The quick answer is it depends on your tax bracket, but usually, if you itemize expenses, then yes, estate planning fees can be tax deductible.
The estate tax, sometimes called the death tax, is a tax levied on the estate of a person who has recently died. It applies to the money and assets in an estate before they are dispersed to a person’s designated heirs. Only estates that reach a legally defined threshold are subject to the estate tax. The inheritance tax is different from the estate tax. The inheritance tax applies to money after it has been passed on to beneficiaries, who are responsible for paying the tax. Utah does not levy an inheritance tax. However, inheritance laws from other states may apply to you if someone from a state with an inheritance tax leaves you something. Some states for instance, have inheritance laws that apply to out-of-state inheritors. Check local laws if you inherit money or property from someone living out of state. It’s always better to check than to find out later that you should have paid a tax bill and didn’t. Utah does not have a gift tax. There is a federal gift tax exclusion of $15,000 per receiver per year. If you gift one person more than $15,000 in a year, you must report it to the IRS. The gift in excess of $15,000 will reduce your lifetime exemption of $11.18 million and your federal estate tax exemption.
Federal Estate Tax
Though Utah has no estate tax, there is still a federal estate tax to think about. If your estate is large enough, the federal government may tax your estate after you die. There is an $11.18 million exemption for the federal estate tax. The exemption increased after President Trump signed the tax bill in 2017. The exemption is portable for married couples. This means that when both spouses die, they can protect up to $22.36 million in their estate with the right legal steps.
Estate planning, like any type of financial planning, isn’t easy. Working with a financial advisor can make it easier. As you’re planning your estate, think about the end of your life as well. You may want to consider drafting a living will. A living will provides instructions for matters like medical care when you can no longer make decisions. Be sure to choose someone you trust to have power of attorney and make medical decisions on your behalf, if it comes to that. The cost of your estate plan varies with which documents you need and with the complexity of each document. These documents are the estate planner’s tools. A good estate planning attorney will recommend a combination of those tools and help you prepare a strategy to make the tools work together. Keep in mind that fees for estate planning are not just a function of the time your attorney spends drafting documents. Good estate planning attorneys use their skills, knowledge, and expertise to construct a holistic plan that will help you accomplish your unique estate planning goals. You will pay more for the work of a more experienced estate planning attorney who can provide a complex plan. If you do not need a complex plan, consider finding an attorney who focuses on plans for simpler estates.
Types of Fees for Estate Planning
Lawyers use different types of fees for different services, and the way you pay your attorney has a big impact on how much you will end up paying for your estate plan. Lawyers typically use one of three common rate structures –flat fees, the billable hour, or contingency fees.
Flat fees are used when your attorney can quickly assess your needs and know what type of estate plan you require. Your estate planning attorney can look at your financial status, family situation, and any special considerations and know what planning tools you will need. For these common cases, your attorney may offer a flat fee arrangement that is, a firm price to complete all of your estate planning work. You may be asked to pay this amount, or part of this amount, before work begins. At Ascent Law, we typically charge $2,500 flat fee for a entire estate plan including a will, trust, power of attorney, and health car directive.
A typical flat fee estate plan includes the most common estate planning tools such as:
• a simple will
• a powers of attorney for finances and property
• a power of attorney for healthcare decisions
• a living will outlining end of life decisions, and
• an appointment of guardianship for parents.
While this typical estate planning bundle, not all flat fee arrangements are identical. When agreeing to a flat fee, be sure you understand what documents and services are included in your estate plan.
For plans that don’t fit into one of those common flat fee categories, your estate planning attorney will likely charge an hourly rate for the time they spend thinking about, working on, and meeting with you about your case. When charging an hourly fee, your attorney may ask you to provide a retainer before starting work on your case. A retainer is a prepayment of fees that the attorney will draw from as they work on your case. Retainer policies vary among attorneys and law firms. Your attorney may ask for a retainer of the entire expected cost of creating your estate plan. Or, your attorney may ask for just a portion of that amount (maybe one-half) and then bill you for the rest later. Estate planning attorneys often use a billable hour if they anticipate your estate plan will require extra sophistication in planning or time coordinating with other professionals (for example, your financial planner). If your attorney cannot confidently predict the cost of your estate plan, they will charge an hourly rate that reflects their knowledge and expertise in the estate planning field. Location also factors into your attorney’s hourly rate. Generally, attorneys in metropolitan areas charge higher hourly rates than attorneys in less populated areas. Hourly rates also vary from state to state.
Estate planning attorneys typically do not use contingency fees. Contingency fee arrangements work best in cases where your attorney is trying to win you money in a lawsuit or settlement. For example, you agree to pay the attorney a portion (typically one-third) of whatever the attorney can get for you. If you get $15,000 in a settlement negotiated by your attorney, you would pay $5,000. Because estate planning isn’t adversarial, you’re not fighting another person; contingency fees don’t make sense. However, probate attorneys might use a form of contingency fee for helping you settle an estate.
Get It In Writing
No matter which type of fee arrangement your attorney uses, make sure you get it in writing! Your attorney should offer you an engagement letter that details:
• fees and payment terms
• the scope of work your attorney will do (i.e., what estate planning documents are included in your plan)
• confidentiality requirements, and
• any agreements about conflict resolution.
This is the contract between you and your attorney. If your attorney does not provide an engagement letter like this, ask for one. You and your attorney should sign the agreement before work begins.
A final factor that contributes to the cost of your estate plan is who actually performs the work. This can vary depending upon the type of lawyer or law firm you hire. If you hire a solo attorney or a small firm, your attorney typically handles much of the work on your case and will charge you their hourly rate for all the work. If you hire an attorney from a larger law firm, your attorney will typically delegate some tasks to junior attorneys, paralegals, or other staff. This is particularly true if common, formulaic documents fit your estate plan’s needs. This division of labor isn’t necessarily a bad thing for you. Junior attorneys, paralegals, and staff have hourly rates much lower than the experienced senior attorney who conducted your first meeting. Having staff complete tasks under the supervision of that senior attorney saves you money while also allowing you to take advantage of that senior attorney’s experience and knowledge. Knowing what goes into the cost of an estate plan, the question remains “So, how much?” As the above paragraphs reflect, the costs can vary widely. Some attorneys may prepare a simple will or power of attorney for as little as $150 or $200. On average, experienced attorneys may charge $250 or $350 per hour to prepare more sophisticated estate plans. You could spend several thousand dollars to work with such an attorney.
According to the IRS, legal fees for estate tax planning services may be tax deductible if they are incurred for one of the following purposes:
• The production or collection of income
• The maintenance, conservation, or management of income-producing property
• Tax advice or planning, especially regarding the determination, collection or refund of any taxes
That means if your estate plan includes advice regarding the construction of income-generating instruments (such as a trust), the legal fees related to that service are tax deductible. Another example would be advice regarding estate taxes, whether it involves forming a general strategy to minimize potential taxes, or transferring assets to avoid an inheritance tax. Outside of estate planning, there are a few other legal fees that qualify as miscellaneous deductions. These include legal fees related to:
• Performing or maintaining your job
• Tax advice or planning for a divorce
• Collection of taxable alimony
• Resolving tax issues stemming from business profits or losses
• Rent or royalties from property
• Farm income or expenses
Non-Deductible Legal Expenses
These are considered personal legal expenses because they do not directly pertain to taxes. The list includes:
• Preparation of a will, power of attorney, or medical directive
• Breach of a promise to marry suit
• Property claims or settlements from a divorce
• Custody of children
• Civil or criminal charges pertaining to a personal relationship
• Preparation or defense of a title
• Damages for personal injury
Income Taxes and Estate Taxes
While everyone is required to file a tax return with the IRS each year, only about 0.1% to 0.2% of estates are valued high enough to be subject to an inheritance tax when an individual passes away. As of 2017, individual estates with less than $5.49 million are exempt from estate taxes. Joint estates are allowed up to $11 million in assets before they are subject to the tax. The estate tax may be as high as 40%, but the average percentage is usually closer to 17%. Your attorney will provide an array of services in the course of constructing and managing your estate. As stated previously, some of these services are tax-deductible, and some are not. To itemize qualified legal expenses as miscellaneous deductions, your attorney will need to distinguish in the invoice what portion of their services is tax-related. For example, your attorney could state that 25% of their fees were for your will (non-deductible), and the remaining 75% were for income and estate tax planning. The actual percentage of your bill that is ultimately tax-deductible will vary from case to case, but it’s common for 60% to 75% of estate planning legal fees to be deductible. Keep in mind that qualified deductions are subject to the 2% miscellaneous deduction rule. Once the total deduction is calculated, the IRS will subtract 2% of your adjusted gross income (AGI) from the final figure. For example, if your miscellaneous deductions amount to 5% of your adjusted gross income, the IRS will deduct 2%, and allow you to deduct the remaining 3% from your taxable income. Many estate planning attorneys already bill separately for tax-deductible services, but it’s still a good idea to address the topic with your attorney early in the process. The best time to discuss it would be in your initial consultation, while you are evaluating the potential fit with this particular attorney. In addition to addressing the billing practices, consider asking the attorney some of the following questions to get a feel for their process.
There’s a difference between estate planning attorneys and attorneys who do estate planning. If your estate is simple and you aren’t at risk for estate taxes, then this distinction is less important. If your estate plan involves any complexities, or is large enough to put you at risk for estate taxes, then you’ll want to work with an attorney who specializes in estate planning. Look for someone who spends at least 50% of their time on estate planning, and who has complimentary experience in probate, taxes, and elder law. Many clients prefer a fixed rate over hourly billing so there is no surprise when the final invoice comes in the mail. Your attorney should be able to provide you with an estimate based on the work expected for your case. Keep in mind, however, that this is only an estimate. If any unexpected complications arise in the process, the attorney may charge additional fees to cover the extra work, so be sure to ask what the rate would be if that happens.
How Often Do You Hold Account Reviews?
The legislative landscape is liable to change over time, and chances are your situation and goals will change over the years, too. If your estate plan is simple and your personal situation doesn’t merit changes, then you should reassess your planning documents every 3–5 years. However, a good attorney should check in with you annually even if it’s just by phone or email to review your plan and address the need for any adjustments. Depending on your situation, your attorney may advise you to establish a trust as part of your estate plan. Many estate planning attorneys have an assistant or small department to assist you in transferring assets to the trust, but not all attorneys do. At a minimum, they should be able to provide you with detailed, written instructions on how to transfer assets to the trust. The process can be complex and overwhelming, though, so it’s best if they can actually help you through the process. As the executor of an estate, settling the estate’s tax liabilities is a primary responsibility. For larger estates federal estate taxes come into play. Accounting for specific types of expenses and taking advantage of allowable deductions can reduce the estate tax burden.
Outstanding Debts Left by the Deceased
Before distributing assets to heirs, the estate should pay any valid debts left by the deceased. The probate process generally establishes what debts the estate owes. The probate process varies by state, so be sure to check with a lawyer if you have questions. Executors typically use estate funds or proceeds from the sale of assets to pay outstanding debts and administrative expenses. However, if the decedent had a Trust, there may be language allowing Trust funds to be used particularly for the payment of Estate taxes and administrative expenses. Note-creditors have different deadlines to submit a claim to the Executor as determined by state law.
What expenses might qualify for the deduction?
We won’t get into all the analysis about itemized versus above-the-line deductions, but will instead focus on categories of deductible expenses. They include:
• Accountant or tax return preparer fees for estate and trust tax returns (IRS Form 1041)
• Attorney fees, for example defending against an undue influence claim
• Trustee fees (i.e., the yearly cost of professional trust management services)
• Expenses associated with management and maintenance of property
• A portion of investment advisory fees
• Fees paid to a personal representative/fiduciary to administer the estate.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506