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Sunday, July 29, 2012

Are all legal fees for an executor paid out of the estate?

I've received the following question about lawyer's fees on an estate, which I think will be useful to many readers.

"My mother is an executor of a will and the lawyer who has assisted her with the proper legal forms etc, has sent her a lengthy letter and bill stating that his fees are to be paid out of her own pocket or rather out of her executor’s fee. It has been my understanding that all professional fees regarding the estate are paid out of the estate. Am I wrong in this?"

A blanket statement that included "all professional fees regarding the estate" would in fact be wrong. Let's take a look at the general rule, and then talk about what might change the general rule.

The general rule is that the legal fees for getting probate and looking after an estate are to be paid from the estate and would not not affect any executor's pay. This would include legal advice, obtaining probate or administraiton, sending out notices, preparing Releases, etc. However, the lawyer is often asked to take on tasks over and above legal work. For example, many executors ask the lawyer to hold estate funds in the lawyer's trust account, or to hold meetings with the beneficiaries, or to prepare an accounting.

When the lawyer does tasks that are really the executor's job, such as those last three examples I gave, this is not supposed to come out of the estate, but out of the executor's fee. If the lawyer does the executor's work, why should the estate pay both the lawyer and the executor? That means the estate is paying twice for the work to be done once.

People mistakenly think that the lawyer's job is to "do the whole estate". However, that is the job of the executor, not the lawyer. The lawyer's job is to take care of the parts of an estate that pass through the legal system, such as getting probate from the courts, or dealing with any litigation. If an executor is hiring a lawyer to do other, non-lawyer things - such as selling a house or cleaning out personal possessions from the home - the executor is simply choosing to hire an agent to do the executor's own work.

In this reader's case, I think the letter and bill were probably "lengthy" because the lawyer was giving a breakdown of exactly which tasks he or she did on behalf of the estate, in an effort to explain why funds were to come out of the executor's fee.

Based on my own experience of over 25 years of dealing with wills and probate, I believe that part of the problem is a mis-communication between lawyer and client. While the lawyer may think she is being perfectly clear when she advises the executor that the estate will only cover legal fees "to do the probate", this isn't a lot of help when the executor doesn't actually know what is and isn't included in a probate.

A bigger part of the problem, of course, is that most people are only executors once in their lifetimes or twice if they are very unlucky, and they don't really know what to do or where to start.

Here are some tips for dealing with legal fees on an estate:

1.  If you hire a lawyer, discuss legal fees up front before the lawyer does any work. Ask for details about what is covered. Ask a question such as "is there anything you're going to do on this estate that will come out of my executor's fee?"

2.  Get the details of the planned legal fees in writing. In some jurisdictions in Canada, lawyers are required by the Law Society to give this to clients in writing, so it might happen automatically, but always ask for this. Then when you get the letter you can read it over to make sure you understand the arrangements.

3. A key phrase to listen for when discussing the estate with the lawyer is something like "would you like me to take care of that, or would you like to handle it yourself?" If you can do it yourself but choose to get the lawyer to do it, chances are you're paying extra.

4. If you don't have the time or the ability to do all of the required estate tasks yourself, or the beneficiaries are questioning everything you do, you may well be tempted to hire the lawyer to do the whole estate. It's a lot cheaper, and in many cases much more efficient, to hire a trust company to do that. If you bank with one of Canada's major banks, you can simply ask the manager or the banking officers to put you in touch with the bank's trust company arm. (Or call me, I'll fix you up!)

4 comments:

  1. Hello,

    My father passed away 10 months ago. He left behind a will. Then his new girlfriend of 6 years surprised us with her cohab agreement, my father apparently signed 5 years after the will. She is claiming she is a dependent and now the estate has to pay all her bills indefinitely. What's worse is that she also claims she is entitled to my dad's rrif's which were bequested to my sister. Those rrif's were opened, and my sister being named as the beneficiary, two years after signing the cohab agreement...2013. My question is: Shouldn't the assignment of beneficiary of the rrif, supersede even the cohab and any dependency claim?
    Thanks in advance.

    ReplyDelete
  2. Hi Lynn,
    When the executor fee is reduced by legal bills because the lawyer performed some of the executor's duties, I wonder what you see in practice regarding the amount to include in executor income. Is the executor taxed on the gross amount of the executor fee or the net amount received after the legal bills?

    ReplyDelete
    Replies
    1. He should be taxed only on what he actually received, i.e. the net amount. The legal bills were actually paid by the estate.

      Lynne

      Delete

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