Personal Thoughts and Reports...

I had the privilege of attending the San Gabriel Valley Chapter of the Financial Planning Association, today, to give a talk on defensive actions planners can take to minimize the risk of malpractice claims. My local FPA chapter consists of a fine group of professionals; I had a good time doing the presentation, and I hope that the members found it informative. Later on these pages, I may periodically discuss some of the subjects of my talk, which included a survey of fee-only planners, primarily under the umbrella of the Garrett Planning Network. The survey (which was not scientific and had 46 respondents) shows that nearly half of the respondents were not covered by E & O insurance.

On another front, today the California Court of Appeal issued a published decision in one of my cases, in my client's favor. The issue was what constitutes a "dismissal" for disability under the disability retirement provisions of the County Retirement Law of 1938, specifically interpreting California Government Code Section 31725. A slip opinion for Kelly v. County of Los Angeles can be found on the California Court of Appeal (District Two) website.

Upcoming Malpractice Avoidance Seminar

Next Wednesday on July 26, 2006, I will be presenting a seminar on malpractice avoidance by financial planners, entitled Judo for Financial Planners: Strategies for Avoiding Malpractice Claims, at the San Gabriel Valley Chapter of the Financial Planning Association.

Another Cogent Argument Against the "Death Tax"

Andrew Chamberlain, Gerald Prante and Patrick Fleenor of The Tax Foundation have prepared an excellent analysis advocating the elimination of the estate tax, entitled Death and Taxes: The Economics of the Federal Estate Tax.

(Hat tip: Wills, Trusts & Estate Prof. Blog)

Should I Use a Trust?

Frequently, clients assume that a trust is necessary. After all, there is so much (dis)information out there about estate planning. So the question: Is a trust really cost effective?

Usually.

There are many factors involved, but if you own real estate, or if you have a fairly substantial estate which would be subject to a probate proceeding, a trust may be cost effective if you (1) don't want to hand over a large amount of assets to an attorney, for the fees required to probate a will (2) don't want to hand over a substantial filing fee to the court, and (3) don't want to hand over large sums to pay for an executor or administrator. Also, an estate can take up to a year or more to close. Personally, I am aware of an estate which has been open for sixteen years (by the way -- I am not the attorney for that estate). That's a bit unusual; but it is not unheard of.

The cost of a probate estate is based upon the value of the assets involved. In California, real estate prices have risen substantially. Just a few weeks ago, I was driving in an area of Los Angeles which might have been called a "ghetto" at one time. Whereas even 5 years ago the houses were generally unpainted, unlandscaped and run-down, the neighborhood was turning around: Most had new paint and were being well taken care of. The value of these homes increased substantially over the past few years. It's amazing how private ownership of valuable property is an incentive for the owner to take care of it. But, I digress...

The attorney in a probate proceeding must generally obtain fees through the court, and the amount of fees are governed by statute. A private agreement for fees between attorney and client (if the fees would be in excess of what is allowed by statute) is unenforceable. Denton v. Smith, 101 Cal.App.2d 841 (1951).

Let's say that an estate is valued at $400,000 of probate assets in California. According to the schedule of fees and assuming that all fees are ordinary -- that there are no extraordinary fees involved -- the attorney fees would be in the amount of $11,000 under Probate Code Section 10810. If the executor charges an ordinary fee (and, ignoring the filing fee) the cost would increase by another $11,000 (under Probate Code Section 10800), for a whopping cost of $22,000. Add court allowed extraordinary fees and filing fees, and the amount goes up even more from there. Sometimes, families save on personal representative fees if a family member waives the fee. Still, the sticker-shock is there.


Although the value of an estate may be a factor in the amount of work involved in preparing the documents and funding a trust, the cost of preparing a trust is usually much less. Unlike a probate estate, the cost of preparing a trust is usually based upon the work involved in preparing the documents and funding the trust, rather than the value of the estate, per se. This is not to say that there are not other transaction costs involved with trusts. Generally (again, depending upon the complexity and purposes of the trust), there are costs in administering a trust, particularly after major events -- like the death of the first and second spouses. Even so, the overall cost is generally less.

There are advantages, however, to administering an estate -- court administration has its virtues. However, the costs are generally much less for trusts, which is one of the many reasons why they are so popular.

Update: Jennifer Sawday, Esq. at the California Estate Planning Practice Blog has just posted an informative outline of the probate process, and the California Probate Code attorney's fee schedule.

Estate Tax Redux

Things are looking dim for a Senate compromise on a permanent increase of the estate tax exemption, and a higher applicable exclusion amount exempt from tax. Given the possibility that Republicans may lose power or voting strength this November, raising the exclusion to -- say -- $5 million per individual decedent (instead of the current $2 million) might be the best which can be hoped for. Look for a vote in the next week, or two.

For many of you who do not follow the estate tax roller-coaster, the exclusion amount is set to increase until 2009, then expire in 2010, and then come down to pre-tax relief levels (about $1 million) in 2011.

My theory: this is a long shot in the Senate -- especially given the fact that this is an election year. The Dems have positioned themselves to be the anti-tax reduction party.

If the estate tax remains in it's current wacky state -- with the tax reduction set to "sunset" in 2011 -- don't look for financial and estate planners to shed any crocodile tears. Face it -- many advisors depend upon the insanity of the Internal Revenue Code to make a living...