checking account
funded until it is the last account closed and distributed. This will take at least one year as that is
how long debtors have after the legal announcement in the newspaper to seek
redress for debts owed that they can prove.
My father is a veteran he is entitled to burial in a VA national
cemetery, a flag, a headstone and honors.
All I would need is his DD-214 showing he was honorably discharged. However, he prefers to be buried with family
where there are the funeral expenses to consider which includes services,
burial, and much more. According to the
National Funeral Directors Association, the average cost of a funeral is more
than $7000 which has the potential to escalate rapidly. You have to make sure your designated
representative will quickly have access to the funds necessary to cover these
short term expenses. Best case scenario
would be to set up a joint account with a trusted relative or friend.
Property Appraisals
An appraisal by a court-appointed independent third party (a probate
referee) is sometimes necessary if there is real property or other non-cash
(personal property) assets in the estate, such as jewelry, artwork, etc. of
substantial value. The probate referee
fee may be statutory or set by custom in the area. Often the fee is a small percentage (e.g.,
1/10 of 1%) of the appraised value of the asset, plus miscellaneous charges,
such as mileage, photos, etc.
Attorney Fees
This is usually the largest portion of probate fees. In some states the attorney’s fees are set as
a flat amount. In others, they are based
on the size and/or complexity of the estate.
They may amount to 2-4% of the estate’s value, but can be higher
depending on how complex the estate is. They
will never be fixed cost values. If you
are doing much of work as executor, like contacting brokers and other account
administrators, sending out proof of death and proof of executorship, and the
like, that work can be the bulk of an attorney's charges. So, the cost incurred by having the attorney
deal with the court documents can end up being billed as hourly. Again, the estate may hire any it can afford
to ease and speed work along.
Surety Bonds
As discussed, if my parent's estate went into probate I
would need a co-executor or surety bond to assume responsibility for my
parent's estate and debts. Since I would
be dealing with a will there did not seem to be a way to waive the bond in
Virginia which some states allow. If you
have to take one out you will probably have to have it insured before traveling
to the clerk's office to qualify as an executor (personal representative) of
the estate. Make an appointment with the
county/city clerk prior to the final acceptance meeting to confirm what
documents and information you need to bring with you. Those documents will probably be a death
certificate, the original will (which will be kept by the court), and an
estimate/inventory of the estate assets, a probate information form filled out (often
found online), documentation to identify you and a checkbook to pay court
costs.
Things can get confusing as the bond can go by different
legal names. An Estate Bond is a type of
surety bond, also known as a Probate Bond / Waiver of Probate Bond, Executor
Bond, Administration Bond and Fiduciary Bond.
Estate Bonds are mandated by the court in order to provide assurance
that the executor of an estate correctly allocates the assets for an
incapacitated or deceased person with whom they have been assigned fiduciary
duty.
In other words, Estate Bonds are directed by the court in
order to guarantee the honest accounting and faithful performance of duties by
a fiduciary or trustee. Estate Bonds
provide assurance that the executor of an estate appropriately handles, and
distributes, the assets of the disabled or deceased person whom they are
duty-bound to act on behalf of.
If an executor is asked to post bond, this is to insure that if the
value of the probate property declines as a result of the executor’s
misconduct, the bond will make the estate whole again. It is like an insurance policy. Obtaining such a probate bond can be costly
and depends on the value of the property subject to the bond. It can be $500 or much more if it is a
sizeable estate. You can now see why a
Financial Planner acting as a buffer can be a legal assist to your actions as
executor.
How to apply for an Estate Bond
The licensed Surety will provide the court with a bond subject to
receipt and satisfactory review of the following documentation:
- completed Fiduciary Bond Application and Indemnity Agreement
- completed Independent Legal Advice form, if required
- completed Personal Net Worth Statement
- copy of the Application to Court for Certificate of Appointment of Estate Trustee
- copy of Will, if applicable
- copy of Consents to Appointment, if applicable
- copy of Nominations and Renunciations, if applicable
Costs of the Estate Bonds vary slightly, Surety Company to Surety
Company and from applicant to applicant; given the size and circumstances of
the estate. A good guide is the following:
Rate: $3.50 per $1,000 of surety bond amount. Two to three years premium payable in advance;
the first year premium is considered fully earned. The 2nd and 3rd year premiums are
pro-rated returned upon receipt of the original bond. The amount of the bond will need to be twice
the personal property in the estate or guardianship. If real estate is involved you will not need a
bond to cover that unless you are going to sell the property.
Probate Court
Appearances
The named executor under the will of the decedent will have
to take an appointment with the probate division of the Circuit Court where the
decedent used to live. Depending on the
locality you should be able to get an appointment within less than two
weeks. If you are out-of-town, the
probate division will often adjust to your schedule.
If you live out of state as I do, understand you will likely
need to travel the decedent's state to carry out some of your executor
duties. The named executor under the
will of the decedent will have to take an appointment with the probate division
of the Circuit Court where the decedent used to live, or have a local attorney
make the appearance for you. As the
vultures descend on the estate they will care little about your work or family
obligations. You can seek reimbursement
from the estate for travel and expenses but this will all have to documented
and shown to the court.
Some out-of-state executors may be inclined to use the
estate's attorney to handle many estate matters but this is irresponsible as
the legal fees incurred will mean the decedent's heirs will receive less of the
estate once distributed. If you are
inclined to do this because of medical, business, job or family obligations it
may be best to reject being named executor on the will. If for any reason you believe you cannot
effectively do the duties of executor, then it would be senseless to take on
the legal obligations by doing so.
If the estate is subject to probate as it will likely be
where a will is involved, the state may want someone (another executor)
involved who is subject to that states jurisdiction. This may require the out-of-state executor to
hire a probate attorney, financial advisor, or appoint someone local as co- or
alternate executor. The website http://miorinilaw.com/lawyer/Commonwealth-of-Virginia_cp2607.htm
states the following:
- You will then receive your Letters of Administration, proof of your appointment and a booklet to assist you with your new duties
- Give notice of your appointment to the heirs-at-law within a month from your appointment and file a certificate of notice with the court
- File an inventory of assets within four months of your appointment
- File an accounting within sixteen months from your appointment unless you can file a “Statement in Lieu of an Account"
Compensation for an Executor in Virginia is determined in
the sole discretion of the court which has jurisdiction over the estate. As a general guideline, courts have
determined that an executor is entitled to whatever fee is fixed by the
will. Where a specific fee was not
fixed, the courts have considered reasonable a fee equal to 5% of the
assets. This could be reduced to a 2.5%
commission, where the executor was not entitled to sell the real property of
the estate, but only to deliver it in kind.
While there is no specific rate set by statute in Virginia,
many jurisdictions have established guidelines for determining an Executor’s
Commission, based on the complexity of the estate, the responsibilities assumed
by the executor, and the amount and type of professional services required to
administer the estate. For example, the
Commissioner of Accounts of Fairfax County has established guidelines for
Executor Commissions, which are published.
In general, these guidelines allow for an Executor’s Commission as
follows:
On income: 5% of income receipts (not including capital gains) realized during each accounting period.
On principal: A fee based upon the inventory value, including amended inventories, of the decedent’s probate assets in accordance with the following schedule:
On principal: A fee based upon the inventory value, including amended inventories, of the decedent’s probate assets in accordance with the following schedule:
- First $400,000 - 5%
- Next $300,000 - 4%
- Next $300,000 - 3%
- Balance over $1 million - 2%
- Balance over $10 million - By prior agreement
with the Commissioner
Reasonable fees for attorneys, accountants and/or investment advisors may be reimbursed if necessary for the proper administration of the estate. However, if an executor chooses to use an attorney or accountant for the basic administration of the estate, this may be deducted from the Executor’s Commission, depending on a number of factors considered by the Commissioner of Accounts. Factors can include how well documented your time and expenses are, and believability of the documentation.
Administrator and Executor bonds (also called Probate Bonds) are required by county courts in Virginia of persons appointed to handle a deceased's estate. These bonds generally guarantee that all the estate debts will be satisfied and that the remaining assets will be properly distributed to the appropriate heirs. Because of the complexities involved, the surety usually requires that the applicant obtain the assistance of an attorney, although we do have markets that will consider bonds for qualified applicants without an attorney. Bond amounts are determined by the court. Bond premiums must be paid annually until the estate is properly settled.
Summary
There are many costs that can easily build up in managing and distributing an estate. This article does not pretend to cover them all. For example, we have not gone into detail about burial costs, and others for which the estate is responsible. Instead, we have tried to discuss a variety of costs related to an executor's distribution and management of the estate in question. There is much more to learn and be familiar with in Virginia and elsewhere. I hope this series has provided some insight into these matters and given your ideas on where to go from this point to make your executorship a successful one.
(See: http://www.vaela.org/for-the-general-public/71-the-probate-process-in-virginia.html,http://www.courts.state.va.us/courts/circuit/resources/probate_in_virginia.pdf, http://www.tax.virginia.gov/site.cfm?alias=Probate,http://law.freeadvice.com/estate_planning/probate/virginia-probate-basics.htm,http://www.usafa.edu/superintendent/ja/LivingTrust.cfm?catname=JA, http://info.legalzoom.com/can-executors-live-out-state-22047.html)
Glossary:
Probate - is the process of "administering" and distributing a deceased person's assets. Probate includes recording the will in the records of the Clerk's Office, and usually includes appointing an executor, who is supervised by the court in the administration and distribution of the estate.
Decedent - An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. A decedent's estate is the real and Personal Property that an individual owns upon his or her death.
Surety - A person who assumes legal responsibility for the fulfilment of another's debt or obligation and himself becomes liable if the other defaults. 2. Security given against loss or damage or as a guarantee that an obligation will be met; a pledge, guaranty, or bond.
Fiduciary - Of or relating to a holding of something in trust for another: a fiduciary heir; a fiduciary contract.
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