A recent entry in SmartMoney’s “Ten Things” series (about what professionals won’t tell you about their services) is “Ten Things Estate Planners Won’t Tell You.” Here’s a generous exerpt, with my comments as a estate planning attorney who knows first-hand exactly what he’ll tell you.
1. “You probably don’t need me.” Let’s face it: Estate planning is scary. Not only does it involve protecting your hard-earned assets but it makes you think about that most dreaded of topics—your own mortality. That’s one reason why many of us run to an estate planner when it comes time to write a will.
But the fact is, you might not need any help. “The overwhelming majority of estates don’t trigger the federal estate tax,” says a spokesperson for the Internal Revenue Service. In fact, as of 2009 you must be worth at least $3.5 million when you die to pay tax at all. If you fall below that—and don’t have any complicated estate issues—you probably don’t need a lawyer to draw up a will for you. . . .
[Arthur Nielsen: This is a little like saying that if you can install a light fixture, you never need an electrician. Self-help might make sense if you're capable of doing the research to find good resources, and patient enough to take the time to understand them. But it is extremely easy to make one or two little mistakes that will ruin a will or a trust -- particularly if you've downloaded it from the internet and filled in names and birthdates. Planning for estate taxes is only one of dozens of possible planning issues that a plan might need to deal with, and most people are not aware of all of the questions that need to be answered. For an estate that has significant assets, or family relationships to deal with, there is no substitute for an experienced estate planning attorney.]
2. “Estate planning isn’t actually my thing.” What does it take to call oneself an estate planner? Not much, it turns out. Some estate planners are financial planners. Others are CPAs. Many are lawyers. But none of those titles guarantees an intricate knowledge of estate planning. “If you have a $50 million estate and you ask a lawyer if he does estate planning, the answer you’ll get 100 percent of the time is an enthusiastic ‘Yes, I do,’” says Tony Fiorillo, a former financial adviser . . . .
[Arthur Nielsen: I think it is uncommon for non-lawyers to try to sell estate plans; it certainly is in my stomping grounds in Central Minnesota. But it's true that you should be suspicious of any non-attorney who purports to be able to draft estate planning documents for you. An accountant or certified financial planner can advise you about estate planning concepts, but if they're responsible (i.e., don't want to be liable for the unlicensed practice of law), they'll refer you to an attorney to prepare the plan and draft the documents.
And, by the way, the vast majority of lawyers do not do estate planning and would not presume to plan a $50 million estate -- though close to 100% will recommend someone. A referral like that would be valuable currency to any attorney, even if they can't do the work themselves.]
3. “I’d love to be your executor—it’s a great way to make some extra money.” Who should execute your will once you’re gone? It’s a tricky question, especially for parents who don’t want to favor one child over another but who also aren’t crazy about the idea of entrusting the job to the son who just depleted his 401(k) for a new Miata.
In your time of indecision, you may find your estate planner offering to take the job. A generous gesture? Not likely. Executors often pull in hefty fees. “It guarantees future employment or retirement money,” says Stephen McDaniel, former president of the National Association of Estate Planners and Councils and a certified estate planning specialist in Tennessee.
In California, for example, where executor fees are based on an estate’s size, a $1 million estate would pay $23,000 to the executor. Many people give the job to family members, who often refuse payment. But an estate planner stepping in to do the job will understandably want to pocket the profit.
[Arthur Nielsen: Well, an estate planner usually won't tell you that -- because it's not really what they're thinking. It's rare in my experience that an attorney would be named executor of a client's will, let alone seek out the job. It usually only happens if there's no reasonable alternative.
The discussion of executor compensation in California is true: probating a smallish estate in California can be very lucrative work for the time it requires. But California is an unusual state, with a statutory compensation scheme that gives the executor the right to a percentage of an estate , regardless of the time invested. This is one of several reasons that probate avoidance is a huge concern in California.
4. “You don’t need a living trust.” Living trusts have been a favorite estate planning tool of the past decade, and it’s easy to see why—they allow your estate to transfer property and assets outside the clunky probate process, saving your heirs time and money. Overzealous planners love them too, since setting one up can boost their bill. “I’ve had several clients who had gone to an estate planner and were pressured into setting up a living trust,” says John Huggard, an estate planner and author of Living Trust, Living Hell: Why You Should Avoid Living Trusts. “It drove the cost of a basic estate plan from $500 to $3,500.”
While the prospect of a long probate can be enough of a deterrent to justify the cost of a living trust, that’s becoming less the case. David Scull, a probate attorney in Bethesda, Md., says that over the years many states—including “almost everything west of the Mississippi”—have simplified their probate processes. Two exceptions: If you live in a big city or own property in two states, probates can still be tedious. But in most cases, he says, “If the executor is organized, it’s possible to do a $10 million estate in minutes.”
[Arthur Nielsen: It's true that not everyone needs a revocable living trust. But for a couple thousand dollars, a trust can enable your family to avoid at least that much in probate fees (and six months of probate administration), as well as keep your financial matters out of a public forum like probate court. Most of the people who have actually administered a probate estate would not be quick to argue that a revocable living trust is unnecessary.
Another point: The size of a probate estate is not what determines whether it'll be easy or difficult. It's the complexity. An estate that has $10 million in cash and one heir would, indeed, be possible to probate in minutes (a few hundred minutes, anyway). On the other hand, a $100,000 estate could be a nightmare if its assets are spread among a dozen little bank accounts, plots of undeveloped real estate and vintage comic books, to be divided according to a badly drafted will between the members of a bickering family.]
5. “I make more money in insurance than on planning your estate.” John Scherer, a certified financial planner who was once a Northwestern Mutual Life insurance agent, recalls working with a client in need of estate planning. Scherer referred him to an attorney, who charged about $7,500 to draft a will. Then, in order to fund his estate-tax liability, the client considered buying life insurance—a policy Scherer predicted would put about $10,000 in commission in some lucky agent’s pocket.
Given the financial incentive for selling insurance, it’s no wonder so many estate planners have managed to muscle their way into the insurance business as well. Despite the obvious conflict of interest—planners who sell insurance have an incentive to recommend it—it is a lot easier than it once was for planners to do both. That’s because many states have rewritten their laws so that certified public accountants who pass a state exam and are sponsored by an insurance carrier can sell insurance products and collect a commission when doing estate planning.
It’s a requirement that the financial incentive be disclosed, but apparently, many planners aren’t complying with the rule. It’s a “huge” problem, says attorney Jay Adkisson, who runs Quatloos.com, a website that tracks financial scams. He says his site has received dozens of e-mails from people complaining that their CPA or attorney pitched life insurance but didn’t mention a commission. “If someone says, ‘I’m going to help you with estate planning’ and a product is a central point in the presentation—run, don’t walk,” advises John Olsen, an estate planner in St. Louis.
[Arthur Nielsen: I have never met -- or heard of -- an estate planning attorney who sells insurance. We definitely will talk about insurance as a strategy for estates that have substantial illiquid assets, like commercial real estate or a business, and relatively little cash. The insurance can provide a source of cash to pay estate taxes and other expenses and avoid the need to sell off other assets. But any estate planning lawyers who are selling insurance, or profiting by steering clients to people who do, are rare. Having said that, I'm a big fan of the Quatloos site, which patrols the underbelly of the financial world in an entertaining way, and they may know something I don't.]
6. “My customer service stinks.” The tax code gets a major revision about every other year, and people’s lives change constantly. Yet some clients are lucky if they ever hear from their estate planner after the initial meeting. Part of the reason is that many estate planners started practicing years ago, when the idea of maintenance was a foreign concept: Back then people changed jobs less often, moved investments less frequently, and, frankly, amassed wealth less quickly, says Kathleen O’Blennis, an estate planner with Polsinelli Shalton Flanigan Suelthaus PC in St. Louis. Today, “planning is an ongoing issue,” she says.
But don’t take it for granted that your planner will hold your hand once your initial plan is in place. Cautionary tale: O’Blennis once had a client who, under a previous planner, sold his home and failed to get the new home transferred into the existing trust. O’Blennis says she managed to salvage the trust, but it cost the client thousands of dollars. “If I were looking for a planner,” she says, “I’d ask what they’re going to do to help me maintain this thing once the animal is born.”
[Arthur Nielsen: If you have a well-drafted estate plan, you do not need to consult with your attorney more than every 2 or 3 years, unless you have some important change in your family or financial situation. This is what I tell clients when they finish their plans. They must get into the habit of respecting their trust, and making sure that any substantial property they acquire, or accounts they form, are put into the trust. Good firms circulate updates to their clients about changes in the tax laws, or other planning opportunities. But estate planning attorneys simply do not call all of their clients every couple months to make sure they haven't purchased a new house. An attorney who did that would have a lot of annoyed clients.]
7. “Your pushy sister is your problem.” Sure, estate planning is primarily about money, but it’s also about family and their complicated relationships. But good luck finding a planner who knows something about both. “[Planners] are so entrenched in the tax game that they forget about how the estate plan will ultimately impact the family after a death,” says Mike Smith, a court-appointed guardian of estate disputes and chief deputy clerk in the Northern District of Georgia.
Things can get especially dicey when a family limited partnership is involved. This estate-planning tool, which lets people slash estate taxes and protect assets from creditors, divides ownership of the assets among family members. The general partner makes all the decisions, while the limited partners simply reap financial benefits. Sounds simple in theory, but that’s not always the case in reality. Gerald Le Van, an estate attorney and family-business consultant, has worked on a handful of family limited partnerships that he says were headed toward litigation because the siblings just couldn’t get along. His advice is to anticipate problems early. Lesson No. 1: “Siblings will take orders from parents, but not from each other,” Le Van says.
[Arthur Nielsen: This is true, but doesn't belong in this article -- because it is exactly the sort of thing that an estate planner WILL tell you. Scrutinizing family relationships, minimizing conflict, and not letting the tax tail wag the planning dog are fundamental to the estate planning process.]
8. “I’m in bed with the bank.” You might not know it, but your planner may have other relationships that could affect your estate. Take the case of management consultant Edmund McCormick, who appointed Bankers Trust as corporate fiduciary of his $37 million estate. After McCormick’s death back in 1988, Bankers Trust appointed the law firm White & Case to represent the estate through probate. As it turned out, White & Case was also a Bankers Trust attorney, meaning that the estate had no unbiased legal representation, says Patrick Hanley, spokesperson for Edmund McCormick’s widow, Suzanne.
Things turned litigious when, according to Hanley, White & Case failed to go after two of the estate’s coexecutors who were allegedly involved in the embezzlement of $232,000 from the estate. To Hanley, the reason is clear: Such a lawsuit would have been embarrassing for Bankers Trust, which failed to catch the problem early. In 1998, Suzanne McCormick and her family filed objections against the bank with the Surrogate Court in White Plains, N.Y., alleging mismanagement of the estate and breaches of fiduciary duties; she lost the case. To add insult to injury, White & Case was paid $250,000 out of the estate for its services. (White & Case declined to comment; the lawyer representing Bankers Trust says that White & Case acted without bias.)
Despite the outcome of the case, McCormick’s situation serves as a cautionary tale for anyone with a complicated estate. “The banks and lawyers are having collusive relationships,” says Standish Smith, founder of Heirs, a nonprofit organization in Villanova, Pa., that helps beneficiaries with complaints regarding trusts and estates. “It’s hard to figure out if the lawyer is working for the client or the bank.”
[Arthur Nielsen: This describes a single case, and vastly simplifies it, no less. Setting that aside, an example is not proof. Does the existence of Bernard Madoff make every investment advisor a crook?]
9. “Go ahead and sue me—you won’t win . . .” In some cases, the mistakes of an estate planner are caught early. In most situations, however, your planner’s blunders won’t surface until long after you’re gone. And that can create big problems if your heirs want to sue for malpractice. “The key witness is dead,” says Bruce Ross, an estate planner and trust lawyer in Los Angeles.
Generally speaking, beneficiaries have two main hurdles in estateexecutor malpractice suits. The first is statute of limitations. The death of the parent begins the statute clock running, oftentimes causing it to expire before problems come to light. (Statute of limitations rules vary by state.) The second hurdle is privity, a contract law that prohibits a third party (in this case, a beneficiary) from suing a party in the original contract (for example, an executor). It works like this: If a car dealer sells you a lemon, and you in turn sell it to your neighbor, the neighbor can’t sue the dealer, because he’s one step removed.
So what options does a beneficiary with a beef have, if any? If an estate planner who makes a mistake is also a lawyer with malpractice insurance, beneficiaries may have a shot at getting their due. “If a lawyer says he’s a specialist, he’s held to a higher standard,” says Ross. Indeed, most states have relaxed their privity law precedence and some, led by California, have even written into the legal code the liabilities held by lawyers who act as estate executors.
[Arthur Nielsen: The executor can pursue a decedent's legal claims, including attorney malpractice. But what beneficiaries are complaining about far more often in these situations is that their parents did not put into place some tax-saving or estate-freezing strategy that would have resulted in a bigger inheritance to them. Almost always, the reason is becuase their parents chose to avoid the complexity or expense of the additional planning, and not because the planning attorney dropped the ball.]
10. “. . . but things might be changing.” Texas, which long upheld a strict interpretation of privity, is another state that has recently pried open the door to estate planner malpractice suits. In a landmark 2005 case, the state Supreme Court found in favor of a petition filed by Kristen Terk Belt and Kimberly Terk Murphy, joint executors of their father’s estate, to take to trial law firm Oppenheimer, Blend, Harrison & Tate, of San Antonio, for legal malpractice. The two daughters had hired the law firm to draft a will and advise on asset management, which they claimed the firm failed to do adequately by neglecting to protect the estate’s assets with simple tax planning.
What green-lighted their suit in the face of the state’s strict privity interpretation was the fact that the sisters were not just beneficiaries but also executors of their father’s estate. This case led the way for Texas and other states as well to begin holding lawyers accountable to an estate after the death of the parent, whether or not these lawyers served as the estate’s executor.
In light of the trend, a good attorney will suggest that beneficiaries also act as executors to help protect their interests, but many lawyers continue to write themselves into the estate plan as the sole fiduciary, even after “most states have put regulations on attorneys acting as sole fiduciaries,” says Dominic J. Campisi, chair of the ABA Malpractice Committee of Real Property, Probate and Trust Law. Some states, like Massachusetts, have a long history of assigning law firms as executors, and attorneys aren’t given an incentive to discuss other options.
[Arthur Nielsen: This speaks for itself.]
