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Friday, January 28, 2011

The Mystery of Calculating Executor's Fees in Pennsylvania

The issue of calculating fees for an executor, executrix, administrator or personal representative in Pennsylvania estate cases is interesting because there is in fact no hard and fast rule about how such fees are to be calculated. Therefore no sure way to know what you can expect to see in the accounting if you are a beneficiary.

While executors’ fees are set by statute in many states, the “PEF” Code (the Pennsylvania Probate, Estates and Fiduciaries Code) provides only that a personal representative’s compensation shall be “reasonable and just” – based upon the specifics of each estate - and that it “may” be calculated on a graduated percentage. (20 Pa.C.S. §3537) The executor then has several options available, including charging (i) a flat fee or (ii) an hourly fee.

Though a "reasonable and just" standard may appear to be a very loose, wishy-washy standard, anyone acting as an executor or administrator should be aware that the executor’s commission will ultimately be subject to review on many levels: first and foremost, by the Orphan’s Court, to determine the reasonableness of the fee based upon the size of the estate, particularly if a beneficiary has objected to the accounting; second, by the Attorney General’s office, to review the fees’ effect upon the pay out of a charitable gift if a charity is a beneficiary of the estate; and third, by the Department of Revenue, to ensure against fraudulent deductions for fees claimed on the Inheritance Tax Return.

To guard against the prospect of an unfavorable audit, the Pennsylvania personal representative should take careful note of the percentage guidelines established by the court in Johnson Estate, 4 Fid.Rep.2d 6,8 (1983). In actuality, although the schedule established in Johnson was only included as an attachment to the judge’s written opinion, it has served as the unofficial guideline for gauging executor commissions and attorney fees ever since, with countless other judges adopting it as their own benchmark for review of accountings in subsequent cases.

Typically, if the ultimate commission is not more than what is provided on the Johnson schedule (below), and is calculated based upon standards of financial reason and fairness, it is likely that it will likely be met with approval all around.

EXECUTOR COMMISSIONS







Per Col.

Per Total


$

00.01

to

100,000.00

5%

5,000.00

5,000.00


$

100,000.01

to

200,000.00

4%

4,000.00

9,000.00

Executor or

$

200,000.01

to

1,000,000.00

3%

24,000.00

33,000.00

Administrator

$

1,000,000.01

to

2,000,000.00

2%

20,000.00

53,000.00


$

2,000,000.01

to

3,000,000.00

1½%

15,000.00

68,000.00


$

3,000,000.01

to

4,000,000.00

1%

10,000.00

78,000.00


$

4,000,000.01

to

5,000,000.00

½%

5,000.00

83,000.00

1%

Joint Accounts

1%

P.O.D. Bonds

1%

Trust Funds

3%

Real Estate Converted
with Aid of Broker

5%

Real Estate:
Non-Converted

1%

Real Estate:
Specific Devise

Reasonableness, however, always reigns: While the percentage method appeals to judges of the Orphans' Court, keep in mind the Pennsylvania Superior Court has criticized the practice in their own opinions in Sonovick Estate, 373 Pa. Super 396 (1988), and Preston Estate, 560 A.2d 160 (1989).

An Executor should also consider that money received as compensation for any fiduciary duties is taxable for federal income tax purposes and usually for state income tax purposes as well. Accordingly, the executor may want to elect NOT take a commission after all as he or she may receive more by just receiving his or her distributive share of the estate.

For purposes of this article, I have used the titles "executor", "executrix", "administrator" or "personal representative" interchangeably. All refer to the person or entity that is in charge of administering a decedent's estate. In fact, an executor or executrix is a party that is appointed by a Will; an administrator is a party that is not appointed by Will, but is approved by the Court; and a personal representative can be either a party named in a Will or appointed by the Court.

NOTE: Special thanks to Elizabeth Carter for helping to prepare this article.

Monday, January 17, 2011

Estate Planning for Non-Traditional Couples

For purposes of this article, I am going to define a traditional couple as a relationship between a man and a woman who are in their first marriage and the only children are children of the marriage. Estate planning for traditional couples usually consists of having a Will, Financial Power of Attorney, Medical Power of Attorney and Advanced Health Care Directive.

The traditional plan itself usually consists of each spouse leaving money to the other (occasionally in trust for tax planning purposes). On the death of the surviving spouse, everything is left to the children. The surviving spouse is usually executor and trustee of any trusts. If a traditional couple does not create a Will, the state's intestacy scheme will send the money in the same direction - but without any trust or tax planning.

There are typically three types of couples that need planning significantly different from that of traditional couples:
  1. Same Sex Couples
  2. Couples where at least one party has children from a previous relationship (often called "Blended Families"); and
  3. Couples who are in a long term hetero-sexual relationship but are not legally married.
For all non-traditional couples it is even more important to prepare Wills, Financial Powers of Attorney, Medical Powers of Attorney and Advanced Health Care Directives. However, while the documents stay the same, the methodology is very different.

The laws for same sex couples vary widely by state, and the federal government does not recognized the validity of a same sex marriages or civil unions for tax purposes or for most other purposes. If one partner dies without a Will, in most states, the state intestacy law will not direct that the money goes to the surviving partner. Additionally, in many states, the partner will have no rights to administer their loved one's estate or act as a guardian absent written instruction.

Since state law will usually not protect the rights of same sex couples, it is imperative for gay and lesbian couples to prepare a Will, Power of Attorney and Health Care Directive. Additionally, trust and tax planning becomes even more important as does coordination of the couple's other assets. This is particularly true if there are children involved.

Even in states where the law is favorable, same sex couples must plan to minimize the federal estate tax, as the unlimited marital deduction only applies to heterosexual couples. Planning must also be done to minimize state estate taxes and state inheritance taxes if the couple is thinking about moving to another jurisdiction.

For Blended Families, many of the traditional planning techniques do not work because the goal is not always to provide for the spouse first and then for the children. Special planning is needed to ensure that both the needs of the surviving spouse and children from the prior relationship are addressed. This often involves setting up irrevocable life insurance trusts or segregating assets.

For couples who are in a long term relationship but are not legally married, planning is often a sore point. Legally, such couples are pretty much in the same boat as same sex couples unless they living a jurisdiction that has common law marriage. If no planning is done, the surviving partner gets completely cut out.

Ignoring the issue not only leads to litigation, but a more expensive estate administration process and higher taxes. If you are in a non-traditional relationship, I strongly recommend seeing a competent estate planning attorney in a jurisdiction near you to flush out all the issues that affect you.

New York Statutory Power of Attorney

If you recall, I wrote an article back in 2009 that the New York legislature changed the requirements for the New York Power of Attorney form.

Looking around online today I noticed that most of the free New York Statutory Power of Attorney forms that are available online are WRONG. They are either old forms or do not include the Major Gifts Rider. This includes the New York State Bar Association form which appears on many government web sites.

Do not forget, if you want to make Major Gifts (defined by New York as gifts in excess of $500 per person per year under NY GOB LAW Section 5-1502I(14)), you must complete the separate Major Gifts Rider. Additionally, although the NY Power of Attorney form does not require any witnesses, the Major Gift Rider does. Both must be notarized - so be careful out there.

Wednesday, January 5, 2011

Inflation Updates for 2011

Every year the Internal Revenue Service publishes a list of inflation adjustments. Here are the important ones that relate to Gift and Estate Taxes and others that are just useful:
  1. 2011 Annual Gift Tax Exclusion will stay at $13,000. This means a person can give any other person at least $13,000 before it is subject to the federal gift tax. I won't go into the details about how and when it will qualify - just realize that as long as it is an outright gift, it will usually qualify. Also, a husband and wife may split a $26,000 gift for tax purposes before there is a gift tax.

  2. 2011 Annual Gift Tax Exclusion for Gifts to Non-Citizen Spouses will be $136,000. This is the maximum amount a person may transfer to a non-citizen spouse before the gift is subject to a gift tax. In order for US law to apply, we will usually be talking about a gift being made to a permanent resident alien spouse. One place where this gets triggered unexpectedly by many is retitling of real estate - so be give careful thought to this before changing ownership. This is up from $134,000 in 2010.

  3. The 2011 Federal Estate Tax Exemption will be $5,000,000. We've talked about this before, so it should not be a surprise to anyone that the estate tax exemption is settling at $5,000,000 for the next two years. This means that if you die in 2011, the federal government will not have a death tax on the first $5,000,000 that you pass on (unless you have made large gifts in previous years).

  4. The 2011 Federal Lifetime Gift Tax Exemption will also be $5,000,000 for the next two years. This is in addition to the annual gifts that a person can make. Beware of gifting highly appreciated assets!

  5. 2011 Reporting Requirements for Large Gifts Received from Foreign Persons: recipients of gifts from certain foreign persons may be required to report these gifts under § 6039F if the aggregate value of gifts received in a taxable year exceeds $14,375.

  6. 2011 Mileage Reimbursement Rates: the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
      • 51 cents per mile for business miles driven
      • 19 cents per mile driven for medical or moving purposes
      • 14 cents per mile driven in service of charitable organizations
Source: IRS Rev.Proc. 2010-40 & IR-2010-119 & IRC Section 2001