NATIONAL ACADEMY OF CONTINUING LEGAL EDUCATION

Presents

AN OUTLINE TO ACCOMPANY A TAPED COURSE

ON DEDUCTIBILITY OF LEGAL FEES FOR ESTATE PLANNING AND ADMINISTRATION, AS WELL

AS DEDUCTIBILITY OF PERSONAL REPRESENTATIVES’ FIDUCIARY COMMISSIONS

By

Frank S. Berall, Esq.* Copp & Berall, LLP

864 Wethersfield Avenue Hartford, Connecticut 06114-3184

(860) 249-5261

Frank S. Berall is the principal of Copp & Berall, LLP, and Senior Tax Counsel to Andros, Floyd and Miller, P.C. Both firms are in Hartford, Connecticut. He is a member of the Connecticut and New York Bars, holding B.S. and J.D. degrees from Yale and an LL.M. (in Taxation) from New York University School of Law.

He is Co-Chair of the Notre Dame Estate and Tax Planning Institute, the Senior Topical Editor for Probate and Estate Planning of the Connecticut Bar Journal, on the Editorial Boards of Estate Planning and ALI-ABA's The Practical Tax Lawyer, a Life Member of the American Law Institute, a Fellow of both the American College of Trust and Estate Counsel and the American College of Tax Counsel, an Academician and Vice President, Americas, of the International Academy of Estate & Trust Law and is on the Executive Committees of the Connecticut Bar's Tax and its Estates and Probate Sections.

He was Co-Chair of the Advisory Council of the Hartford Tax Institute for 10 years, President of the Hartford Tax Club and an adjunct faculty member at Yale Law School, the University of Connecticut Law School, the University of Hartford's Graduate Tax Program and the American College (of Life Insurance), was a Regent of the American College of Trust and Estate Counsel, chaired two of its committees, was on its Editorial Board, was chair of four committees of the American Bar Association's Tax Section, four of its Probate Section and chaired both the Tax and Probate Sections of the Connecticut Bar Association. He is the President and a Director of the Hartford Yale Club, a Past President and former Director of The Culver Summer Schools Alumni Association and a former Trustee of The Culver Educational Foundation. The National Association of Estate Planning Councils has designated him as an Accredited Estate Planner. He is listed in current editions of Who's Who in America, Who's Who in the World, Who's Who in the East and Who's Who in American Law and is recognized for his expertise in both trusts and estates law and tax law in the 1987 through 2007 editions of "The Best Lawyers in America" and by Connecticut Magazine as a 2006 and 2007 Super Lawyer.

Neither the author nor the National Academy of Continuing Legal Education are responsible for the applicability, accuracy, validity, tax or legal consequences of the materials or forms contained in this outline as applied to any client's situation.

* Copyright © 2006 by Frank S. Berall. All rights reserved. This outline includes material from similarly named articles by the author in 33 Estate Planning No. 9, Part I (September 2006) and 33 Estate Planning, No. 10, Part II (October 2006) and an article awaiting publication in 79 Conn. B. J., #3 (Nov. 2006).

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DEDUCTIBILITY OF LEGAL FEES

I. ALLOWABILITY OF ADMINISTRATION EXPENSE DEDUCTIONS DEPENDS ON STATE LAW ..............................................................................................1 A. Introduction ..............................................................................................1 1. Beneficiaries’ legal fees...............................................................................1 2. Payment of fees for litigation.......................................................................1 3. An engagement letter should advise the clients of the expected source for paying the legal fees...............................................................................2 4. Attorneys should ascertain the source of their fees in advance ...................2 B. Deductions of Administration Expenses (including legal fees) are limited to Necessary ones allowed under state law..................................................................2 C. General rules governing deductibility of legal fees .................................................3 1. Clients’ willingness to pay them increases if they are deductible ...............3 2. The regulations limit administration expenses ............................................3 3. Legal fees for estate planning ......................................................................4 D. Billing techniques for obtaining a legal fee deduction ............................................7 1. Break a bill for pre-death fees into three categories ....................................7 2. Allocation of fees.........................................................................................8 3. Fees earned after death ................................................................................8 4. Those deducted on the estate tax return.......................................................8 5. In all cases, the names and possibly the addresses ......................................8 II. CONDITIONS FOR DEDUCTIBILITY OF FIDUCIARY COMMISSIONS ...................8 A. Court decree unnecessary ........................................................................................8 B. Supporting data may be required .............................................................................8 C. Three conditions to satisfy.......................................................................................9 1. The Territory Director (formerly called the District Director) is reasonably satisfied......................................................................................9 2. The claimed deduction would be allowable ................................................9 3. The amount claimed is in accordance..........................................................9 D. Six Circuits have held personal representatives’ fees must meet the Requirements of both local law and Section 2053 ..................................................9 1. Finding an expense allowable under state law is simply a threshold ..........9 2. For expense to be deductible .......................................................................9 3. The Tax Court, below, found.......................................................................9 4. The Second Circuit did not believe the Tax Court’s conclusion .................9 5. Accordingly, the Second Circuit held........................................................10 III. ESTIMATES OF EXECUTORS’ COMMISSIONS AND ATTORNEYS’ FEES AGREED UPON ARE DEDUCTIBLE, ALTHOUGH UNPAID AT THE CLOSE OF

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AN ESTATE TAX AUDIT ............................................................................................10 A. Agreed upon reasonable fees are allowable...........................................................10 B. Fees affidavit required ...........................................................................................10 C. Ask extent of details I.R.S. desires ........................................................................10 D. Keep good time and service records ......................................................................11 E. Where the fiduciary is also the estate’s attorney separate sets of records Should be kept ............................................................................................11 F. Handling disbursements.........................................................................................11 G. I.R.S. standards for deductibility ...........................................................................11 IV. FEES AND COMMISSIONS ARE DEDUCTIBLE EVEN IN UNAGREED CASES WHERE THE AUDIT RESULTS ARE GOING TO BE APPEALED...............12 V. FEDERAL COURTS MAY REVIEW EXPENSE DEDUCTIONS ALLOWED BY A STATE PROBATE COURT...................................................................................12 A. Federal law determines reasonableness .................................................................12 B. I.R.S. can have a different view than a state court.................................................12 C. I.R.S. can obtain time and service records.............................................................13 D. Conflicts in circuits ............................................................................................13 E. Local court allowance of a fee, if facts involved deductibility, will limit I.R.S. objections ............................................................................................14 VI. WAIVER OF COMMISSIONS.........................................................................................14 VII. FIDUCIARY COMMISSIONS AND ATTORNEYS’ FEES INCURRED IN ADMINISTERING PROPERTY NOT SUBJECT TO CLAIMS ARE DEDUCTIBLE..15 A. Trustees commissions are deductible on Schedule L, Not Schedule J ..................15 1. Trustees commissions are deductible on Schedule J .................................15 2. Commissions paid trustees of a trust funded prior to death.......................15 3. Section 2053(b) allows a deduction in determining the taxable estate......15 B. Legislative history ............................................................................................15 C. Limitations on the deduction .................................................................................16 1. Treas. Reg. §20.2053-3(d)(2) allows a deduction .....................................16 2. Under Treas. Reg. § 20.2053-3(d)(1) ........................................................16 3. Treas. Reg. § 2053-8(a) points out that .....................................................16 4. Paragraph (b) of the above regulation........................................................17 5. It is not clear how far the limitations on the deductions............................17 6. Most of the limitations under section 2053(a) ...........................................17 7. Thus, trustees’ commissions of a fully funded trust ..................................18 VIII. GENERALIZATIONS ABOUT THE WAY STATE LAW RULES DIFFER AND SPECIFICS OF THOSE IN CALIFORNIA, CONNECTICUT, ILLINOIS,

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MASSACHUSETTS, MICHIGAN, MINNESOTA, NEW JERSEY, NEW YORK NORTH CAROLINA, OHIO AND PENNSYLVANIA...................................................18 A. Reasonable compensation is usually allowed fiduciaries ......................................18 1. Most jurisdictions allow individual fiduciaries reasonable compensation ............................................................................................18 2. The Restatement (Second) of Trusts .........................................................18 3. The Restatement (Third) of Trusts.............................................................18 4. The Uniform Trustees’ Powers Act ...........................................................18 5. The Uniform Probate Code........................................................................19 6. Neither of the two major treatises offer any nationwide rule ....................19 B. California ............................................................................................19 1. Service as both an attorney and a personal representative ........................19 2. Trustee acting as his own attorney.............................................................19 C. Connecticut ............................................................................................20 1. Connecticut is one of the many states without any statute governing fiduciary compensation..............................................................................20 2. In Hayward v. Plant Connecticut’s landmark case ....................................20 3. Reasonable compensation is allowed if fee not fixed in advance..............21 4. Bank fee schedules.....................................................................................22 5. Connecticut is not bound by will provisions specifying New York’s statutory compensation ..............................................................................23 6. Bank fee schedules are generally held to be reasonable............................23 7. The concept of reasonable compensation .................................................23 8. Special problems and difficulties could justify higher fees.......................24 9. Hayward v. Plant’s reasonableness standard also applies to attorneys’ fees ............................................................................................24 10. Fidiciaries’ legal fees if reasonable and necessary are reimbursable from the estate ............................................................................................25 11. It’s unclear who bears litigation costs in unsuccessful appeal ..................26 12. Standing to appeal......................................................................................26 13. Attorneys who act as fiduciaries may receive reasonable compensation but should separate their two roles in their time records ...........................27 14. Paraprofessional and secretarial services should be billed ........................27 15. Reasonableness of fees is passed on in an accounting...............................27 16. Fees should rarely be contingent ...............................................................28 17. Probate courts’ suggested fees...................................................................28 18. Two or more fiduciaries.............................................................................29 19. Determining an attorney’s hourly rate and the reasonableness of his compensation ............................................................................................29 20. Additional fees for extraordinary results ...................................................30 D. Illinois ............................................................................................31 E. Massachusetts ............................................................................................32 F. Michigan ............................................................................................32 G. Minnesota ............................................................................................32

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H. New Jersey ............................................................................................33 I. New York ............................................................................................33 J. North Carolina ............................................................................................33 K. Pennsylvania ............................................................................................33 L. Ohio ............................................................................................33 IX. COURTS IN OTHER STATES, INCLUDING FLORIDA, KENTUCKY, NORTH DAKOTA, OKLAHOMA AND PENNSYLVANIA HAVE CASE LAW APPROVING FEE PROVISIONS IN THE GOVERNING INSTRUMENT...................34 X. THE ACTEC STUDY OF FIDUCIARY FEES ................................................................34

A. The Model Rules of Professional Conduct and the ACTEC Commentaries On them ............................................................................................34

XI. PRACTICAL SUGGESTIONS TO PERSUADE BENEFICIARIES AND COURTS OF THE REASONABLENESS OF A FEE ......................................................................36

A. Submit an engagement letter to probate court for advance approval, if in Litigation ............................................................................................36 B. Fees affidavit ............................................................................................36 C. Affidavit of extraordinary services ........................................................................37 D. Bonanza fees ............................................................................................37 E. Beneficiaries’ consents and requests that the court not require their Appearance ............................................................................................37 F. The legal fee should be reduced if an outside accountant is used .........................37 G. Occasional problem in using the decedent’s family accountant............................38 H. Investment counsel ............................................................................................38 I. Lay and inexperienced fiduciaries .........................................................................38 J. Where the fiduciary is also the estate’s attorney ...................................................39

XII. OTHER LIMITATIONS ON DEDUCTIBILITY OF AN ESTATE’S LEGAL FEES AND FIDUCIARY COMMISSIONS ...............................................................................39 A. Beneficiaries’ attorneys fees..................................................................................40 B. No double deduction for administration expenses.................................................40 C. Deduct on either income or an estate tax return ....................................................40 1. This statement should be filed with the income tax return ........................41 2. The election to deduct administration expenses ........................................41 3. When the fiduciary is not sure ...................................................................41 4. The allowance of the deduction in computing an estate’s taxable income ............................................................................................41 5. Even single items may be split between two taxes ....................................41 6. Items must be either business or nonbusiness expenses ............................41 7. Careful observation of the statute of limitations is required......................41

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8. Double deductions are not allowable.........................................................42 9. Where there is a marital deduction ............................................................42 D. If taken on an income tax return, the estate tax increases......................................42 E. Selling expenses ............................................................................................43 F. Trustee’s commissions...........................................................................................43 G. Waiver of commissions..........................................................................................44 H. Expenses of handling realty and tangibles.............................................................44 I. Commissions and attorney’s fees are taxable income to the recipient ..................45 J. Bequests in lieu of commissions are not deductible ..............................................45 1. Ordinarily they are gifts and thus not taxable income...............................45 2. When the bequest is deductible by the estate and income to the recipient ............................................................................................45 K. The 2% floor on miscellaneous itemized deductions ............................................46 1. Section 67(a) provides that ........................................................................46 2. This two per cent floor also applies in determining the adjusted gross income of an estate or trust, except that: ..........................................46 3. Deductions subject to the 2% floor............................................................46 4. The key to full deductibility of miscellaneous expenses of estates and trusts is whether they would have been incurred had the property not been held in the estate or trust .............................................................47 5. Excess deductions ......................................................................................47 6. Distributions ............................................................................................47 7. Case law interpreting the 2% rule..............................................................47 8. Controversy continues ...............................................................................51 L. Effects on the marital and charitable deductions of charging administration Expenses against estate accounting income...........................................................52 1. The basic plan ............................................................................................52 2. The majority of the Supreme Court could not agree on the rationale........52 3. Analysis of the Hubert Opinions ...............................................................53 4. Hubert Regulations ....................................................................................53 5. Effect of the Hubert Regulations on the charitable deduction...................54 6. Drafting suggestions ..................................................................................54 7. Covey’s aggressive position ......................................................................54 M. Accountants’ Fees ............................................................................................55 N. Miscellaneous Expenses ........................................................................................55 O. Selling Expenses ............................................................................................55 P. Expenses for beneficiaries are not deductible........................................................55 XIII. CONCLUSION ............................................................................................55 APPENDIX A – REQUEST FOR APPROVAL OF ACCOUNT.................................................57 APPENDIX B --REQUEST THAT NO APPEARANCE BE REQUESTED AT PROBATE HEARING ON AN ACCOUNT......................................................58

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DEDUCTIBILITY OF LEGAL FEES

FOR ESTATE PLANNING AND ADMINISTRATION AND DEDUCTIBILITY OF PERSONAL REPRESENTATIVES’ FIDUCIARY COMMISSIONS

By Frank S. Berall, Esq.* Copp & Berall, LLP 864 Wethersfield Avenue Hartford, Connecticut 06114-3184 (860) 249-5261

I. ALLOWABILITY OF ADMINISTRATION EXPENSE DEDUCTIONS DEPENDS

ON STATE LAW A. Introduction

A fiduciary who has retained an attorney will usually be allowed to pay the latter’s fees from the estate or trust. But, if the services are not those in the normal course of administration, such as where the fiduciary is acting in his own self-interest, he1 will be personally responsible for these legal fees.

1. Beneficiaries’ legal fees

Attorneys’ fees incurred by beneficiaries are ordinarily paid by them. However, the common fund doctrine permits a beneficiary who has benefited the estate or trust at his own expense to have his attorneys’ fees reimbursed by the fiduciary of that entity. Thus, because all beneficiaries have benefited from the litigation, either they or the estate or trust should pay for it.

2. Payment of fees for litigation

Under the American Rule, each party to a dispute is required to pay his

* Copyright © 2006 by Frank S. Berall. All rights reserved. 1 Author's note re use of gender terms: wherever the words "he", "his", "him", "man", "men" or comparable words or parts of words appear in this outline, they have been used solely for literary purposes in the interest of having a smooth reading text. They are meant to include all persons--whether male or female. The use of male nouns and pronouns to refer to or describe both the wealthier spouse and the first spouse to die and the use of female nouns and pronouns to refer to or describe the less wealthy spouse and surviving spouse has been done for the same reason. No discrimination is intended nor should any be inferred.

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own legal fees. An exception allows the fees of one party to be assessed against the other if there have been acts of bad faith, a breach of trust or obdurate or vexatious conduct. In these cases, some state statutes charge the opposing party with the fees.

3. An engagement letter should advise the client of the expected source for paying the legal fees

To be prudent, before commencing any fiduciary litigation, an attorney should determine whether his fees will be paid by the adverse party, the estate or trust or his own client. He should also analyze the risk that the latter may even be compelled to pay the adverse party’s attorneys’ fees. His engagement letter should then clearly state how he expects to be paid. In the usual case, his client will be obligated to pay the attorneys’ fees if they are not paid by the trust, the estate or the adverse party.

4. Attorneys should ascertain the source of their fees in advance

Before commencing fiduciary litigation, the attorney should determine the source of payment of his fees: (a) namely the adverse party, the estate or trust or his own clients and also (b) whether the latter may be compelled even to pay the adverse party’s attorneys’ fees. Then, the engagement letter should clearly state how he expects to be paid. In the usual case, the client will be obligated to pay his attorneys’ fees, if they are not paid from the trust, the estate or by the adverse party.2

B. Deductions Of Administration Expenses (including legal fees) Are Limited

To Necessary Ones Allowed Under State Law.

Section 2053(a) allows deductions from a decedent=s gross estate for:

“such amounts...for administration expenses...as are allowable by the laws of the jurisdiction...under which the estate is being administered.”

Besides this requirement that these expenses, as well as debts, must be allowable under local law,3 they are limited to those "actually and necessarily incurred in

2 Paragraphs 3 and 4 as well as certain subsequent material have been are paraphrased (with permission of their author) from Heckscher, Fees, Fees, Fees: A Blessing and a Bane, How to Charge, Collect and Defend Them, 31 ACTEC Journal 1, 21-22 (Summer 2005). That article has a collection of cases involving fees incurred in defending a fiduciary, fees for services primarily benefiting the latter individually, the timing of when an attorney will know how the fees will be paid, attorneys’ fees allowable under the “common fund doctrine,” the exception to the American Rule when that doctrine will not apply and obtaining reimbursement of attorneys’ fees from the opposing party. It discuses cases when a court may allow recovery of fees on fees or will not allow such a recovery. 3 Treas. Reg. ' 20.2053-1(a).

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the administration of the decedent's estate."4 Furthermore, a court must decide "the facts upon which deductibility depends," and it should appear that the claim was decided on its merits.5 Decrees entered by consent of the parties are acceptable only if there was a bona fide recognition of the claim by them and by the court.6 However, a court decree is not per se necessary to establish the deduction.7 The cases suggest, however, that while a state court decision of allowability under local law will ordinarily be accepted, it is not conclusive.8

C. General Rules Governing Deductibility of Legal Fees

1. Clients’ willingness to pay them increases if they are deductible

a. The willingness of clients to pay legal fees can be increased and their pain in so doing decreased if they can obtain a tax deduction for their payment. Ordinarily, an estate's largest administration expenses are executors' commissions and attorneys' fees.

b. These legal fees and fiduciary commissions incurred in estate

administration are deductible as administration expenses in computing the taxable estate for federal estate tax purposes.

c. To be allowable as estate tax deductions, they must be for post-

death services. They should be shown on Schedule J of Form 706. d. Alternatively they may be deducted for income tax purposes on the

estate=s fiduciary income tax return, Form 1041.

2. The regulations limit administration expenses to those "actually and necessarily incurred in the administration of the decedent's estate."9

a. Deductions either for debts or administration expenses may only

be taken if, under the local law governing estate administration, they are allowable.10

4 Treas. Reg. ' 20.2053-3(a).

5 Treas Reg. § 20.2053-1(b)(2). 6 Id. 7 Id. 8 See Hibernia Bank v. United States, 581 F.2d 741 (9th Cir. 1978). 9 Treas. Reg. ' 20.2053-3(a).

10 Treas. Reg. ' 20.2053-1(a).

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b. But, a state court decree allowing a claim or expense will be

followed only if the court actually decided "the facts upon which deductibility depends," and it appears that the claim was decided upon its merits.11

c. Decrees entered by consent of the parties are acceptable only if

there was a bona fide recognition of the claim by the consenting parties and the court accepted this on its merits.12

d. Nevertheless, a court decree is not per se necessary to establish the

deduction.13 The cases suggest, however, that while a state court decision as to allowability under local law will ordinarily be accepted, it is not conclusive.14

e. Legal fees for pre-death services are debts of the estate, deductible

under section 2053(a)(3) and reportable on Schedule K. Furthermore, they may also be deductible as deductions in respect of a decedent (under section 691(b)) on the estate's fiduciary income tax return.

f. A portion of those fees deducted for income tax purposes, whether

as an alternative to an estate tax deduction or in computing taxable income of a trust, may be disallowed. This amount will be equal to two percent of the estate's adjusted gross income.15 To the extent the fees are passed through to the beneficiaries (other than trust entities) instead of being deducted on the estate’s or trust’s tax returns, they may also be subject to this two percent rule.

3. Legal fees for estate planning

a. The deductibility of legal fees for estate planning are largely governed by section 212. This allows:

“a deduction [for] all the ordinary and necessary expenses paid or incurred during the taxable year-

11 Treas. Reg. ' 20.2053-1(b)(2). 12 Id. 13 Id. 14 See Hibernia Bank v. U.S., 581 F.2d 741 (9th Cir. 1978). 15 Section 67(a). For details, see, infra, Part XII K.

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(1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax.”

b. The section has been construed as allowing a deduction of

expenses for the production of income for a portion of the fees incurred in estate planning.16

c. Merians v. Commissioner,17 the principal authority for the

deduction for tax advice in estate planning, allowed a section 212(3) deduction for legal fees allocable to such advice. But the court permitted deduction of only the portion (20%) of the taxpayers' estate planning fees it considered attributable to tax advice. The relatively small portion considered to be for tax advice was due to the lack of specific records, although taxpayers' attorney testified that most of his time was spent on tax matters. However, the court found no other evidence (such as an itemized bill for legal services) on which to base a deduction for his entire fee.

d. There were several concurring and dissenting opinions. One

concurrence stated that the case should be reopened to allow the taxpayers to prove what portion of their legal fee would be deductible under section 212(2). Another said that expenses incurred for estate planning tax advice are ordinary and necessary management expenses and thus deductible under section 212(2). The remaining concurring opinion and two dissenting ones would have allowed a section 212(3) deduction solely for legal expenses incurred in the preparation of gift tax returns, reasoning that this section addresses deductions for tax counsel for settled events, not for planning future ones. Thus, the dissents would not permit a deduction for legal expenses incurred in estate planning, because there is no current tax liability when the latter is being done.

e. The entire deduction for legal advice attributable to estate planning

16 Merians v. Commissioner, 60 T.C. 187 (1973), acq. 1973-2 C.B. 2.

17 Id.

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and general business advice was disallowed where the taxpayer failed to produce evidence as to the amount, if any of his legal fees for these categories.18 Similarly, where there was no showing of the portion of a fee allocable to estate planning and that to a will, the deduction was also denied.19 However, legal fees for services and advice in connection with the merits and legal aspects of plans submitted to a taxpayer by a firm of estate planners for the rearrangement and reinvestment of her entire estate were deductible.20

f. The Tax Court’s opinion in Wong v. Commissioner,21 cited

Merians22 and held that 20% of legal fees for estate planning services was deductible as tax advice under section 212(3). However, it found no portion of the fees deductible under sections 212(1) or (2), because nothing was incurred for the production or collection of income. Furthermore, the taxpayers did not itemize the time spent on the services performed.

(1) Citing Luman v. Commissioner, 23 the Tax Court held that

the expenses incurred for rearranging title to income producing property, for planning personal and family affairs or for retaining ownership of property were section 262 non-deductible personal ones.24

(2) Creation of a trust was held not to have been done to obtain

investment advice nor for the management of taxpayers' income producing property; thus no portion of their legal expense was deductible under section 212(2).

(3) A deduction is probably not permissible for preparation of

an unfunded revocable trust and is certainly not allowable for drafting a will with or without a testamentary trust.

18 Arthur D. McDonald, 52 T.C. 82 (1969).

19 G.L. Schultz, 50 T.C. 688, aff=d. on other issues, 420 F.2d 490, 70-1 U.S.T.C. & 9170 (3rd Cir. 1970).

20 Nancy R. Bagley, 8 T.C. 130, acq.1947-1 C.B. 1.

21 Wong v. Commissioner, 58 T.C.M. 1073 (1989).

22 Merians, supra, note 16. 23 Luman v. Commissioner, 79 T.C. 846 (1982).

24 Id., at 856. See, also, Epp v. Commissioner, 78 T.C. 801, 804-805 (1982).

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However, it could be argued that since a funded revocable trust is a protective arrangement for the management and conservation of property its preparation should therefore be deductible under section 212(2). But, where an irrevocable trust is created and property irrevocably transferred to that trust for the benefit of others, the origin of the transfer would seem to be personal and, therefore, non-deductible.25

D. Billing Technique for Obtaining a Legal Fee Deduction

To obtain a deduction for any legal fee, itemize the bill in such a way that both the tax deductible and non-deductible portions are clearly shown as such.

1. Break a bill for pre-death fees into three categories

In both Merians26 and Wong 27 there were three distinct kinds of legal fees charged for estate planning:

a. Those incurred to prepare wills and other testamentary documents

were not allowable as deductions; b. Those incurred for tax advice and return preparation were allowed;

and c. Other estate planning expenses, the deduction of which will

probably be disallowed by the I.R.S., but might be sustained by a court, thus placing them in a grey area. The argument for allowance of the latter is that they are section 212(2) expenses incurred for arranging for the management, conservation or maintenance of income producing property that will be in the taxpayer's estate at death and, under section 212(3), were incurred in connection with the determination (minimization) of the taxpayer's future tax liability.

2. Allocation of fees

In billing clients for estate planning, allocate legal fees to the above three

25 Mathews v. Commissioner, 61 T.C. 12 (1973), rev=d, 520 F.2d 323 (5th Cir. 1975), cert. denied., 424 U.S. 967 (1976). The material preceding this footnote and the footnote itself are from Streng, 800 T.M., Estate Planning, pages A-201 and 202.

26 Supra, note 16.

27 Supra, note 21.

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categories by preparing one or possibly two or even three separate bills.28

a. The allocation need not be strictly on a time basis. b. The preparation of a will and other testamentary type documents is

not worth as much to the client or as difficult for the lawyer to prepare as documents in the gray area of deductibility.

c. The fully deductible work for the management of income

producing property (such as creating a funded trust and in connection with current tax planning and property management) is more difficult to do and worth more to the client.

3. Fees earned after death cannot be deducted on both the estate and

income tax returns. 4. Those deducted on the estate tax return that were incurred in

administering property not subject to claims should be listed on Schedule L, not Schedule J.

5. In all cases, the names and possibly the addresses of the lawyers to

whom they were paid should be shown. II. CONDITIONS FOR DEDUCTIBILITY OF FIDUCIARY COMMISSIONS

Those commissions which have actually been paid, agreed upon or even estimated, so long as they are expected to be paid, are deductible.

A. Court Decree Unnecessary

Even if they have not been fixed by court decree (the usual case at the time of most federal estate tax audits), their deduction will ordinarily be allowed.

B. Supporting Data May Be Required

Executor's commissions may need to be supported by fee affidavits or even time records, particularly when they are in addition to substantial professional fees.

C. Three Conditions To Satisfy Treas. Reg. ' 20.2053-3(b)(1) provides that for an executor's commission to be deductible, three conditions must be met:

28 This author usually sends only one bill, separating and itemizing the three categories.

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1. The Territory Director (formerly called the District Director) is

reasonably satisfied that the commissions claimed will be paid; 2. The claimed deduction would be allowable under local law; and 3. The amount claimed is in accordance with the usually accepted practice

in the jurisdiction for estates of similar size and character. D. Six Circuits Have Held Personal Representatives= Fees Must Meet The

Requirements Of Both Local Law And Section 2053

1. Finding an expense allowable under state law is simply a threshold requirement that must be satisfied before considering section 2053's federal requirements for allowability.29

2. For an expense to be deductible under section 2053, it must qualify as an

administration expense under both applicable state law and federal law as set forth in Treasury Regulations.30

3. The Tax Court, below,31 found that most of the personal representatives=

time was spent handling trust assets, rather than probate property. Because the former passed by operation of law, not requiring action by the personal representatives, the Tax Court concluded the time spent on trust assets did not qualify as Anecessary@ for estate administration under section 2053.

4. The Second Circuit 32 did not believe the Tax Court=s conclusion to be

clearly erroneous, pointing out that the decedent limited the amount of property transferred in her estate, by using a trust and thus limited the estate=s deduction for administration expenses.

5. Accordingly, the Second Circuit held the Tax Court=s decision allowing

the maximum amount of personal representatives= fees based on the estate=s assets value as well as the maximum amount of the trustees= fees based on the trust assets to be appropriate.

29 Estate of Grant v. Commissioner, 2002-2 USTC & 60,443 (2nd Cir. 2002) and cases cited therein from the Fourth, Fifth, Sixth, Ninth and Eleventh Circuit Courts of Appeal.

30 Id.

31 Estate of Grant v. Commissioner, 78 TCM 900, T.C.Memo. 1999-396 (1999).

32 Supra, note 29.

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III. ESTIMATES OF EXECUTOR'S COMMISSIONS AND ATTORNEYS' FEES

AGREED UPON ARE DEDUCTIBLE, ALTHOUGH UNPAID AT THE CLOSE OF AN ESTATE TAX AUDIT

An estimated amount of commissions, fees, disbursements and other administration expenses, which have not yet been paid, may be deducted on the federal estate tax return. A. Agreed Upon Reasonable Fees Are Allowable

The Internal Revenue Manual, the Code and Regulations are consistent in allowing, during an audit, the deduction of reasonable fees (based on the size and character of the estate), even when unpaid, if agreed upon by the parties and if the Territory Director is reasonably satisfied that such amounts are proper and will be paid.33 But, besides being reasonable, they must be consistent with local practice and allowable under local law, such as in a probate court decree. Boatman's First National Bank v. United States.34

1. The court inferred that the I.R.S. refusal to allow the deduction was

based on other disagreements, not on doubts that the unpaid fees would be paid.

2. It held that, contrary to the I.R.S. position, the existence of unrelated

disagreements does not figure into whether unpaid fees may be deducted. B. Fees Affidavit Required

The Estate Tax Attorney will require substantiation of the fees in a fees affidavit, Form 4421 (Declaration of Executor's Commission and Attorney's Fees). This must be signed under penalties of perjury. It affirms that the amounts have been agreed upon and will be paid.

C. Ask Extent Of Details I.R.S. Desires

The estate tax attorney should be asked if he would like (a) any details of the work performed and (b) a breakdown between that performed by different attorneys and legal assistants.

D. Keep Good Time And Service Records

33 Treas. Reg. '' 20.2053-3(b) and (c).

34 Boatman's First National Bank v. United States, 705 F. Supp. 1407, 89-1 U.S.T.C. & 13,795 (W.D. Mo. 1988), which cited the Internal Revenue Manual LEM IV, ' 4343, & (15)51, for this statement, and upheld the deduction.

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To be able to furnish this information, it is essential to keep accurate and precise time and service records. (These may also be required in a state death tax audit and by the probate court.) Some probate courts allow less fees for an attorney’s work as an estate fiduciary than for his legal work.

E. Where The Fiduciary Is Also The Estate's Attorney Separate Sets Of

Records Should Be Kept

Attorney's fees will not be deductible where the fiduciary is an attorney and claims both attorney's fees and executor's commissions for the same work. Thus, it is advisable to keep separate time and service records for the fiduciary's and attorney's duties, particularly where the same person is acting in both capacities.

F. Handling Disbursements

Disbursements made by the law firm or the fiduciary should be reimbursed by the estate and separately deducted on the appropriate 706 schedule (J or L).35 They need not be shown on the fees affidavit.

G. I.R.S. Standards for Deductibility

A letter from the Assistant Commissioner to all Assistant Regional Commissioners, said that estates may only deduct attorneys' fees when the:

“District Director [now the Territory Director] is reasonably satisfied that the amount claimed will be paid and that it does not exceed reasonable renumeration for the services rendered, taking into account the size and character of the estate and the local law and practice.”

This letter referred to Treas. Reg. ' 20.2053-3(c), which says:

“Attorney's fees. (1) The executor or administrator, in filing the estate tax return, may deduct such an amount of attorney's fees as has actually been paid, or an amount which at the time of filing may reasonably be expected to be paid. If on the final audit of a return the fees claimed have not been awarded by the proper court and paid, the deduction will, nevertheless, be allowed, if the Territory director is reasonably satisfied that the amount claimed will

35 Schedule J deals with funeral and administration expenses of property subject to claims and Schedule L deals with expenses incurred in administering property not subject to claims.

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be paid and that it does not exceed a reasonable renumeration for the services rendered, taking in account the size and character of the estate and the local law and practice. If the deduction is disallowed in whole or in part on final audit, the disallowance will be subject to modification as the facts may later require.”

IV. FEES AND COMMISSIONS ARE DEDUCTIBLE EVEN IN UNAGREED CASES

WHERE THE AUDIT RESULTS ARE GOING TO BE APPEALED

Even in an unagreed estate tax audit or when a statutory notice of deficiency is to be issued, estimated attorneys' fees and executors' commissions, as set forth on Form 4421, will be allowed, although not all of them have been paid by the close of the audit.

V. FEDERAL COURTS MAY REVIEW EXPENSE DEDUCTIONS ALLOWED BY

A STATE PROBATE COURT

The Tax Court upheld a N.Y. Surrogate Court's approval of a final account allowing attorneys' fees and disbursements (although there was no itemized breakdown of the attorneys' services, only affidavits describing them), executors' commissions and accountants fees, where the accountants' services were shown as necessary to the estate's administration. Estate of Helen Ward DeWitt v. Commissioner,36 held the Tax Court had jurisdiction to review the deductibility of administration expenses approved by a probate court. In this case, they were all deductible as a matter of law, because they were allowed by the state court which itself had ruled on the facts on which deductibility depended.

A. Federal Law Determines Reasonableness

Estate of Smith v. Commissioner,37 held that an administration expense deduction had to be reasonable under the circumstances and this was a question of federal law establishing the outside limits for what may be considered allowable.

B. I.R.S. Can Have A Different View Than a State Court

The reasonableness of executor's commissions and attorney's fees claimed by an attorney for an estate can be investigated by the I.R.S., even though the amount has been approved by a state court. United States v. White,38 where the attorney

36 Estate of Helen Ward DeWitt v. Commissioner, 54 T.C.M. 759 (1987).

37 Estate of Smith v. Commissioner, 510 F.2d 479 (2d Cir. 1975), 75-1 U.S.T.C. & 13,046, cert. denied, 423 U.S. 827 (1975).

38 United States v. White, 853 F.2d 107 (2d Cir. 1988), 88-2 U.S.T.C. & 13,777, cert. granted, 489 U.S. 1051, cert. dismissed, 493 U.S. 5(1989), where the approval of the fees by a New York Surrogate's Court was ignored by the I.R.S.

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was also the executor.

C. I.R.S. Can Obtain Time And Service Records

The White case gave the I.R.S. the ability to redetermine the reasonableness of attorneys' fees and fiduciary commissions independently of state courts. Its summonses of relevant documents (attorneys' time records or an itemized list of services performed, the time expended for each service and the hourly rate charged) were upheld as being for a legitimate purpose, namely the determination of tax liability. The N.Y. Surrogates Court approval of the fees and commissions was held not binding on the I.R.S. under ' 2053(a)(2).

D. Conflict in Circuits

However, the Seventh Circuit's Jenner 39 case interpreted that same section to require generally that the state court order be followed.

1. The Sixth and Seventh circuits allow commissions, fees and other

administration expenses if deductible under state law. 40 2. Other courts hold these expenses deductible only if allowable under

both state and federal law.41 3. At least one court held that the dispute matters only in the determination

of whether the expense is deductible at all and is not material as to whether it is reasonable and thus allowable, 42 whereas other cases hold the dispute to be material in determining reasonableness.43

E. Local Court Allowance of a Fee, If Facts Involved Deductibility, Will Limit I.R.S. Objections and the federal courts.

39 Jenner v. Commissioner, 577 F.2d 1100 (7th Cir. 1978), 78-2 U.S.T.C. &13,251; See also Estate of Park v. Commissioner, 475 F.2d 673 (6th Cir. 1973), 73-1 U.S.T.C. &12,913.

40 Estate of Park v. Commissioner, 475 F.2d 673 (6th Cir. 1973), 73-1 U.S.T.C. & 12,913; Jenner v. Commissioner, 577 F.2d 1100 (7th Cir. 1978), 78-2 U.S.T.C. & 13,251; and Ballance v. Commissioner, 347 F.2d 419 (7th Cir. 1965), 65-1 U.S.T.C. & 12,283.

41 Hibernia Bank v. United States, 581 F.2d 741, 78-2 U.S.T.C. & 13,261 (9th Cir. 1978) and Pitner v. United States, 388 F.2d 651, 68-1 U.S.T.C. & 12,499 (5th Cir. 1967); see also Smith v. Commissioner, 510 F.2d 479, 75-1 U.S.T.C. & 13,046 (2d Cir. 1975); cert. denied, 423 U.S. 827 (1975).

42 Bank of Nevada v. United States, 80-2 U.S.T.C. & 13,361 (D.Nev. 1980).

43 Pitner, supra, note 41, and United States v. White, supra, note 38.

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If a local court has approved a commission or a fee, the I.R.S. is limited in its ability to determine its deductibility. Treas. Reg. ' 20.2053-1(b)(2) says:

“The decision of a local court as to the amount and allowability under local law of a claim or administration expense will ordinarily be accepted if the court passes upon the facts upon which deductibility depends. If the court does not pass upon those facts, its decree will, of course, not be followed. For example, if the question before the court is whether a claim should be allowed, the decree allowing it will ordinarily be accepted as establishing the validity and amount of the claim. However, the decree will not necessarily be accepted even though it purports to decide the facts upon which deductibility depends. It must appear that the court actually passed upon the merits of the claim. This will be presumed in all cases of an active and genuine contest. If the result reached appears to be unreasonable, this is some evidence that there was not such a contest, but it may be rebutted by proof to the contrary. If the decree was rendered by consent, it will be accepted, provided the consent was a bona fide recognition of the validity of the claim (and not a mere cloak for a gift) and was accepted by the court as satisfactory evidence upon the merits. It will be presumed that the consent was of this character, and was so accepted, if given by all parties having an interest adverse to the claimant. The decree will not be accepted if it is at variance with the law of the State; as, for example, an allowance made to an executor in excess of that prescribed by statute. . . .”

Where the fee or commission has not been approved by the state court, the I.R.S. has a broader power to determine deductibility.44

VI. WAIVER OF COMMISSIONS

If executor's commissions are to be waived, this should be decided upon early during the course of administration, no acts (such as deducting them on the estate or income tax returns) should be performed inconsistent with waiver and a waiver should be filed within six months of death.45 However, meeting the time requirement and even filing a waiver do not appear to be essential, so long as no acts inconsistent with a waiver are performed, such as payment of commissions to the executor.

VII. FIDUCIARY COMMISSIONS AND ATTORNEYS' FEES INCURRED IN

44 Treas. Regs. '' 20.2053-1(b)(2), 20.2053-3(b)(1) and 20.2053-3(c)(1).

45 See Rev. Rul. 66-167, 1966-1 C.B. 20.

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ADMINISTERING PROPERTY NOT SUBJECT TO CLAIMS ARE DEDUCTIBLE

A. Trustees Commissions Are Deductible On Schedule L, Not Schedule J

Where there are a number of nonprobate assets or a fully funded inter vivos trust with little or nothing in the probate estate, administration expenses incurred in connection with these items should be deductible on Schedule L of the Federal Estate Tax return.

1. Trustees commissions are deductible on Schedule J only to the extent that

the trustee is performing services which would normally be performed by an executor with respect to assets subject to claims.

2. Commissions paid trustees of a trust funded prior to death, where the

trustees are performing all the duties of the executor, while not deductible on Schedule J, are deductible on Schedule L, if paid for administering property not subject to claims.

3. Section 2053(b) allows a deduction in determining the taxable estate

for:

amounts representing expenses incurred in administering property not subject to claims which is included in the gross estate to the same extent such amounts would be allowable as a deduction [for administration expenses] if such property were subject to claims, and such amounts are paid before the expiration of the [statute of limitations].

B. Legislative History

This section appeared for the first time in the 1954 Code with the objective of permitting the deduction of expenses incurred in administering nonprobate property, that would not be deductible under section 2053(a), because their payment was not allowable out of the probate estate or because, when added to the other deductions permitted by section 2053(a), they would exceed the amount of property in the estate subject to claims, which limits the amount of deductions under section 2053(a). 46

1. However, even before the enactment of section 2053(b), a number of

cases using various different theories permitted the deduction of expenses connected with administering nonprobate property.

46 H. Rep. No. 1337, 83d Cong. 2nd Sess. 91 (1954).

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2. Those that could not be deducted under section 2053(b) were treated as either reductions of the value of property included in the gross estate or as administration expenses under section 2053(a).47

3. The condition in section 2053(b) that the expenses must be the kind of

expenses that would be deductible under section 2053(a), if they were incurred in connection with property subject to claims, rests on a vague analogy between expenses of administering probate and nonprobate property included in the gross estate. This is somewhat difficult to apply.

C. Limitations on the Deduction

Section 2053(c)(1)(A) limits this deduction "to the extent that [these amounts] were contracted bona fide and for an adequate and full consideration in money or money's worth. ..."

1. Treas. Reg. ' 20.2053-3(d)(2) allows a deduction for the expenses of

selling estate property:

“if the sale is necessary in order to pay the decedent's debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution. [These expenses include] brokerage fees and other expenses attending the sale . . .”

2. Under Treas. Reg. ' 20.2053-3(d)(1):

“[e]xpenses necessarily incurred in preserving and distributing the estate are deductible, including the cost of storing or maintaining property of the estate, if it is impossible to effect immediate distribution to the beneficiaries.”

3. Treas. Reg. ' 20.2053-8(a) points out that:

“Usually, these expenses are incurred in connection with the administration of a trust established by a decedent during his lifetime.”

4. Paragraph (b) of the above regulation requires that to be allowable as

deductions, these expenses must be

47 Lowndes, Kramer & McCord, Estate and Gift Taxes, Section 15.12 (3rd ed. 1974). Use of this citation as authority is risky. The authors criticize the results of the cases that would support this proposition at the bottom of p. 391 and top of p. 392 of their text.

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“occasioned by the decedent's death and incurred in settling the decedent's interest in the property or vesting good title to the property in the beneficiaries. Expenses not coming within the description in the preceding sentence but incurred on behalf of the transferees are not deductible.”

5. It is not clear how far the limitations on the deductions under section

2053(a) apply to the deductions of other administration expenses under section 2053(b).48

6. Most of the limitations under section 2053(a) are inapplicable to section

2053(b) because of differences in subject matter.49

a. For example, even the prohibition against deducting administration expenses from both the estate tax and the income tax of the estate under section 642(g) would not appear to apply to the expenses of administering nonprobate property, which would be deductible from the income tax of the individual who paid the expenses rather than the income tax of the decedent's estate.50

b. The first prerequisite to expenses being deductible under section

2053(b) is that they be deductible under section 2053(a).51 They must also be incurred in "settling the decedent's interest . . . or vesting good title in the beneficiaries." 52 But this does not impose a limit on deductibility different than those imposed by section 2053(a).

c. Section 2053(b) allows the deduction of expenses that are similar

to those incurred by an executor with regard to probate assets.53

7. Thus, trustees' commissions of a fully funded trust should be deductible because they are equivalent to executors' commissions paid by

48 See Lowndes, Kramer & McCord, supra, note 47, Section 15.12.

49 Id.

50 Id., citing Harry C. Porter, 52 T.C. 515 (1969).

51 Treas. Reg. ' 20.2053-8(b).

52 Id.

53 Stephens, Maxfield & Kind, Federal Estate and Gift Taxation, & 5.03[4] (Warren, Gorman & Lamont, 6th ed., 1991).

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a probate estate. Attorneys’ fees for representing the funded trust are in the same category.

VIII. GENERALIZATIONS ABOUT THE WAY STATE LAW RULES DIFFER AND

SPECIFICS OF THOSE IN CALIFORNIA, CONNECTICUT, ILLINOIS, MASSACHUSETTS, MICHIGAN, MINNESOTA, NEW JERSEY, NEW YORK NORTH CAROLINA, OHIO AND PENNSYLVANIA

A. Reasonable Compensation is Usually Allowed Fiduciaries

1. Most jurisdictions allow individual fiduciaries reasonable

compensation Some states have statutes to this effect, others allow compensation based

on an agreement. Sometimes the amount is on a case by case basis. Issues arise where an attorney or his law firm performs the fiduciary duties as well as providing legal services. Each state treats this differently.54

2. The Restatement (Second) of Trusts states that a trustee may receive

reasonable compensation for his services. An additional fee is allowed for extra services, in the absence of a statute providing a definite rule fixing the amount of the trustee’s compensation.55

3. The Restatement (Third) of Trusts not only allows a trustee

compensation, but also specifically allows him to be indemnified for expenses he incurs for the estate.56

4. The Uniform Trustees’ Powers Act (hereafter UTPA) allows trustees to

employ various persons, including attorneys, even if they are associated with the trust.57 Arizona, Florida, Hawaii, Idaho, Nebraska, New Hampshire, Maine, Mississippi, South Carolina and Utah have adopted this language. Kentucky and Oregon adopted similar language.

5. The Uniform Probate Code (hereafter UPC) gives the same power to

54 Heckscher, supra, note 2, p. 26. 55 Restatement (Second) of Trusts, § 242, comment d. 56 Restatement (Third) of Trusts, § 38. 57 UTPA § 3(c)(24).

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personal representatives.58 Alaska, Arizona, Hawaii, Idaho, Maine, Minnesota, Montana, North Dakota, Nebraska, New Mexico, South Carolina, South Dakota and Utah are among the jurisdictions that have adopted this section. Florida, Michigan, Colorado and Wisconsin have adopted similar statutory provisions.

6. Neither of the two major treatises offer any nationwide rule, but

confirm that the allowance of fees varies from state to state with some courts disallowing dual compensation and many allowing a reasonable fee when additional services are performed.59

B. California

1. Service as both attorney and personal representative

“California specifically prohibits an attorney serving as a personal representative from receiving compensation as an attorney, although the individual can of course be compensated for his duties as personal representative, unless the court approves the attorney fee in advance and finds that ‘the arrangement is to the advantage, benefit and best interests of the decedent’s estate’60

2. Trustee acting as his own attorney

Similarly, California restricts dual compensation for a trustee who is acting as his own attorney, allowing it in limited circumstances, such as when all parties are notified and do not object.61

C. Connecticut62

1. Connecticut is one of the many states without any statute governing

58 UPC § 3-715(21). 59 See George G. Bogert, The Law of Trusts and Trustees § 543(M) (2nd ed. 1983) and Austin W. Scott and William F. Fratcher, The Law of Trusts § 188.3 (4th ed. 1987). See also Corpus Juris Secundum, Executors § 252. Both the text preceding this footnote and the latter itself have been paraphrased and condensed from Heckscher, supra, note 2, p. 36 and 37. 60 CAL. Prob. Code § 10804. The quotation is from Heckscher, p. 38, supra, note 2. 61 CAL. Prob. Code §15687. Text paraphrased from Heckscher, p. 38, supra, note 2. 62 Most of the Connecticut material is from an article by the author, Attorneys’ Fees And Fiduciaries’ Commissions In Estate Administration In Connecticut, supra, note *.

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fiduciary compensation 63

“The probate court has exclusive jurisdiction over the . . . determination of . . . fees . . . nor are there [any] official guidelines promulgated by the Probate Court Administrator. . . .” 64 Therefore, except where an executor's compensation has been previously fixed,65 Connecticut allows reasonable compensation for services rendered.66 The compensation should be based upon a combination of the responsibilities assumed and the services performed, both before being appointed and thereafter, while acting as a fiduciary.

2. In Hayward v. Plant,67 Connecticut’s landmark case about executors’

commissions and attorneys’ fees, the Connecticut Supreme Court affirmed that “an executor . . . is entitled to a reasonable compensation for his services depending upon the circumstances of the case . . . . In this connection, ‘reasonable’ means what is fair in view of the [1] size of the estate, [2] the responsibilities involved, [3] the character of the work required, [4] the special problems and difficulties met in doing the work, [5] the results achieved, [6] the knowledge, skill and judgment required of and used by the executors, [7] the manner and promptitude in which the estate has been settled, [8] the time and service required, and [9] any other circumstances which may appear relevant and material to the determination.”

3. Reasonable compensation is allowed if fee is not fixed in advance

Except where an executor's compensation has been previously fixed,68

63 Connecticut Probate Practice Book (4th. Ed., Rev. 2000), Part I, Chapter IV, Page I-38 (Prob. Practice Book).

64 Retired Probate Judge (of the West Hartford, Connecticut Probate Court) John Berman, Compensation in Probate, 1 CONN. PROB. L. J. 205 (No. 2, Spring 1986); hereafter cited as Berman. 65 At least one case has ignored an agreement fixing compensation. Andrews v. Gorby, 237 Conn. 12, 675 A.2d 449, 13 Conn. L. R. 602 (1996), stated that where the attorney who drafted a will had named himself executor, the Probate Court could depart from the will’s fee schedule and award him a lesser amount as reasonable compensation, with the burden of proof on the attorney to prove the reasonableness of the compensation by a preponderance of evidence. Subsequently, the Fairfield County Superior Court, acting on a remand, held an executor who incurs legal expenses to attempt to increase his fiduciary and thus his legal fees could not be reimbursed from the estate, because actions to obtain fiduciary or legal fees do not benefit the estate in any manner and thus must be a personal expense of the claimant. Andrews v. Gorby, 33 Conn. L.Rptr. 201, 2002 W.L. 31126312 (Conn. Super. Ct. 2002), aff’d. 78 Conn. App. 441, 826 A.2d 1267 (2003).

66 Berman, supra, note 64, p. 206.

67 Hayward v. Plant, 98 Conn. 374 at 384 (1923). 68 Supra, note 65.

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Connecticut allows reasonable compensation for services rendered.69

“In some cases the compensation or the manner of computing compensation is fixed in advance, either by . . . will, by . . . agreement between the testator and the executor, or . . . between the fiduciary and all . . . beneficiaries. The right of a testator to fix by his will the compensation of his executor is generally recognized . . . [because of] testator intention, estoppel, election or implied contract.”70 Connecticut courts are usually silent on the issue of whether a testamentary provision for compensation of the executor is binding on the probate court.71 “A Connecticut probate court would not be bound by a provision for compensation in a testator’s will if there were facts or policies justifying departure from the provision such as objections by heirs or creditors.”72 The Department of Revenue Services “is not unaware of the more stringent position” of increased scrutiny of fees by the probate court.73 “The compensation of a fiduciary may be fixed by an agreement between him and other persons beneficially interested in the estate or between him and the testator.74 In the case of an agreement between a testator and the executor named by him it is questionable whether the contract would be strictly enforced since one of the parties is dead.75 This type of contract would also be subject to the same policy considerations as a will provision, such as the rights of creditors and satisfaction of heirs and beneficiaries. “An agreement between those interested in the estate and the fiduciary may bind those parties but [not] the probate court . . . . 76 To the extent that it is

69 Berman, supra, note 64. 70 Berman, supra, note 64, p. 211, citing Comment, Executors and Administrators--Effect of Testamentary Provisions on Executor’s Fees, 38 MICH. L. REV. 381, 385 (1940); hereafter cited as Comment. 71 See DiSesa v. Hickey, 160 Conn. 250, 278 A.2d 785 (1971) where the court did not reach the issue of whether it would be bound by a provision in the will fixing the fee of the executor at 15% of the estate’s gross inventory, but held that this provision was not clear and, therefore, the executor was entitled to “reasonable” fees. 72 Berman, supra, note 64, at 212, citing Comment, supra, note 5 at 386. 73 GAYLE WILHELM, DEATH TAXES IN CONNECTICUT (3d Ed., 2005), § 2:34 , hereafter cited as DEATH TAXES. 74 37 C.J.S. Executors and Administrators § 870 (1942). 75 Berman, supra, note 64, at 211, citing Comment, supra, note 5, at 385. 76 Berman, supra, note 64, at 212, citing DiFrancesca v. Rousseau, 36 Conn. Supp. 33, 409 A.2d 1252 (1979); In re Barnes Estate, 20 Conn. Supp. 179, 129 A.2d 257 (1956). Appellant has no right to appeal as creditor of the estate from the settlement of the accounts where she entered into an agreement with the administrator and withdrew

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relevant to the determination of reasonableness, the court takes into consideration whether those beneficially interested in the estate are satisfied with the manner in which the estate was handled and with the fees charged. An agreement between the parties might be evidence that the heirs and beneficiaries understood the fee arrangement.

4. Bank fee schedules

“Most financial institutions which act as fiduciaries have formulated and published fee schedules. These published fee schedules are generally based on percentages of the value of the assets in the estate or of the income from a trust. Since the fees are published, it could be presumed that the testator, in naming the bank or trust company as executor or trustee of their estate or trust, was aware of its charges or was at least aware of the method of computing the fee.”77 While these fee schedules are ordinarily accepted by most Connecticut probate courts (unless they are based on New York’s statutory fees, which are usually considered excessive for Connecticut estates), at least one court stated that “use of a fee schedule by the fiduciary in and of itself is not approved by the court since it is constructed upon an assumption that the degree of services to an estate corresponds closely to the asset value of the estate, whereas each estate has its own peculiar problems, difficulties and requirements of skill and judgment.”78 Additional percentage charges in certain corporate fiduciary schedules, made for special services to the estate, such as managing and selling real estate, have been discounted, certainly in contested cases, whether by corporate or individual fiduciaries, relying on the reasonableness standard.79

5. Connecticut courts are not bound by will provisions specifying New York’s statutory compensation

An award of fees according to New York fee statute may not necessarily be consistent with Connecticut policy and law as to reasonableness. Thus, New York law, although incorporated into the compensation portion of a will, may violate the positive policy of Connecticut law under the standards of

her objection to the will in return for a promise by the administrator that she would be taken care of for life. 77 Berman, supra, note 64, p. 212. 78 Wolfgang v. Cowell, 2 Conn. L. Rptr. 730, 1990 W.L. 283131 (Conn. Super. Ct. 1990). 79 DEATH TAXES, supra, note 73, § 2:34.

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Hayward v. Plant.80 These are also specifically incorporated into Connecticut’s Probate Practice Book.81 Finally, courts should give deference to the statutory construction by the probate court.

6. Bank fee schedules are generally held to be reasonable

Various percentage tables of minimum fees used as a guide by certain corporate fiduciary's associations, as well as the published schedules of individual banks, are generally accepted by probate courts as representing "reasonable compensation" in the usual case,82 but “fiduciary [compensation and presumably that of their attorneys] still must be evaluated according to the reasonableness standards established by Connecticut case law.”83 Additional services of a fiduciary, such as for managing and selling real estate, overseeing and performing manual labor as well as rental management services may be compensated if within the Hayward v. Plant criteria.84

7. The concept of reasonable compensation

As discussed in Hayward v. Plant85 reasonable executors’ and administrators’ commissions, as well as attorneys’ fees in representing estate fiduciaries should be based on a combination of responsibilities assumed and services performed, both before and after being appointed or retained.

8. Special problems and difficulties . . . could justify higher fees

“Examples . . . include difficulties in gathering the requisite heir information, marshalling estate assets, preparing real property for sale, handling disputed claims against the estate or on behalf of the estate, defending a will contest, and handling tax problems. [They] . . . often require more effort, expertise, administrative time and additional court hearings. . . . Results achieved are a factor but the fee should not be adjusted primarily on the basis of the results

80 Supra, note 67. 81 Supra, note 63. 82 GAYLE WILHELM, SETTLEMENT OF ESTATES IN CONNECTICUT (2d Ed. 2005), hereafter cited as WILHELM, & 9:117. Examples of percentage fee charges and the courts' reactions are at Wilhelm, & 9:118, mentioning that corporate executors have commonly and customarily charged fees of two or three percent of the estate, See Wolfgang v. Cowell, 2 Conn. L.Rptr. 730 (Stamford/Norwalk Sup. Ct., 1990).

83 Berman, supra, note 64, citing in its note 36, Spencer v. Hartford Nat’l Bank, Conn. L. Trib., Jan. 3, 1983, at 14, 15 (Conn. Super. Ct. Apr. 27, 1982).

84 WILHELM, supra, note 82, ¶ 9:120 through 9:123. 85 Hayward v. Plant, 98 Conn. 374, 119 A. 341 (1923).

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achieved without due consideration of other factors. . . .”86

Besides the above, dealing with closely held operating businesses, any difficulties obtaining their performance information, even before a fiduciary’s appointment, his expertise in analyzing financial statements and handling assets requiring special attention, in this author’s opinion should all be considered in determining reasonableness.

While the reasonableness standard is used as a benchmark when determining whether a claimed fiduciary fee is appropriate, the fee itself must be set “in good faith and . . . [justified] if its reasonableness is challenged by an interested party or the court . . . by complete and accurate records of all time spent and actions taken in carrying out his or her duties, so that charges can be directly related to the tasks performed."87

9. Hayward v. Plant’s reasonableness standard also applies to attorneys’ fees88

Although no Connecticut Supreme Court decisions address directly what hourly rates are reasonable for compensating fiduciaries and their counsel, the courts are willing to follow “established” practice.89 “Subsequent decisions of the Connecticut Supreme Court have left the rule of reasonable compensation for fiduciaries and Hayward v. Plant’s factor analysis firmly entrenched in Connecticut law. . . . [They have] been adopted by the courts in The Rules of Professional Conduct [for Attorneys, hereafter cited as Rule] and the Probate Practice Book.”90 “A fiduciary may choose his own counsel . . . determine . . . [his] compensation, and the court will extend . . . [him] a certain amount of latitude in that regard.” 91

A rule of thumb used by many Connecticut probate judges is that a

86 Berman, supra, note 64 at 206-207. 87 PRAC. BK., I-38, supra, note 63.

88 In re Estate of Harry A. McQuillen, III, 15 QUINN. PROB. L. J. 31 at 36 (Darien Probate Court 2000). 89 Rodenbach and Wilhelm (hereafter cited as Rodenbach), Compensation of Fiduciaries and their Counsel in Connecticut, 3 Conn. Prob. L.J. 295, 306 and 308 (1988).

90 Rodenbach, Id. at 300 and 302 (1988).

91 WILHELM, supra, note 82, & 9:115 summarizing Connecticut law on fees, cites Hayward v. Plant, supra, note 85.

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fiduciary's fee of less than 4% of the gross estate is presumed reasonable.92 The 1995 Superior Court’s decision in Andrews v. Gorby,93 according to Wilhelm,94 was cited for the rule that executor's fees must be just and reasonable and stated that a provision in the instrument stipulating the amount or method of calculation of the fee is binding on a fiduciary and beneficiaries, that fee schedules are neither reasonable nor unreasonable per se. Percentage fees are not necessarily objectionable in all cases. Fee schedules are commonly used, without an explicit direction in the will, as a basis for computing reasonable compensation for an executor. In exceptionable circumstances the probate court may depart from the compensation schedule and award reasonable compensation. The court pointed out that judicial notice of human nature may be taken; namely, that most people considering their will do not give nearly as much attention, if any, to fiduciary compensation as they do to the disposition of their estate or minimizing taxes.

10. Fiduciaries’ legal fees if reasonable and necessary are reimbursable

from the estate

“Legal fees incurred by the fiduciary in connection with the performance of duties owed to the estate are a personal expense of the fiduciary, but are reimbursable out of the funds of the estate if reasonable and necessary.”95 Section 45a-294(a) allows “the executor his just and reasonable expenses in defending the will in the probate court, whether or not the will is admitted to probate.” Then, if the defense is successful, the expenses of defending a will in probate or on appeal is charged pro rata against the beneficiaries’ shares so that the residuary beneficiaries will not bear the entire expense.96

92 In Estate of Stella Macgonical, 7 Conn. Prob. L. J. 37 and 8 Conn. Prob. L.J. 212 (Stratford Prb. Ct. April 1993), the late Probate Judge F. Paul Kurmay (who was also the Probate Court Administrator) applied the Hayward v. Plant standard in fixing the executors' fees and allowed the two individual executors $125,000. This was 3.9063% of the $3,200,000 Macgonial estate. In addition, Judge Kurmay allowed $60,000 in attorneys fees. The combined fees, totaling $185,000, were 5.7813% of that estate. “The legal fees incurred in contesting allowability were allowed because the Executors acted reasonably and in good faith and had the right to engage counsel.” DEATH TAXES, supra, note 73, § 2:34.

93 Andrews v. Gorby, 33 Conn. L. Rptr. 201, 2002 W.L. 31120312 (Bridgeport Sup. Ct., 1995), aff’d 78 Conn. App. 441, 826 A.2d 1267 (2003). 94

WILHELM, supra, note 82. 95 WILHELM, supra, note 82, & 9:124.

96 CONN. GEN. STAT. § 45a-294(c). See Berman, supra, note 64, at 210.

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11. It’s unclear who bears litigation costs in an unsuccessful appeal

“The statute is unclear as to who bears the costs of litigation when the will is denied admission to probate and the executor takes an appeal which is unsuccessful. The statute seems to provide that the successful appellant and the unsuccessful appellee will be allowed the costs of maintaining and defending the appeal. However, the unsuccessful appellant will bear the expense of taking an appeal. Therefore, there should be an understanding among those who will profit from the appeal that they will be responsible for the expenses of taking the appeal. Of course, in all of these cases the probate court shall allow only the expenses which are just and reasonable.97 Thus, the probate judge has discretion as to who will finally bear the expense of a will contest.98

12. Standing to appeal

“The probate court’s ruling on the allowance of any item in an account is subject to appeal to the superior court by one with standing, such as a creditor, heir or beneficiary of the estate. However, when the fees of an attorney, accountant or other provider of services for the fiduciary are disallowed, that provider has no standing to appeal from the probate court decree disallowing those fees. The provider of services must bring a civil action in superior court against the executor or administrator for relief. The obligation is a personal one and not an estate obligation. However, if the action is brought while the executor or administrator still holds that office, the superior court may order the amount of the claim to be paid wholly out of the estate.”99

13. Attorneys who act as fiduciaries may receive reasonable compensation, but should separate their two roles in their time records100

Hourly rates for legal services should be reasonable, charged only for legal work, in proportion to the work involved and its value to the estate. Community practices should be observed and an adequate description of services rendered should be submitted.101

97 CONN. GEN. STAT. § 45a-294(a). 98 See Berman, supra, note 64, at 210. 99 Id. 100 PRAC. BK., ch. IV, II, § B, p. I-40. See also,WILHELM, supra, note 82, & 9:125 and DEATH TAXES, supra, note 74, §2:34, p. 2-82.

101 WILHELM, supra, note 82, & 9:126.

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“When an attorney acts only in the fiduciary capacity he is entitled to receive compensation based on the “reasonable” standard applicable to non-attorneys as enunciated in Hayward. A different standard applies to the fee of an attorney who is acting as legal counsel for the estate. . . “When accounting for time spent the fiduciary of an estate should describe the tasks performed, indicate whether or not he is an attorney,102 and distinguish between the legal and nonlegal services performed.

14. Paraprofessional and secretarial services should be billed separately

The court of probate, when examining fees, allows the attorney’s hourly rate only for legal services performed. Thus, a lawyer who is also acting as the fiduciary, or a lawyer who is performing all of the administrative tasks for the named executor, should handle an estate in a cost efficient manner using paralegal or other staff assistance for administrative duties not requiring legal expertise. These duties include balancing the checkbook, paying bills and marshalling the assets. If the attorney performs this myriad of tasks he should be prepared to allocate his time among the various types of duties recognizing that some tasks are compensated at a higher hourly rate than others.”103

15. Reasonableness of fees is passed on in an accounting

“Legal fees incurred by the fiduciary . . . [of an] estate are . . . reimbursable out of the ... estate if reasonable and necessary. . . . [Their] reasonableness . . . [is] addressed by the Probate Court in . . . [an] accounting . . . .” 104 “In determining . . . whether attorneys’ fees are reasonable and proper and therefore the fiduciary entitled to reimbursement, the usual rule is ‘quantum meruit’. The Probate Court’s determination should be based upon consideration of a variety of factors, generally those set forth in Hayward v Plant 105 with respect to executors and Rule 1.5 of the Connecticut Rules of Professional Conduct.” 106 The use and utility of ‘time sheets’ continues to be

102 “The common law rule was that a fiduciary could not make payment to himself for legal services. Connecticut has abandoned that common law rule in its practice, although there is no case or statute to support this. Forger, Report of Committee on Fees and Commissions in Probate Proceedings, 103 TRUST AND EST. 935, 936 (1964). Berman, supra, note 64 at 208, note 13. 103 Berman, supra, note 64 at 208-209. 104 WILHELM, supra, note 82, ¶ 9:124. 105 Supra, note 67. 106 Hereafter referred to as “Rule.”

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explored by the probate courts.” 107 Among Rule 1.5’s pertinent factors justifying the reasonableness of attorneys’ fees are essentially a broadened restatement of Hayward v. Plant. 108 They are “(1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal services properly; (2) The likelihood, if made known to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) The fee customarily charges in the locality for similar legal services; (4) The amount involved and the results obtained; . . . [and] (5) The time limitations imposed by the client or by the circumstances; (6) The nature and length of the professional relationship with the client; (7) The experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) Whether the fee is fixed or contingent.”

16. Fees should rarely be contingent

However, fees for representing fiduciaries administering estates and trusts should rarely, if ever, be contingent, except for a wrongful death suit or a similar claim normally handled on a contingent fee basis. Then it should be only for that claim, not for any other estate administration work, and only those tax matters for which contingent fees are permissible under Circular 230.109

17. Probate courts’ suggested fees

“If the fees are perceived as unreasonable the court frequently suggests a fee which would be acceptable without scrutiny, which also provides the opportunity for the larger fee to be accepted at the option of the attorney’s fiduciary. The length of time spent in administering an estate or trust is an important factor in considering fees although not necessarily a controlling one. The judge may also require an affidavit of the tasks performed and the rationale for the apparently high fees. If the estate involved work which was not apparent from examining the file, the fees will be allowed if the fees then fall within the standards of reasonableness as perceived by the judge. Most judges consistently apply their own method of determining reasonableness.

107 WILHELM, supra, note 82, ¶ 9:125, p. 9-58. 108 Supra, note 67. 109 I.R.S. Circular 230, § 10.27(c)(3) permits “[a] contingent fee . . . for preparation of or advice in connection with an amended tax return or a claim for refund (other than a claim for refund made on an original tax return), but only if the practitioner reasonably anticipates at the time the fee arrangement is entered into that the amended tax return or refund claim will receive a substantive review by the Internal Revenue Service.”

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Many courts will alert attorneys and fiduciaries that the fees set forth in the Succession Tax Return appear high so the issue can be resolved prior to filing the final account.”110

18. Two or more fiduciaries

Where there are two or more fiduciaries, separate awards of reasonable compensation will be made to each one, based upon his services.111 Courts then may give a disproportionate amount to an active as opposed to an inactive fiduciary, even if this increases the costs to the estate.112

19. Determining an attorney’s hourly rate and the reasonableness of his compensation

The hourly rate of an attorney “is usually a function of professional credentials and experience. This method does a good job taking into account ‘time and service’ and even factors like ‘knowledge, skill and judgment,’ ‘special problems and difficulties,’ and ‘character of work’ to the extent these are reflected in the use of timekeepers with different training and experience and hourly rates for different types of work.” 113 Estate of Marie D. Fach114 noted that it “is an accepted fact that attorneys’ fees for services vary greatly from one area of this state to another [and the law firm that represented the estate in the Fach case] maintains the highest rating possible in the Martindale Hubbell Law Directory.”115 Both of these

110 Berman, supra, note 64 at 209. 111 See DEATH TAXES, supra, note 73, § 2:34, p. 2-82. 112 Stevenson v. Moeller, 112 Conn. 491, 496, 152 A. 889, 891 (1931); Hayward v. Plant, 98 Conn. 374, 385, 119 A. 341, 245 (1923). 113 Rodenbach, supra, note 89, at 306. 114 Estate of Marie D. Fach, 8 Conn. Prob. L .J. 10 (Prbt. Ct. District of Essex, Jan. 6, 1993). 115 WILHELM, supra, note 82, in an example at § 9.125, quotes Probate Judge McManus’ statement in the Fach case. See also, DEATH TAXES, supra, note 73, § 2:34, p. 2-84, where it is pointed out that “the court noted with some dismay that many of the entries in the computer records (such as ‘estate administration’) did nothing to help the court determine the nature of the services, and also criticized selection of a minimum time component of 15 minutes [, found the attorneys’ fees reasonable but disallowed] . . . various disbursements which it considered part of law firm overhead (word processing, late night taxi, in-house messengers, night restaurant, photocopying, LEXIS, telephone). It also considered relevant that the proposed legal fees were not challenged by the D.R.S. or the I.R.S…. [T]he court determined that a substantial amount of these ordinary fiduciary services had in fact been provided by counsel and reduced the fees of the Bank of New York accordingly,” pointing out that since the fiduciary’s preparation of the federal and state death tax returns and the probate accounting had been delegated to counsel, these costs should not be included in the fiduciary’s fee. However, in this author’s opinion, photocopying, LEXIS, and telephone charges should have been allowed here, since ABA Formal Opinion 93-379, infra, note 145, next to last

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factors were noted in connection with the list of criteria described in the Connecticut Rules of Professional Conduct as determining the reasonableness of legal fees.” “An attorney’s charges will be based upon time spent, the complexity of the work and other criteria . . . .” 116 Thus, pertinent factors in determining reasonableness of legal fees are “the time and labor required . . . and the skill requisite to perform the legal service properly . . . [as well as] the experience, reputation, and ability of the lawyer or lawyers performing the services. [Furthermore,] as counsel to an estate, he or she owes a duty not alone to the fiduciary but also to the court of probate, the beneficiaries, and other interested parties. . . . [H]is or her responsibilities are correspondingly extensive.” 117

20. Additional fees for extraordinary results

“Many attorneys request additional fees for extraordinary results not fully covered by time compensation . . . where extraordinary service or results are rendered or obtained. Special compensation is well rooted in the compensation law of fiduciaries and their counsel.” 118 “The attorney for an estate often finds himself or herself spending substantial additional and arguably unnecessary time . . . arguing with a client [fiduciary] as to an undoubtedly proper legal course of action. When the bill is submitted, particularly if it includes time sheets and a description of services, it can at first blush appear unconsciously [sic] large for the result accomplished. At the time of the accounting the attorney would be well advised to submit to the court an Affidavit of Services explaining why the legal fees are larger than usual.” 119 Apostle v. Bumster120 involved disputes between co-executors, one of whom was also the estate’s attorney. The Superior Court pointed out that: “[s]ettling these disputes at times required the intervention of the Probate Court with resulting delays and incurring additional costs to the estate.

sentence, allows them. 116 PRAC. BK., supra, note 63, Part I, Ch. I, p. I-4. 117 Id. Ch. IV, II. B, pp. I-39 and 40. 118 Rodenbach, supra, note 89, at 308-310. See also, Berman, supra, note 64 at 207. 119 WILHELM, supra, note 82 at § 9.124. 120 Apostle v. Bumster, 2000 W.L. 961368 (Conn. Super. Ct. 2000).

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“Other delays and expenses resulted [because of a will contest, and various matters. The court held that] much of the delay in the probating process was directly attributable to the plaintiffs’ determination to control the day-to-day procedures of the probating process, and failure to accept [the] attorneys’ legal opinions regarding the probating and tax procedures.” 121 Accordingly, the court found the attorneys’ fees to be reasonable, “taking into consideration the size and complexity of the estate,122 the obstacles raised by the [co-executor] that prolonged the probating process and the lack of complete cooperation on the part of the [co-executor] in the efficient and expeditious conduction of her executrix’ duties.”123

Wilhelm124 says, “[T]he time and effort an attorney is required to expend in providing legal services to a fiduciary who, for whatever reason, requires such attention, is a factor which needs to be taken into account under both the standards set in Hayward v Plant125 and the principles of the Rules of Professional Conduct.” Wilhelm summarized the law concerning fiduciary and attorney’s fees as it existed in 1988 and then continued with “brief digests of a number of cases, generally those decided since that date . . . .” 126

D. Illinois

An attorney is entitled to compensation for both legal and nonlegal services.127

E. Massachusetts

Massachusetts has found that “there is nothing improper (absent to contrary provision in the trust) in allowing extra compensation to a trustee who is also an attorney . . .”128

F. Michigan 121 Id, note 120.

122 Citing the Connecticut Supreme Court’s opinion in Andrews v. Gorby, 237 Conn. 12, at 23 (1996), supra, note 65. 123 Supra, note 120. 124 WILHELM, supra, note 82, at the end of § 9:125. 125 Hayward v. Plant, supra, note 67. 126 DEATH TAXES, supra, note 73, § 2:34, pp. 2-77 through 2-85. The most important cases discussed therein have already been covered in this outline. 127 Estate of Hackett v. Greve, 366 N.E.2d 1103 (Ill. Ct. App. 1977). 128 Lembo v. Casley, 361 N.E.2d 1314 (Mass. Ct. App. 1977).

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Michigan apparently will allow both executor’s and attorney’s fees for the same person.129

G. Minnesota

Personal representatives are allowed reasonable compensation for services. 130 In determining what is reasonable compensation, the court shall give consideration to the following factors: (1) The time and labor required; (2) The complexity and novelty of problems involved; and (3) The extent of the responsibilities assumed and the results obtained. 131

Attorneys are allowed "such compensation [from an estate] as shall be just and reasonable." 132 In the absence of a prior written agreement, the following factors [determine] what is a fair and reasonable attorney's fee:

(1) The time and labor required; (2) The experience and knowledge of the attorney; (3) The complexity and novelty of problems involved; (4) The extent of the responsibilities assumed and the results obtained; and (5) The sufficiency of assets properly available to pay for the services.

While Minnesota Statutes and cases dealing with compensation of personal representatives do not mention other fiduciaries, it is the practice to apply them by analogy to a trustee, where the entire estate (or nearly all of it) has been placed in an inter vivos trust prior to death.

H. New Jersey

When a fiduciary who is also his own attorney has “performed professional services in addition to his fiduciary duties, the court shall, in addition to [his] . . . commissions . . . , allow him a just counsel fee.”133

I. New York 129 See Estate of Laverty, 1999 W.L. 33441251 (Mich. Ct. App.), aff’d, 2002 W.L. 483552 (Mich. Ct. App.). 130 MINNESOTA STATUTES ' 524.3-719(a) (1996).

131 MINNESOTA STATUTES ' 524.3-719(b) (1996).

132 MINNESOTA STATUTES ' 525.515(a) (1996).

133 N.J. STAT. ANN. § 3b:18-6.

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New York has a statutory sliding percentage scale for fiduciary commissions. While there is no statutory provision for attorneys' fees, it is customary for the New York Surrogate's Courts to allow the equivalent of a full fiduciary's commission to his, her or its attorney. When the attorney is also the fiduciary, one and a half to two commissions may be allowed. 134

J. North Carolina

Dual compensation is allowed when the attorney acting as fiduciary “renders professional services, as an attorney, which are beyond the ordinary routine of management and of a type which would reasonably justify the retention of legal counsel by any fiduciary or trustee not himself licensed to practiced law.”135

K. Pennsylvania

Pennsylvania apparently has no statutory fees and relies on case law.

L. Ohio An attorney serving as executor and attorney for an estate whose beneficiaries consented to the fees requested, was allowed a statutory executor fee and half of the attorneys’ fees claimed based on the formula established by local court rule, which provides that an attorney serving as both executor and attorney for an estate is entitled to half of his attorneys’ fees if he receives a full executor’s fee.136

IX. COURTS IN OTHER STATES, INCLUDING FLORIDA, KENTUCKY, NORTH DAKOTA, OKLAHOMA AND PENNSYLVANIA HAVE CASE LAW APPROVING FEE PROVISIONS IN THE GOVERNING INSTRUMENT137

Heckscher138 analyzes cases involving conflicts of interest and the proof required to recover attorneys’ fees and fiduciary commissions in dual capacity situations. He points out that an attorney claiming a fee must prove that value of his services, trial courts have discretion to determine reasonable compensation for a fiduciary and one serving in a dual capacity must demonstrate the services performed in each capacity and offer proof regarding the value of these services. Where state statues dictate fiduciary fees that will be the starting point but the court must still determine the attorneys’ fees to be reasonable. If there are statutory fees, both the attorney’s fee and the commission will

134 N.Y. SURR. CT. PROC. ACT, Law ' 2307 (McKinney 1967 & Supp. 2002).

135 N.C. GEN. STAT. § 32-51. 136 In re Estate of Rothert, 2002 Ohio 2150 (Ohio Ct. App. 2002). 137 See Heckscher, Part F, supra, note 2, also pages 41 and 42 of Heckscher. 138 Supra, note 2.

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frequently be subject to court scrutiny. X. THE ACTEC STUDY OF FIDUCIARY FEES

ACTEC139 Study #5 sets forth the fees (as of 1993) of estate fiduciaries and testamentary trustees in all 50 states, the District of Columbia and the Canadian Province of Ontario. The preface to it points out that these fees:

“vary in the 50 states and sometimes in different cities in the same state and with different corporate trustees in the same city. The fees are intended to be based upon a reasonable value of the services rendered by the fiduciary in the particular case. Necessarily, the extent of the services required will vary from case to case.” 140

A. The ABA’s Model Rules of Professional Conduct and the ACTEC Commentaries on Them

Many states have adopted the ABA’s Model Rules of Professional Conduct (hereafter MRPC). Connecticut adopted them October 1, 1986. MRPC 1.5, dealing with fees, says nothing about fees for fiduciary representation. However, the ACTEC Commentaries141 on MRPC 1.5 provide that these fees “may be established in a variety of ways, provided that the fee ultimately charged is a reasonable one taking into account the factors described in MRPC 1.5(a).”142 The ACTEC Commentaries go on to point out that fees in trust and estate “matters frequently are primarily based on the hourly rates charged by the attorneys and legal assistants rendering the legal services or upon a mutually agreed upon fee determined

139 ACTEC is an acronym for American College of Trust and Estate Counsel. Its 1993 study #5 had its New York compilation dated February 2, 1994.

140 Id., page 5-2. 141 ACTEC Commentaries on the Model Rules of Professional Conduct, 4th ed. 2006, hereafter ACTEC Commentaries. 142 These factors are: “(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.” ACTEC Commentaries p. 62 and 63. These are quite similar to those set forth in Hayward v. Plant, supra, note 67, and the language of the Probate Practice Book, supra, note 63.

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in advance. Based on the revisions to MRPC 1.5 (Fees) in 2002, unless the lawyer has regularly represented the client on the same basis or rate, the lawyer must advise the client of the basis upon which the legal fees will be charged and obtain the client’s consent to the fee arrangement. As revised in 2002, the rule also requires a lawyer to inform the client, preferably in writing, before or within a reasonable time after commencing the representation, of the extent to which the client will be charged for other items, including duplicating expenses and the time of secretarial or clerical personnel. Any changes in the basis or rate of the fee or expenses shall be communicated to the client.143 Basing a fee for legal services solely on any single factor set forth in MRPC 1.5 (Fees) is generally inappropriate unless required or allowed by the law of the applicable jurisdiction. In recent years courts in several states [but not Connecticut] have, in effect, prohibited or seriously limited the use of fees based upon a percentage of the value of the estate.” However, an attorney who had previously represented a corporate fiduciary on unrelated estate matters was not required to have a written fee agreement for representation of same corporate executor of a new estate.144 “Most states allow a lawyer who serves as a fiduciary and as the lawyer for the fiduciary to be compensated for work done in both capacities. However, it is inappropriate for the lawyer to receive double compensation for the same work.”145 “Under the majority view, a lawyer who represents a fiduciary generally with respect to a fiduciary estate stands in a lawyer-client relationship only with the fiduciary and not with the fiduciary estate or the beneficiaries. In this connection note that a distinction should be drawn between the duties of a lawyer who represents a fiduciary in the fiduciary’s representative capacity (a ‘general’ representation) and the duties of a lawyer who represents the fiduciary individually (i.e., not in a representative capacity).” 146

143 ABA Formal Op. 93-379 (1993) “articulates more particularly the duties of a lawyer to disclose the basis of fees and charges as provided in MRPC 1.5. In addition, in matters where the client has agreed to have the fee determined with reference to the time expended by the lawyer, a lawyer may not bill more time that she actually spends on a matter, except to the extent that she rounds up to minimum time periods (such as one-quarter or one-tenth of an hour). A lawyer may not charge a client for overhead expenses generally associated with properly maintaining, staffing and equipping and office; however, the lawyer may recoup expenses reasonably incurred in connection with the client’s matter for services provided in house, such as photocopying, long distance telephone calls, computer research, special deliveries, secretarial overtime, and other similar services, so long as the charge reasonable reflects the lawyer’s actual cost for the services rendered. A lawyer may not charge a client more than her disbursements for services provided by third parties like court reporters, travel agents or expert witnesses, except to the extent that the lawyer incurs costs additional to the direct cots of the third-party services.” 144 Connecticut Ethics Op. 00-22 (2000). 145 ACTEC Commentaries, p. 63, supra, note 141. 146 Reporter’s Note to the First Edition of ACTEC Commentaries, p. 2.

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XI. PRACTICAL SUGGESTIONS TO PERSUADE BENEFICIARIES AND COURTS OF THE REASONABLENESS OF A FEE

A. Submit Engagement Letter to Probate Court for Advance Approval, if in Litigation

When an attorney is retained in a probate matter being litigated, it might be advisable to submit his engagement letter to the probate court for advance approval. But bear in mind that opposing counsel (who must be given a copy of anything filed in the court in a contested matter) may then object to some of its terms.147

B. Fees Affidavit

Before submitting an estate’s interim or final account to a probate court, the attorney should consider sending a copy to each beneficiary. If the estate was unduly complex and either required more time than usual or a greater degree of skill in dealing with tax or other legal problems, it would be wise to send a fees affidavit, too. This could summarize the attorney’s time sheets, showing his hourly rate and those of other lawyers and legal assistants who worked on the estate. The information may keep beneficiaries from being unduly upset if the fees seem excessive. If it appears necessary, a complete printout of the firm’s time records, showing the details of all services performed and time spent in administering the estate, should be sent. Many judges are interested in reviewing the attorneys’ time and service records, especially if they are higher than the particular judge’s guidelines or where a beneficiary objects to fiduciary or attorney fees. Even if no objection is made, the probate judge may ask for a fairly detailed explanation of what benefit the attorney’s and/or fiduciary’s services were to the estate.

C. Affidavit of Extraordinary Services

If the attorney’s fees have exceeded any local fee guidelines, the fees affidavit enables the probate judge to understand why this occurred. However, to help justify a fee in excess of the guidelines, it would also be wise either to file an affidavit of extraordinary services with the court or describe these services in the fees affidavit. This or these affidavits should accompany a copy of the account, which should probably be sent to each residuary beneficiary, explaining any difficult collection and legal matters, problems in dealing with one or more beneficiaries, other controversies and tax problems that led to any time consuming audits with the Internal Revenue Service or the state’s tax department, particularly if tax litigation ensued and there was a substantial tax saving.

147 This was suggested to the author by Attorney Douglas R. Brown of Brody, Wilkinson and Ober, P.C., Southport, CT.

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D. Bonanza Fees

Where the attorney did extensive work, a fee higher than his usual hourly rate should be considered, at least on these matters. But this should be agreed to in advance by the beneficiaries, probably in another engagement letter. If the attorney’s efforts save the estate substantial taxes or enable it to recover or save other large sums or valuable property, even a percentage fee should be considered. Again, this should first be discussed both with the fiduciary and the residuary beneficiaries, allowed in the tax audits and approved by the court. If it was not mentioned in the original engagement letter, a supplemental one should be sent to the fiduciary.148

E. Beneficiaries’ Consents And Requests That The Court Not Require Their

Appearance

If a beneficiary has no objection to the fees and approves the account, he should sign a request that the court approve it. This should be sent to the court by the attorney, accompanying the account. If all beneficiaries consent to the fees and approve the account, in the interest of saving time and costs the attorney should consider requesting the court not to require anyone to appear at the hearing on the account.149

F. The Legal Fee Should Be Reduced If An Outside Accountant Is Used

Professional fees paid for services normally performed by an attorney should reduce his legal fee. Similarly, when a percentage fee is being charged or a corporate fee schedule used, the fee should include all probate work, as well as preparation of all federal and state income and estate or inheritance tax returns. Thus, the cost of any outsourced work should be subtracted from the corporate fiduciary or the attorney’s fee. The former may resist the reduction, even though tax returns, inventories or accounts are prepared (not just audited) by the fiduciary’s attorney. Therefore, if an attorney uses an outside accountant (not an employee of his firm) to prepare any income or estate tax returns or the probate account, the attorney’s fee should be reduced by the accountant’s, so their combined fees do not exceed the amount of an attorney’s fee for doing all work.

G. Occasional Problem In Using The Decedent’s Family Accountant

Occasionally, the fiduciary or the decedent’s family insists that the family’s personal or business accountant be used to do the tax returns (even the decedent’s final one); this collaboration frequently takes more of the attorney’s time (in addition to the time of the accountant) than if his paralegal did everything under his supervision. The

148 The beneficiaries are not the attorney’s clients. 149 A sample beneficiary’s request that a court approve the account and waive a hearing is attached to this outline as Appendix A and an attorney’s request that the court allow him not to appear is Appendix B.

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problem is that many otherwise excellent accountants have little knowledge or experience with estate or fiduciary income taxes. Even the attorney’s coordination of his work with that of the accountant takes extra time and increases the possibility that something may be overlooked by both professionals, because each expected the other to handle it.

H. Investment Counsel

The use of investment counsel is entirely different. No attorney should give investment advice unless specially qualified. While he should ascertain the estate’s cash needs, advising which estate securities to sell to raise cash and handling any reinvestment during estate or trust administration is not legal work. It should be done by the corporate fiduciary or else independent investment counsel, where there are only one or more individual fiduciaries, none of whom are qualified as such. Thus, investment counsel work should be separately compensated for, without reducing the legal fee. Where the executor is a corporate fiduciary, barring a contrary will provision, the latter will normally handle liquidation of the decedent’s assets and any reinvestments. If there is to be reinvestment during estate administration, this should have either been explicitly authorized by the will, appropriate provisions of the Fiduciary Powers Act150 should have been incorporated therein or else probate court approval should be obtained.

I. Lay And Inexperienced Fiduciaries

Where a lay fiduciary, such as a surviving spouse, does little but sign papers, dispose of tangibles and clean the decedent’s house, he should receive only a relatively small fee. This could be based on his time spent at a rate comparable to what would be charged by an outsider for the various tasks performed and the responsibilities assumed. The attorney no doubt will have to put in far more time administering such an estate than if the fiduciary was sophisticated. Thus, the attorney should be compensated accordingly. Many attorneys or their legal assistants spend considerable additional time straightening out bank accounts and preparing an inventory. Among other occasions when this may have to be done are when an inexperienced fiduciary insists on keeping the estate’s checkbook, or may have made deposits into a joint account or paid debts or the funeral bill either from it or used his own funds, perhaps before the attorney was retained. Uncashed checks belonging to the decedent or his estate may have been deposited without being properly recorded, instead of being held to be turned over to the attorney to identify their source, nature and whether they are pre-death or post mortem items. Reimbursements may be due the surviving joint tenant or some other payer of funeral expenses or debts.

150 CONN. GEN. STATS. §45a-234(3).

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To avoid these problems, lay fiduciaries should be encouraged to turn over all receipts to the attorney’s legal assistant. All bills should be paid from the estate’s account, even if this causes a delay in their payment. The legal assistant should keep the estate’s checkbook, reassuring the fiduciary that the latter’s sole signature authority gives him complete control over all funds. All checks are to be signed by him and should be accompanied by a written explanation (usually the bill itself is enough) from the legal assistant. Thus, the decision to sign it remains the fiduciary’s. This procedure will avoid much otherwise wasted time in subsequently reconstructing deposits and withdrawals and balancing the account.

J. Where The Fiduciary Is Also The Estate’s Attorney

A number of probate courts look at a fiduciary who is also acting as his own attorney (a perfectly proper thing to do in most states) as being only entitled to a lower fee for work as a fiduciary than as an attorney. While dealing with tax problems should be billed at the attorney’s normal hourly rate, any paralegal, secretarial and similar work done by an attorney should be billed at lower than his normal billing rate. Separate records should be kept of the time spent in each capacity. But to the extent that an attorney, possibly acting as a fiduciary, deals with complex nonlegal issues, such as learning the best ways to sell collections, dispose of artwork and prepare for auctions, such tasks might be worth charging at his hourly rate for legal work or close to it.

XII. OTHER LIMITATIONS ON DEDUCTIBILITY OF AN ESTATE'S LEGAL FEES AND FIDUCIARY COMMISSIONS A. Beneficiaries' Attorneys' Fees

Attorneys’ fees incidental to litigation or other services for the beneficiaries are not deductible administration expenses authorized by the Code and are charged against the beneficiaries personally.

B. No Double Deduction for Administration Expenses

Neither the legal fees, fiduciary commissions nor disbursements accompanying either of them or any other administration expenses are deductible in computing both the taxable estate and the taxable income of an estate. Treas. Reg. ' 1.642(g)-1 requires that for the allowance of these deductions in computing taxable income of an estate a statement be filed:

“in duplicate, to the effect that the items have not been allowed as deductions from the gross estate of the decedent under section 2053 or 2054 and that all rights to have such items allowed at any time as deductions under sections 2053 or 2054 are waived. The statement should be filed with the return for the year for which the items are claimed as deductions or with the district [now the

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territory] director of internal revenue for the internal revenue district [now territory] in which the return was filed, for association with the return. The statement may be filed at any time before the expiration of the statutory period of limitation applicable to the taxable year for which the deduction is sought. Allowance of a deduction in computing an estate's taxable income is not precluded by claiming a deduction in the estate tax return, so long as the estate tax deduction is not finally allowed and the statement is filed. However, after a statement is filed under section 642(g) with respect to a particular item or portion of an item, the item cannot thereafter be allowed as a deduction for estate tax purposes since the waiver operates as a relinquishment of the right to have the deduction allowed at any time under section 2053 or section 2054.”

C. Deduct on Either Income Or Estate Tax Return Most administration expenses may be deducted either on the federal estate tax return or on the estate's income tax return for the fiscal period when they are paid.151 The same is true of losses deductible from the gross estate under ' 2054. As required in the above regulation, to deduct the from the estate’s income, a statement must be filed in duplicate that the items have not been allowed as estate tax deductions and the estate must waive all rights to have such items so allowed. Furthermore, the estate may not take a deduction in computing the taxable income of a trust (or any other person), if the item was deducted in computing the taxable estate.

1. This statement should be filed with the income tax return for the year

for which the deductions are claimed or with the Territory Director for association with the return. It may be filed any time before expiration of the income tax statute of limitations for the year for which the deduction is sought.

2. The election to deduct administration expenses and losses during

administration on the estate tax or the income tax returns is a valuable post-mortem estate planning tool, enabling the fiduciary to reduce overall taxes on the estate in many cases.

3. When the fiduciary is not sure whether to take the deduction from the

gross estate or in computing taxable income, it can be claimed initially on both returns and the statement not attached until a final decision is made that the deduction will be claimed on the income tax return, in which case the I.R.S. must be informed that it will not be claimed on the estate tax

151 Section 642(g).

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return. 4. The allowance of the deduction in computing an estate's taxable

income is not precluded although it was already claimed on the estate tax return, so long as the estate tax deduction has not been finally allowed and the above statement is filed. Once the statement is filed for a particular item or portion, the latter cannot thereafter be allowed for estate tax purposes.152

5. Even single items may be split between the two taxes.153 6. Items must be either business or nonbusiness expenses deductible

under sections 162 or 212. 7. Careful observation of the statute of limitations is required, if this

technique is being followed. Should an audit of either return be called (ordinarily the estate tax attorney auditing a federal estate tax return will also audit the estate's fiduciary income tax returns), the estate tax attorney or revenue agent should be informed that a double deduction has been taken on a preliminary basis.

8. Double deductions are not allowable, but some items may be taken for

both income tax and estate tax purposes. Even a portion of an item may be so divided.154 Expenses attributable to tax exempt income should be taken on the estate tax return, since they are not deductible for income tax purposes.

9. Where there is a marital deduction, deducting fees, commissions, and

other administration expenses for estate tax purposes will save no tax, but by excluding from the taxable estate the estate tax deduction, there will be a decrease in the marital share and more property will be sheltered from

152 Treas. Reg. ' 1.642(g)-1.

153 Treas. Reg. ' 1.642(g)-2.

154 Treas. Reg. ' 1.642(g)-2 says: It is not required that the total deductions, or the total amount of any deduction, to which section 642(g) is applicable be treated in the same way. One deduction or portion of a deduction may be allowed for income tax purposes if the appropriate statement is filed, while another deduction or portion is allowed for estate tax purposes. Section 642(g) has no application to deductions for taxes, interest, business expenses, and other items accrued at the date of a decedent’s death so that they are allowable as a deduction under section 2053(a)(3) for estate tax purposes as claims against the estate, and are also allowable under section 691(b) as deductions in respect of a decedent for income tax purposes. However, section 642(g) is applicable to deductions for interest, business expenses, and other items not accrued at the date of the decedent’s death so that they are allowable as deductions for estate tax purposes only as administration expenses under section 2053(a)(2). Although deductible under section 2053(a)(3) in determining the value of the taxable estate of a decedent, medical, dental, etc., expenses of a decedent which are paid by the estate of the decedent are not deductible in computing the taxable income of the estate. See section 213(d) and the regulations thereunder for rules relating to the deductibility of such expenses in computing the taxable income of the decedent.

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taxes at the death of the surviving spouse.

a. A mathematical analysis will have to be done to determine whether the deduction should be taken for estate tax purposes, when it will not benefit the first spouse's estate, whereas an income tax deduction can save tax even if the decedent's taxable estate has no estate tax liability.

b. But the result will be to include in the latter the income tax

deduction, thus reducing the amount available to be sheltered at the death of the second spouse and increasing the marital deduction share.

c. Thus, the income tax deduction produces an immediate tax benefit

in the first spouse's estate and a tax detriment in that of the surviving spouse.

d. Therefore, sacrificing present income tax benefits to save the estate

tax at the second death should be considered, but do the math first. D. If Taken On An Income Tax Return, The Estate Tax Increases

To the extent deductions are taken on income tax returns, the estate tax increases. 1. Income may then be required to reimburse principal, although the will

does not so specify, for the additional estate tax resulting from failure to claim these deductions as an estate tax deduction.155

2. If used as income tax deductions, they must be deducted in the year they

are paid or accrued. E. Selling Expenses

A deduction from the gross estate or an offset to the sale price of property is permitted for amounts paid by an estate (not as a dealer) for allowable expenses incurred in the sale of the property.156 They cannot be used as an offset to the

155 See Warm's Estate, 140 N.Y. Supp. 169 (Surr. Ct. N.Y. Co. 1955); Bell Estate, 393 Pa. 623 (1958); Bixby's Estate, 295 P.2d 68 (Cal. 1956).

156 Rev. Rul. 71-173, 1971-1 C.B. 204, revoking Rev. Rul. 56-43 1956-1 C.B. 210, was obsoleted by Rev. Rul. 89-75, 1989-1 C.B. 319. The obsoleted ruling followed the unanimous court decisions permitting a deduction for these selling expenses on the estate tax return and an offset for them against the selling price in computing taxable income of the estate. See Bray v. Commissioner, 46 T.C. 577 (1966), aff'd, 396 F.2d 452 (1968), Commerce Trust Co. v. United States, 309 F. Supp. 1317 (1971). However, Rev. Rul. 89-75 merely stated that “[p]eriodically, the Internal Revenue Service has obsoleted Revenue Rulings which, although not specifically revoked or superseded, are not considered determinative with respect to future transactions because (1) the applicable statutory provisions have

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selling price in computing gain if they were used as deductions on the estate tax return. Furthermore, expenses of selling property are deductible only if a sale is necessary to pay debts, administration expenses or taxes, to preserve the estate or effect distribution.157

F. Trustee's Commissions

Except to the extent a trustee performs services with respect to property subject to claims that would normally be performed by the executor, the trustee's commissions are not expenses of administration of a probate estate and are only deductible as expenses of administering property not subject to claims, on Schedule L.158

G. Waiver of Commissions

An executor or administrator who wishes to waive fiduciary commissions must be sure his waiver constitutes evidence of his intent to act gratuitously.

1. A formal waiver may not be necessary if the fees are not: (1) deducted

on any tax returns, (2) shown on an account, nor (3) actually taken.159 2. No taxable gift results and nothing is included in gross income where

the executor effectively waives his right within a reasonable time after beginning to serve.160 A formal waiver within six months of appointment would be effective, as would be an implied waiver through failure to claim fees or commissions. Claiming them as a tax deduction would be inconsistent with an intent to waive.

3. An executor's waiver was found effective although the estate's final

income tax return included "estimated" executor's commissions and the final probate court order inadvertently included an allowance for

been changed or repealed; (2) the ruling position is specifically covered by statute, regulations, or a subsequent published position; or (3) the facts set forth no longer exist or are not sufficient to permit application by the current statute.”

The Ruling went on to declare Rev. Rul. 71-173 obsolete “to make clear to all concerned that . . . [it] is not determinative with respect to taxable years ending after October 4, 1976.”

157 Treas. Reg. ' 20.2053-3(d)(2).

158 Treas. Reg. ' 20.2053-3(b)(3).

159 Rev. Rul. 66-167, 1966-1 C.B. 20, clarifying Rev. Rul 56-742, 1956-2 C.B. 21 and distinguishing Rev. Rul. 64-255, 1964-2 C.B. 15.

160 Id.

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executor's fees, since the executor never actually received any, the estate had insufficient cash to pay any and no fees were ever credited or otherwise made available to him.161

4. The best procedure is probably to file a formal waiver as soon as the

executor decides to waive his commissions. If he died and no written waiver had been filed, not only might the I.R.S. question the matter, but his beneficiaries (or their guardians at litem) might dispute that he voluntarily gave up the commissions. Concerned counsel might be wise to execute a disclaimer of commissions with the petition for probate. If there is a question as to the ability of the probate court to accept the disclaimer, the probate petition itself should contain the disclaimer.162

H. Expenses Of Handling Realty And Tangibles

The expenses for preserving and caring for real property and personal effects may not include outlays for additions or improvements; nor will such expenses be allowed for a longer period than the executor is reasonably required to retain the property.163

I. Commissions And Attorneys’ Fees Are Taxable Income To The Recipient

Executor's commissions (as well as those of trustees and other fiduciaries) are taxable income to the recipients and should be reported as such on their income tax returns for the year in which they are received.

J. Bequests in Lieu of Commissions are Not Deductible

1. Ordinarily they are gifts and thus not taxable income

Occasionally, a testator or settlor may make a bequest or direct that a distribution be made from an inter vivos trust to his executor or trustee, in lieu of a commission.

a. In those instances when the fiduciary would normally be a

recipient of a bequest or a trust distribution (because of his or her relationship by blood or marriage to the testator/settlor) and the bequest or distribution bears no relationship to the commission, the

161 G.M. Breidert, 50 T.C. 844 (1969), acq. 1969-3 I.R.B. 6.

162 Suggested by Edward S. Schlesinger in Immediate Post-Mortem Planning, Third Edition, P-H Wills, Trusts and Estate Planning Forms (1969), question 16 at page 3413.

163 Treas. Reg. ' 20.2053-3(d)(1).

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I.R.S. should treat it as any other bequest. b. It is deductible in computing the estate tax only if it is to a

surviving spouse and qualifies for the marital deduction. c. It is not deductible as an administration expense nor taxable as

income to the legatee or distributee. d. This is clearly the case when the bequest is "in lieu of all

compensation or commissions," and is unconditionally payable, whether or not the legatee acts as executor.164

2. When the bequest is deductible by the estate and income to the

recipient

a. If the will fixes the executor's compensation, this is deductible to the extent it does not exceed the compensation allowable by local law or practice.

b. An amount bequeathed to decedent's son "in full for all services as

executor and trustee" is taxable income and not an exempt gift 165 and a co-executor's receipt of an additional amount over and above that allowed by a state court from an executor who had resigned was not a gift, but represented compensation for services includible in the co-executor's income.166

K. The 2% Floor on Miscellaneous Itemized Deductions

1. Section 67(a) provides that: “[i]n the case of an individual, the miscellaneous itemized deductions for any taxable year should be allowed only to the extent that the aggregate of such deduction exceeds 2 percent of adjusted gross income.”

2. This two percent floor also applies in determining the adjusted gross

income of an estate or trust, except that:

a. “the deductions for "costs which are paid or incurred in connection

164 Merriam v. Commissioner, 263 U.S. 179, 1 U.S.T.C. & 84 (1923).

165 Grant v. Rose, 39 F.2d 338 (5th Cir. 1930), Dismissed on Govt's motion, 283 U.S. 86 (1931).

166 R.M. Cohn v. Commissioner, 409 F.2d 399, 69-1 U.S.T.C. & 9426 (2d Cir. 1969).

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with the administration [thereof] and which would not have been incurred if the property were not held in such [entity]," and

b. “the deductions allowable under '' 642(b), 651, and 661, shall be

treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.”167

3. Deductions subject to the 2% floor

Section 67(b) provides that the miscellaneous itemized deductions subject to the two percent rule are those other than interest, taxes, losses, charitable contributions, medical and dental expenses, impairment-related work expenses, the estate tax deduction for income in respect of a decedent, any deduction allowable in connection with personal property used in a short sale, the section 1341 deduction relating to tax computation where a substantial amount held under a claim of right is restored, the section 72(b)(3) deduction where annuity payments cease before recovery of an investment, the section 171 amortizable bond premium deduction and the section 216 deduction in connection with cooperative housing corporations.

4. The key to full deductibility of miscellaneous expenses of estates and

trusts is whether they would have been incurred had the property not been held in the estate or trust.

If not, they are fully deductible. The section 642(b) personal exemption and section 651 and section 661 distributions deductions are deducted from gross income and therefore not subject to the two percent floor.

5. Excess deductions

It is not clear whether a section 642(h) excess deduction, available on termination of an estate or trust, is subject to section 67’s two percent limit. The deduction is passed through to the beneficiary, but if the estate or trust had not terminated, it would be claiming the deduction. Thus, it would probably be prudent to try to use the deductions first against the entity's income to reduce what, but for the termination, would be the latter's adjusted gross income.

6. Distributions

167 Section 67(e).

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Beneficiaries receiving distributions from an estate or trust which carry out miscellaneous deductions that were not subject to the two percent floor at the fiduciary level (because of the exemption for distributions from that rule), will nonetheless be subject to it on their individual tax returns, except to the extent that the deductions for legal fees and commissions passed through to the beneficiaries are expenses that would not have been incurred had the property not been held by the fiduciary.

7. Case law interpreting the 2% rule

a. O'Neill v. Commissioner,168 held that investment advisor fees paid by a trust constituted expenditures unique to trust administration and therefore were exempt from the two percent floor. In providing this exemption, the court said, in dicta, that:

[e]xpenses such as trustee fees, costs of construction proceedings and judicial accountings are examples of expenses peculiar to a trust and therefore, are subject to the '67(e) exception.

b. Clearly, other expenses described in section 67(e) such as

commissions of a personal representative and fees for the estate's attorney are in the same category. However, in an action on decision, the I.R.S. agreed with the Tax Court and disagreed with the Sixth Circuit. Since there was no conflict in circuits, no petition for certiorari was filed. But the I.R.S. said that while the Sixth Circuit's decision should be followed there, the Tax Court opinion should be followed in other circuits because the I.R.S. hopes to develop a conflict in circuits.169

c. In J.H. Scott, et al v. United States,170 the district court relied on

Mellon Bank, N.A. v. United States,171 held and the Fourth Circuit affirmed that because Virginia law did not require a trustee to consult a financial adviser, a trustee could meet the prudent investor standard even if he invested the entire trust in United States Savings Bonds. Thus, the O=Neill 172 case was

168 O'Neill v. Commissioner, 994 F.2d 302 at 304, 93-1 U.S.T.C. & 50,332 71 A.F.T.R. 2d 93-2052 (6th Cir. 1993), rvg. 98 T.C. 227 (1992).

169 AOD/CC-1994-06 (Sep. 12, 1994).

170 J.H. Scott, et al v. United States, 2002-1 U.S.T.C. & 50.364 (E.D. Va. 2002), aff. 328 F.3d 132, 2003-1 USTC ¶50,428, 71 A.F.T.F. 2d 93-2052 (4th Cir. 2003).

171 Mellon Bank, N.A. v. United States, 265 F.3rd 1275, 2001-2 U.S.T.C. & 50,621 (Fed. Cir. 2001).

172 Supra, note 170.

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distinguished, based on this unique point of Virginia law. The investment fees paid by the trustees, who were also the income beneficiaries, for the services of a financial adviser to assist in financial planning were subject to the 2% rule. They could not show that the investment fees were only incurred because the property was held in the trust.

d. William L. Rudkin Testamentary Trust, Michael J. Knight, Trustee

v. Commissioner173, again raised in the Tax Court whether investment advisory fees paid by a trust would be fully deductible or be subject to the 2% rule. The instrument gave authority to

“invest and reinvest . . . any trust . . . in such manner as . . . [the trustee] may deem advisable without being restricted to investments of the character authorized by law for the investment of estate or trust funds [and] to employ such agents, experts and counsel [deemed] . . . advisable in connection with the administration and management of my . . . trust . . . and to delete discretionary powers to or rely upon information or advice furnished by such agents, experts and counsel.

e. The Commissioner allowed only a deduction of the amount of investment fees exceeding 2% of the trust’s adjusted gross income. The Tax Court pointed out that section 67(e)(1)’s

“exception allowing for deduction of trust expenditures without regard to the 2-percent floor where . . . (1) [t]he costs are . . . in connection with administration . . . and (2) . . . would not have been incurred if the property were not held in trust. Otherwise, deductibility is limited to the extent it would be for individual taxpayers.”

f. The Tax Court concluded that its interpretation in O’Neill v.

Commissioner174 and that of two courts of appeal in the Scott175 and Mellon Bank,176 cases remained sound, rejecting the concepts

173 Rudkin v. Commissioner;124 T.C. 304 (2004), affd., Docket No. 05-5151 (2d Cir. 2006). 174 O’Neill v. Commissioner, 98 T.C. at 230-231, rvs’d 994 F.2d 302 (6th Cir. 1993). 175 Scott v. United States, 328 F.3d 132 at 139-140 (4th Cir. 2003). 176 Mellon Bank, N.A. v. United States, 265 F.3d 1275, at 1280-1281 (Fed. Cir. 2001).

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argued by the trustee. Thus, the deduction was only available to the extent it exceeded 2% of the trustee’s adjusted gross income under section 67(a).

g. The Tax Court rejected the trustee’s argument that while an

individual may make a voluntary and personal choice to seek investment advice, fiduciary duties render such professional advice a necessary and involuntary component of trust administration.

h. Since “individuals allegedly ‘commonly incur’ investment

management fees, the fees are subject to the 2-percent floor on miscellaneous itemized deductions.

“Even worse, fees that are subject to the 2-percent floor are also subject to the alternative minimum tax, which means that they are entirely added back for the alternative minimum tax calculation.

“Accordingly, the Rudkin Trust lost its entire deduction for

investment management fees because it was already in the alternative minimum tax trap before the government disallowed its investment management fees.

*** “[Thus] we now have three (and perhaps as many as four,

depending on how you read the cases) different judicially articulated standards for the ‘ordinary common meaning’ of this ‘clear and unambiguous’ statute, all without (the ostensible) resort to the legislative history.

*** “In construing the statue to allow only costs that individuals are

incapable of incurring outside of a trust, the 2nd Circuit was forced to decide that ‘such trust’ in prong 2 refers back several phrases in the statute to ‘a generic trust’ rather than the ‘such trust’ that actually incurred the cost. They found it necessary to do this in order to extract a simple ‘objective determination of whether the particular cost is one that is peculiar to trusts and one that individuals are incapable of incurring.

*** “It appears that the 2nd Circuit has disallowed expenses that even

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the I.R.S. had heretofore agreed are fully deductible. Form 1041 currently allows a full deduction to ‘Attorney, Accountant, and Return Preparer Fees’ on line 14. Yet, individuals regularly incur these expenses. Are attorney and accountant fees still fully deductible under the 2nd Circuit’s holding in Rudkin?

Individuals regularly incur these types of expenses. Will the I.R.S.

agree with the 2nd Circuit and rewrite their Forms 1041 in time for next year’s filing season?177

i. Under the Golsen rule,178 the Tax Court was not bound by the

Sixth Circuit’s reversal of its O’Neill decision. Thus, another conflict has been created, this time with the Second, Fourth and Federal Circuits in conflict with the Sixth Circuit’s O’Neill179

decision. It is up to the losing taxpayer in Rudkin to decide whether to petition the United States Supreme Court for certiorari.

8. Controversy continues

a. Notwithstanding the above authorities to the contrary, the above expenses and others, if they "would not have been incurred if the property were not held" by a fiduciary, should not only be deductible in full on a trust's or estate's income tax return, but also on the return of beneficiaries receiving distributions from a terminating trust or estate, which report passed through section 67(e) expenses.

b. A suggested way of coping with the problem is to have the

fiduciary retain the investment adviser and pay the latter, increasing its own fee accordingly.

c. Where investment advisory expenses are incurred by a limited

partnership, of which the principal owner is a trust or estate, an analogous argument applies, at least where the fiduciary is the general partner or, in other respects, can control the partnership policy. For protection from surcharge, unless he is a qualified investment advisor, he must incur investment counsel fees.

(1) Legal, accounting, bookkeeping and other similar related

expenses incurred by such a partnership, and shown on the 177 Comments by Carol A. Cantrell in Steve Leimberg’s Estate Planning Email Newsletter #1041, http://www.leimbergservices.com (Oct. 19, 2006). 178 Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d. 445 F.2d 985 (10th Cir. 1971). 179 Supra, notie 174.

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latter's K-1, may be subject to the two percent rule (governing miscellaneous deductions) when passed through to individuals. They should not be so limited when passed through to an estate or trust, under ' 67(e).

(2) The estate's or trust's Form 1041 lines 12 and 14 are the

appropriate places to deduct fiduciary (line 12) and legal and accounting fees (line 14). Such fees passed through from a partnership should be deductible on these lines, rather than being reported on line 15b, as other expenses subject to the two percent rule and thus subject to the latter.

(3) Investment counsel fees should, under the O'Neill case,

supra, also be passed through in full to the trust, to be reported on line 15a, as deductions not subject to the two percent rule floor. At least this should be the case if the partnership is a limited one controlled by a trust, either because the trust has a majority interest in it or where its trustee is the general partner or both.

(4) The O'Neill doctrine should be broad enough to permit the

full deductibility of an estate's or trust's allocable share of a limited partnership's investment counsel fee.180

L. Effect on the Marital and Charitable Deduction of Charging Administration

Expenses Against Estate Accounting Income

The payment of administration expenses from post-mortem income does not reduce the marital and charitable deductions if the fiduciary's discretion to pay administration expense from income is not "a material" limitation on the spouse's right to receive income; thus, charging such expenses to income does not require reduction of the marital deduction. Commissioner v. Hubert,181 held that no reduction in the estate tax marital or charitable deductions was required although administration expenses were charged to estate income, since the discretion conferred on the fiduciaries to pay administration expenses from income was not a "material limitation" on the surviving spouse's (or the charity's) right to receive income.

180 Paragraphs K8 (2) (3) and (4) are from Berall, "The Two Percent Limitation of Miscellaneous Deductions Rule Should Not Apply to Investment Advisory Expenses of Estates and Trusts, Including their Allocable Share of Limited Partnerships' Expenses," Connecticut Bar Association Tax Newsletter 4 (July 1997). For a thoughtful analysis of the conflicting cases concerning how much authority the Internal Revenue Service has to question the deductibility of fees and commissions, see Horn, "Setting and Deducting Fees in an Estates Practice," 24 U. of Miami (Heckerling) Inst. On Estate Planning 3-34, &303.1 (1990). For a very recent article, see Janes, Fiduciary Administrative Expenses: How Much is Deductible? 32 Est. Plan. 21 (Nov. 2005). 181 Commissioner v. Hubert, 520 U.S. 93, 117 S.Ct. 1124, 97-1 U.S.T.C. & 60,261 (Sup. Ct. 1997).

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1. Basic Plan

The theory here was to enable the estate to obtain the benefit of an income tax deduction where, due to the availability of the marital and/or charitable deductions, there was little or no immediate economic benefit for an estate tax deduction for these expenses, without risking a corresponding dollar for dollar reduction in the marital deduction.

2. The majority of the Supreme Court could not agree on the rationale

Of the four opinions (two of them dissents), Justice Kennedy's plurality opinion (four justices) construed the fiduciary's discretion to pay administration expenses from income not to be a "material limitation" on the right to income. It is unclear from this opinion just how "materiality" is to be evaluated. Justice O'Connor's concurring opinion, joined by Justice Souter and Thomas, noted that in two rulings the IRS had conceded that some financial burdens on spouse's income interest would not reduce the marital deduction, that the IRS had the burden of proof on materiality and could clear up this issue by promulgating a regulation clarifying the consequences resulting from paying administration expenses from income.

3. Analysis of the Hubert Opinions

There is now a confusing and unsatisfying set of standards for deciding whether a fiduciary should charge administration expenses to income rather than principal in a given case. To do so, the fiduciary must be authorized by the governing instrument, with that authority consistent with local law. However, whether a particular amount of administration expense would be considered "material" and thus cause a reduction in the marital deduction cannot be predicted for certainty.

4. Hubert Regulations

Treas. Reg. ' 20.2056(b)-4(d) was amended182 subsequent to the Hubert183 decision, following Justice O=Connor=s suggestion in the latter. These 1999 Hubert regulations amendments deal with the effect of administration expenses in valuing the marital deduction. They give the following guidance:

a. Estate management expenses are those incurred in connection with

182 Treasury Decision 8846 (Dec. 2, 1999).

183 Supra, note 131.

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investing, preserving or maintaining estate assets during a reasonable period of administration, such as investment advisory fees, stock brokerage commissions, custodial fees and interest.

b. Estate transmission expenses are those that would not have been

incurred but for the decedent=s death and the consequent necessity of collecting his assets, paying his debts and taxes and distributing his property to his beneficiaries. They include any administration expense that is not a management expense, such as executor commissions and attorney fees (except to the extent of those specifically related to investment, preservation or maintenance of the assets), probate fees, construction expense proceedings, defending against will contests and appraisal fees.

c. In determining the marital deduction, the marital shares= value is to

be reduced by estate transmission expenses paid from the marital share, but shall not be reduced by the amount of estate management expenses attributable to and paid from the marital share. However, to avoid a double deduction, section 2056(b)(9) requires reduction of the allowable marital deduction by the amount of any such management expenses that are deducted on the 706.

d. In determining the marital deduction, the value of the marital share

is further reduced by the amount of estate management expenses paid from the marital share, but attributable to a property interest not includible therein.

e. There are 7 examples illustrating the application of the Hubert

regulations applicable to estates of decedents dying after December 2, 1999.

5. Effect of the Hubert Regulations on the Charitable Deduction

Treas. Regs. ' 20.2055-3(b) contains a similar division of administration expenses into management and transmission expenses and their effects in determining the charitable deduction, but only has one example. 184

6. Drafting suggestions

a. Consider giving the fiduciary discretion to allocate expenses against income or principal or whether to mandate payment of administration expenses from income.

184 Applies to estates of decedents dying after December 2, 1999.

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b. Also consider the use of a "savings clause" which would require

that the income account be reimbursed from principal if payment of administration expenses from income causes a reduction in the allowable marital deduction.

7. Covey's Aggressive Position

Richard Covey suggests that an aggressive estate planner might attempt to increase the size of the credit shelter disposition by adding to the credit shelter funding formula the words "an amount equal to the administration expenses paid from income." (In such case, the amount of administration expenses will be claimed as estate tax deductions on Form 706 rather than income tax deductions on Form 1041). Assuming that administration expenses are not material, the marital deduction would not be reduced and the size of the credit shelter trust could thus be increased without estate tax.185

M. Accountants' Fees

Rules similar to those applicable to attorney fees apply to the deductibility of accountant fees.

N. Miscellaneous Expenses

Those “[m]iscellaneous administration expenses necessarily incurred in preserving and distributing the estate are deductible. These expenses include appraiser's and accountant's fees [whose deductibility is subject to rules similar to those applicable to attorney's fees], certain court costs, and costs of storing or maintaining assets of the estate.”

O. Selling Expenses

Selling expenses “are deductible only if the sale is necessary to pay the decedent's debts, the expenses of administration, or taxes, or to preserve the estate or carry out distribution.”186

P. Expenses for Beneficiaries are Not Deductible 185 See Practical Drafting, July 1997, pgs. 4887-4888. Portions of the material on Hubert are paraphrased from an outline, ANuts, Bolts and Cutting Edge of Fiduciary Income Taxes,@ by George L. Cushing, Esq. of Boston, Massachusetts.

186 The materials on miscellaneous and selling expenses are quoted from Form 706's Instructions for Schedule J on page 24 of the August 2005 form itself, for deaths in 2005. They should be reproduced without change in the 2006 instructions for 2006 deaths.

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Expenses not essential to estate settlement, but incurred for benefit of individuals are not deductible.187

XII. CONCLUSION

Compliance with applicable state law and the Internal Revenue Code is necessary to determine the extent of deductibility of fiduciary and attorneys’ fees of estates and trusts. However, in the absence of statutory fees or any other uniform method for determining the fee for serving as attorney for a fiduciary or for the latter’s commission, these general guidelines can be supplemented by whatever value the attorney believes his services added to the estate in saving taxes or obtaining higher prices at auctions or otherwise disposing of property. Both attorneys’ fees and fiduciary commissions must be based on the reasonable value of the services performed. Different hourly rates should be used for work of varying degrees of difficulty. Keeping the client informed throughout estate administration is quite important. Then, prior to filing any account in court, a copy of it should be sent to all the residuary beneficiaries to try to obtain their approval. If they approve and applicable law permits, the judge should be requested that no one be required to appear at the hearing. But, ultimately fees must be approved by the probate judge. While inter vivos trusts are not normally under probate court supervision nor do they require a court accounting, the trustee and his attorney should nonetheless observe the above mentioned practices followed by probate estates in determining the trustee’s and legal fees.

187 Treas. Reg. ' 20.2053-3(a).

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APPENDIX A REQUEST FOR APPROVAL OF ACCOUNT TO THE COURT OF PROBATE FOR THE DISTRICT OF [ ] RE: ESTATE OF [ ], OF [ ], CONNECTICUT

A final administration account will be presented to the Court for acceptance. I, the undersigned, an interested person in the estate, hereby represent that I have been given a copy of the final account and:

1. Have read and understand the account;

2. Have had any questions I may have had about the account answered;

3. Have no objection to any of the fees charged by the executor or the attorneys;

4. Whether or not I am an attorney, I understand that I have the right to retain counsel to advise me regarding this account;

5. Waive notice of the hearing on the account;

6. Do not intend to attend the Probate Court hearing nor have an attorney attend to represent me;

7. Request the Court to accept and approve the account; and

8. Request the Court to waive a formal hearing on the account.

Dated at __________, Connecticut this _____day of [ ], 2006.

_____________________________

Signature

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APPENDIX B

REQUEST THAT NO APPEARANCE BE REQUESTED AT PROBATE HEARING ON AN ACCOUNT188

[date]

The Honorable Judge ________________Probate Court

Re: Estate of Dear Judge :

Enclosed are:

1. The Return and List of Claims;

2. The Final Account for the above estate;

3. An affidavit explaining the services justifying the attorneys' fees claimed and our complete time and service records kept during this estate administration; [such an affidavit and records are ordinarily not needed] and

4. Requests from [insert number of] beneficiaries indicating that they have looked

over the account, have no objections to it and do not plan to appear either in person or by attorney at the hearing.

As you can see by these requests, the beneficiaries do not object to our fees.

Under the circumstances, I respectfully request that our firm not be required to appear, so

as to save time and costs.

Very truly yours,

Frank S. Berall FSB/jnd Enclosures

188 This is the author’s own form.