When you are doing your estate plan, there are costs all along the way. There are costs to implement your plan. When circumstances change, there are costs to update your plan. If you do not update your plan when needed, there may be costs for failing to update.
There are also costs upon death. With a will or an unfunded trust, there may be estate administration probate costs. If you have a trust, even a fully funded trust, there are still things that need to be done. If you recall from my previous columns, trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets.
You may focus on the up-front costs of your estate plan. We get that question all the time. How much is it for a will? A trust? The up-front costs to get a will are much less than a trust. The cost of an unfunded trust is much less up-front than a fully funded trust based estate plan. If you focus only on the up-front costs, you may miss the big ticket items, such as the after death costs.
I recently did a survey of probate attorneys in Michigan and across the country. What I found is that the most quoted costs of after death probate administration is 5% -10% of the value of the gross probate estate. So if you have a $500,000 probate estate, your loved ones can expect estate administration costs of $25,000 – $50,000.
With a will, it may be more economical up front, but there are huge costs after death. It’s like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.” A fully funded trust based estate plan may cost more up front, but there are substantial savings upon disability or death.
What we have found in our practice with fully funded trust based estate plans, is that in most instances, the total costs to you and your loved ones, is less than 5% of the gross value of your estate. This would include not only the costs during your lifetime to implement and update your plan, but also to administer your plan upon your disability or after your death.
We will discuss a few examples that have come through our office of clients who have attempted to save money by not using a qualified attorney’s services, but it ended up costing them more.
In one case, Dad did a do-it-yourself plan. Without consulting an attorney, after Mom died, he drafted his own quit claim deed to add son to his home. This was done so that if anything happened to Dad, son would get the home. Dad recorded the deed at the county Register of Deeds office.
Dad then met someone, fell in love, wanted to get married, sell the home and move to Florida with his new bride. Son did not like his new step-mom and refused to sign off on the home unless he received his share. Unfortunately, the quit claim deed was a completed gift. Son owned one-half of the home. When the home was sold, son received one-half of the sale proceeds. Ouch!!
In another situation after one of our clients died, we were engaged to counsel their named successor trustee in the administration of the fully funded trust based estate plan. Because our involvement in the trust administration was limited to counselling the trustee, we were charging on an hourly basis.
When it came time to make the distribution of an IRA, the trustee was hesitant to ask us for advice because it was going to cost the trust money. Instead, the trustee followed the free advice of his financial advisor, and made an end of year distribution of the IRA directly to the trust without making any distributions to the beneficiaries.
Because the distribution was taxed directly to the trust, state and federal income taxes amounted to nearly $35,000. We could have counselled the trustee to make distributions to beneficiaries or to stretch out the IRA distributions to the trust over the beneficiaries’ lifetimes. This could have reduced the taxes to about $20,000. The trustee saved $300-$400 by not talking to us, but it cost the trust $15,000.
We had another case in which we did an estate plan for Dad. He did not want to sign up for our annual updating program and we never heard from him again. But we did hear from his kids thirteen years later when he became mentally disabled and then died. From when we prepared the estate plan to the time Dad died, Dad’s trust became unfunded.
When Dad bought a new home or opened a new account, he did not title or beneficiary it into his trust. The costs to the kids to probate Dad’s estate, administer Dad’s trust and to handle related family issues was nearly $9,000. Had everything been kept up and done properly, our fees would have been about $3,000.
In another case, after Dad died, Mom hired an attorney for about $200 to do a quit claim deed to put the three kids names on her home with her. Mom’s home was owned free and clear of any mortgage, which Mom had paid off years ago. Mom’s thinking was that in case something happened to her, like if she died, the kids would get the home. Mom thought that she didn’t have to have a will or trust to accomplish her wishes
Well, one of the kids got into some financial difficulty and didn’t pay her Federal income taxes, for years. The IRS doesn’t appreciate it when you don’t pay your taxes and slapped a tax lien on all of that daughter’s property in St. Clair County. Unfortunately, this also included Mom’s home. The big problem now was that the tax lien was more than the value of the home.
We had to boot the financially challenged daughter off of the deed and then Mom and the other two kids had to take out a mortgage for nearly $200,000 to pay off the IRS and get rid of the tax lien. Now Mom could stay in her own home that she already paid for once. It cost Mom nearly $200,000 to fix a $200 estate plan. We could have done a lot of proper estate planning for a lot less than $200,000.
We had another fully funded trust based client who elected not to participate in our update program. They waited nine years before coming back to update their plan and by that time, their trust became unfunded. After almost a year of monthly appointments and $12,000 in fees, their plan was finally updated and fully funded once again.
Had they participated in our update program, their fees would have been about $6,000 over that nine years. And it would also have been a lot less work for them spread out over a longer period of time.
When you are doing your estate plan, do not only focus on the up-front costs. If you do, you may cost you and your loved ones more overall. You can “Pay me now, or pay me a lot more later.”
By: Matthew M. Wallace, CPA, JD
Published edited January 18, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Pay now or pay more later