Newland's Business Notes



Two Legal Fees -- Double Dipping Through Probate  

Volume 13 Issue 4 -- July/August 2009

Some law firms seem to operate, whether intentionally or not, in a manner that has the effect of generating two, or more, sets of legal fees for the estate of one person.

For some attorneys, including our firm, and some other firms, the goal of estate planning for a married couple with moderate to substantial wealth is to get the bulk of the estate into two revocable living trusts (RLTs). Such RLTs (a) avoid or reduce probate related fees, (b) allow proper use of the marital deduction in order to avoid estate tax at the death of the first spouse (regardless of the size of the estate), and (c) allow structured distributions to beneficiaries.

Avoiding probate costs is a major concern in many states. Probate is a judicially supervised system to handle the affairs of decedents, whether or not they have a will.  In Virginia the system requires the payment of various fees to court officials based upon the size of the estate. In addition, attorneys are usually required to prepare and then file the periodic reports required in probate.

Conversely, in a well planned estate, most of the assets will avoid probate by passing through an RLT. This means minimal probate fees, and little need for expensive legal services. Unfortunately, this often does not happen.

Suppose Dewey, Cheatham & Howe (DCH) is a law firm operating in many areas of the United States . How can DCH get two sets of legal fees for handling the estate of one person? There are several ways, but here are three of them:

1. Complicated Will – DCH can prepare lengthy and complex Wills with testamentary trust provisions. For reasons stated in our newsletter, “Trusts in Wills: Too Costly,” January/February 2005 (available on our website, www.tax-business.com), this often increases probate costs and legal fees.

Wills with testamentary trusts require probate of all family assets, plus recurring probate fees for the testamentary trust.   Usually testamentary trusts require annual reporting and the payment of probate and attorney fees for as long as the testamentary trusts last, which can be many years. 

2. Unfunded RLTs – DCH can create an opportunity for charging two fees by creating RLTs for clients but putting nothing into them. One firm in Northern Virginia famously tapes a $1.00 bill to show the assets contributed to the RLT. Since the RLT has only the $1.00 in it, all other assets still need to go through probate which means the attorney collects one set of fees for handling the probate and transferring the assets into the RLT for which the attorney was previously paid. Some firms simply tell the clients their estate planning is finished. The clients typically leave DCH with the documents in hand but no assets in their Trusts. In some of our newsletters we have compared such RLTs to an automobile without a motor. From the standpoint of avoiding probate, an RLT with no assets is useless.

3. Revocable Life Insurance Trust – DCH’s Hawaii office uses a locally common method to receive two sets of fees.  Some large trust companies in Hawaii strongly advocate using a Revocable Life Insurance Trust (RLIT), which is basically an RLT with the principal purpose of receiving the proceeds of life insurance and distributing such proceeds pursuant to the terms of the trust.

Focusing the trust only on life insurance leaves the other assets outside the RLIT.  The Wills which usually accompany RLITs generally say that all assets will go into the RLIT after probate. The effect of this is to require most assets (other than the insurance proceeds) to go through probate and then into the RLIT.  By so doing, the trust companies and the attorneys get two sets of fees; one for handling the probate estate and a second fee for drafting and handling the RLIT.

Are these methods illegal? The answer is “no,” but such estate planning is usually not in the best interest of the family. This needless probate is often not discussed with or known by the family until they first become aware of it after the first spouse dies.

Copyright 2009
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

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