Estate Planning for Early Retirees -- How to Avoid Getting Screwed.

This article was first posted March 1, 2000.

Even if your plan is to "spend it while you're alive," there is a high likelihood an early retiree living on a 100% safe inflation-adjusted withdrawal rate will leave a significant estate behind. The fact that you minimized fees and commissions on your investments while you were alive is probably the reason your estate is so large. That being the case, there is one final hurdle to negotiate as you pass to the great beyond -- your Estate Attorney.

While many folks complain about "death taxes" (the Republicans in Congress have been particularly vociferous on the issue,) fully 98% of estates are NOT subject to Federal estate taxes. (For the year 2000, you need at least $675,000 before the Federal estate tax kicks in.) The vast majority of people pay much more in legal fees than Federal estate taxes. Many folks are astonished to learn that they have far more to fear from their estate lawyer than the IRS.

Your estate lawyer will want to charge for his services on a "percent of assets" basis. Fees as high as 3% to 4% of assets are common under this arrangement. This is not in your interest. It's akin to buying a mutual fund with a big "front-end sales load" or opening a wrap account with a full-service brokerage firm. Most early retirees are smart enough to avoid these "high fee" investment products -- they should be similarly vigilant to the risk of being hit with exorbitant legal fees.

A 3% to 4% of assets fee might be reasonable if you've lived the chaotic life of a "rock star" and have several "ex's" and a posse of angry step-children fighting over your estate and challenging the will. Mercifully, few of us are in that situation. If all the heirs to your estate are friendly, and cooperative with your executor, an estate can be probated with a minimum of hassle and expense. It may even be possible to waive most of the court appearances, further reducing costs.

Regrettably, few attorney's will volunteer to probate a simple estate for the hourly rate if they think they can get away with whacking you with a 4% of assets fee. This may represent too much temptation even for an attorney you've found to be honest and trustworthy in the past. If you're like most people, your need for legal services doesn't extend much beyond the sale or purchase of a home and the preparation of a will. Even if you've been a long term client of the firm, it's likely your attorney is collecting much less than $1,000 per year in legal fees from your family. If he can collect 10 or 20 times that for a few hours work probating your will by charging a "percentage of assets" fee, he may not care if that jeopardizes any future business.

Few people realize until it's too late that probating many estates is a simple process requiring only a few hours of legal work. It's so simple that, your attorney is likely to turn most of the task over to a paralegal. It's possible for an attorney to screw your heirs out of tens of thousands of dollars if your executor isn't careful in how he manages the lawyer doing the legal work. It's necrophilia on a grand and expensive scale at the expense of your loved ones.

How to Avoid Getting Screwed

It's important for the executor of your estate to keep the attorney on a short leash, with any sharp teeth tightly muzzled. Here's how to do it:

• Get a cost estimate and scope of work. Ask the attorney for a written estimate including hours worked and cost per hour for both attorneys and paralegals. If the attorney says they will will only work on a "percent of assets" basis, that's fine. Collect your papers and move on to another firm.
  
  Getting a firm cost estimate, including number of hours worked, is essential. I actually had one attorney say "Fees are usually not discussed up front for probate services." Oh really? Don't worry about offending your attorney by discussing fees up front. It the lawyer is offended, well then, HE JUST NEEDS TO BE OFFENDED.
  
  The scope of work is important, too. Your executor may also need the services of an accountant (to file the Estate tax return) and an appraiser (if the estate includes some unusual items such as antiques, fine art, or a coin and stamp collection.) It probably makes sense to hire these professionals directly rather than have the attorney do it and mark up these subcontractor's fees.

• Keep good financial records. The more organized your records are, the easier it is to probate your estate. Legal work is just part of it. Your executor will also have to value assets, file tax returns, pay creditors, etc. If you've diligently kept all your records on Quicken, you'll be in great shape. Show up on an attorney's doorstep with everything in a shoe box, expect a big bill just to sort out the mess.

• Find out what probate is like in your state. It varies quite a bit. Some states, like Texas, have a reputation for efficency and low costs. Other jurisdictions, like California, are particularly expensive and onerous. Even Golden State residents with modest assets are often advised to set up living trusts to avoid confiscatory legal fees and probate court costs.
  
  Many state probate courts now have web sites where you can download forms and get checklists showing the documents that must to be filed. It will be much easier to evaluate the price quote you get from the Estate Attorney if you have some idea of the complexity of the process in your state.

• Limit the use of an attorney. The odds are that your visit to the Probate Court's web site revealed that the forms that need to be filed with the court are no more complicated than a driver's license application. If that's the case, you may decide to do much of the work yourself and only use a lawyer in an advisory capacity. Paying an attorney by the hour to review the forms you prepare would be a real cost saver in this instance.

• Don't look to the court to protect you. Many people are under the misconception that the probate court will protect them from being overcharged by their Estate Attorney. Nothing could be further from the truth. Courts routinely approve 3% to 4% of assets legal fees for just a few hours of work in the absence of a written agreement between you and your attorney for a lesser fee. Do the arithmetic. For a $500,000 estate, that's $15,000 to $20,000. I'll bet you didn't earn $5,000 an hour when you were working.
  
  Most state bar associations have arbitration panels where you can contest a fee if you feel you been overcharged. Unfortunately, this process is no different than the NASD arbitration proceeding you must use if you've been screwed by your stock broker. Few clients or customers come away from these venues with full restitution.

Recommended reading.

How to Avoid Probate.

by Norman F. Dacey.

How to Avoid Probate, by Norman F. Dacey is a classic originally published in 1966 by the Connecticut estate planner. The large paperback book that threatened the judicial status quo was bought by more than 2 million people. So widespread was the public's distaste for the probate system, that it became a #1 bestseller while Masters and Johnson's Human Sexual Response was #2. In spite of the fact that it's designed as a self-help book with lots of standard forms, the Prologue and the first three chapters of How to Avoid Probate read like a John Grisham novel. It's out of print, but you may be able to find a well worn copy at your local library.

Retire Early rating:

The Easy Way to Probate: A Step-by-Step Guide to Settling an Estate .

by Kay Ostberg
HALT, 1994, 176 pp.

The Easy Way to Probate: A Step-by-Step Guide to Settling an Estate, by the Americans for Legal Reform is one of the few unbiased references on the subject. It's available from their website at http://www.halt.org

Retire Early rating:

The Living Trust : The Failproof Way to Pass Along Your Estate to Your Heirs Without Lawyers, Courts, or the Probate System .

by Henry W. Abts, III
NTC Contemporary Publishing, 1998, 359 pp.

This is a popular guide book to avoiding probate. This edition also includes new information on planning with an individual retirement account, protecting against frivolous lawsuits and catastrophic illnesses, and getting organized to meet future financial goals.

Retire Early rating:

How to Probate an Estate in Texas : With Forms (Self-Help Law Kit With Forms) .

by Karen Ann Rolcik

128 pages 2nd edition (November 1998) Sourcebooks Trade;

There are books that offer simple explanations of the probate process for many states. This is an excellent one on the Texas Probate Court. It includes checklists and forms. You may not want to probate an estate on your own, but it's an advantage to know how much work is involved before you negotiate a fee with your estate lawyer.

Retire Early rating: