Nicholas Beetham, Business Development Manager, Title Research
Elements of the estate administration process – who pays the fees?
Generally speaking, the costs of administering an estate, as a usual part of probate practice, will be deducted from the estate as a whole. These costs are usually broken down into IHT and any other taxes payable and solicitors’ professional fees and disbursements (e.g. probate fees). Other costs associated with administering an estate might be the cost of uniting a legatee with a specific legacy – which will usually be met by the legatee (see Re: Clough-Taylor [2003] WTLR 15).
This article will address one of the disbursements occasionally appended to the solicitor’s professional fee. From time to time, the solicitor will need outside help to locate one or more missing or unknown beneficiaries. This service will have to be paid for and the question of where the cost should lie is still the subject of some debate. Although, when all is said and done, the estate will be reduced by the cost of locating the beneficiaries, the question is really as to (a) whether the costs should be based on the time taken and borne by the estate as a whole, or (b) whether each located beneficiary’s share in the estate should be reduced by a percentage (often 25-30% plus VAT) or fraction (often 1/3 plus VAT) of his share in the estate. It will be seen that the fees in the latter case are likely to be very much higher in cash terms than those in the former. The following is an attempt to describe the costing methods and assess their risks, if any, to Personal Representatives and their advisers.
Costs borne by the estate as a whole
If it is part of a PR’s duty to locate the beneficiaries to the estate and, ultimately, to account to them then the cost incurred by PRs in their capacity as PR should be borne with few exceptions by the estate as a whole. Solicitors’ costs will almost always be based on a reviewable time-and-expenses budget, estimated in advance and agreed with the PR before taking instructions and will be met by the estate. Similarly, the cost of other professional services will be quantified based on the time necessary to complete the work – and will be met by the estate.
Equally, genealogists are able to give fee estimates for any particular matter, based on the nature of the assignment and their perception of how long it will take to resolve. Their fees, too, should be met by the estate1. Many such cases are by their nature unpredictable in scope and duration. Sometimes it may be necessary to revert to the PR (or much more likely the solicitor acting) for fresh instructions and authorisation of further fees. This is more or less identical to the procedure adopted by solicitors negotiating fee extensions with their clients. Equally, should the matter be cleared up for less than the agreed budget figure, this would be reflected in the genealogist’s invoice.
1 Unless directed otherwise by the Court or, possibly, on the advice of Counsel of 10 years’ Standing
Leverage
As in a solicitors’ practice, different people in a professional genealogist’s office are charged out at different rates according to their role, skills and experience. When work is undertaken on a working budget fee basis as described above, individual tasks within the assignment are delegated to the most cost-effective competent person to complete. This way, maximum value is extracted from the authorised fee budget, to the benefit of the estate, the PRs and, ultimately, the beneficiaries.
This is a clear and transparent way of doing things and presumably PRs would be at no risk of action against themselves by hitherto missing beneficiaries who had been located at the expense of the estate as a whole, rather than having seen their share of the residue diminished by a “contingency fee”.
Costs borne by beneficiaries’ individual shares – agreed with beneficiaries
As a rule, if the costs of locating beneficiaries are to be borne by the shares in the estate ultimately due to the missing beneficiaries, the “contingency fee” method will most likely be used. This has traditionally involved the genealogist identifying and locating the beneficiary then inviting him to sign a “contingency fee” agreement such that the beneficiary’s share in the distributable estate will be divided between the heir and the genealogist who has found him. The amount payable to the genealogist is likely to range either side of 30% plus VAT of the beneficiary’s entitlement, although the writer is aware of at least one beneficiary who was strongly encouraged to sign an agreement seeking 75% of his entitlement.
This way of doing things is often attractive to the genealogist, not least because it can be extremely lucrative – the fees are a direct function of the size of the estate and unrelated to the time taken to locate the heirs. The rise in house prices over the last 10 years means that those estates which might have been modest a decade ago are now much more likely to be liable to IHT. The downside to the genealogist is limited; the only real problem he’s likely to face is where savvy heirs either negotiate aggressively on the fee, or decline to sign the “contingency fee” agreement altogether. Most, however, are happy to sign at first sight – after all 2/3 of something is very welcome, especially if the alternative is 3/3 of nothing.
Costs borne by beneficiaries’ individual shares – agreed with PRs
There is another mode of “contingency fee” charging. Rather than the genealogist having to negotiate a fee with each heir he locates (as above) it involves the genealogist contracting with the PR that, at distribution, an agreed percentage of each located beneficiary’s share will be paid to the genealogist. The effect is the same as the method described above – the difference is that the genealogist does not have to spend time negotiating fees with beneficiaries. However, as before, the fees charged bear no relation to the work done but are a reflection of the size of the estate or the value of the shares in it due to the missing beneficiaries.
The risks
However, there are considerable risks to those PRs and their advisers who choose to fund the cost of locating missing beneficiaries on either of these “contingency fee” bases. PRs and their advisers who operate this way leave themselves open to the risk of legal action from beneficiaries who have signed “contingency fee” agreements and had their entitlements diminished as a result. The genealogist and PRs will also find themselves in conflicts of interest.
The genealogist’s conflicted position (i)
Because the genealogist’s “contingency fee” is solely a function of the size of the estate or the value of the shares ultimately due to missing or unknown beneficiaries, it is (in theory at least) in the genealogist’s interest to spend as little time on research, and to find as few heirs – after the first is located - as possible on each case. The more work done and the more beneficiaries located, the less the profit on the case as a whole. The ramifications are twofold: firstly once a single heir is located and has signed the “contingency fee” agreement, the genealogist knows he will receive a fee; a part – say 30% plus VAT – of the heir’s entitlement. The question then becomes: how much will the heir receive? As more heirs are found, the more necessary it is that they all sign a “contingency fee” agreement, in order to preserve the genealogist’s fee. The more work done, the lower the profit. The more heirs that are found, but who don’t sign the fee agreement, or who negotiate the fee downwards, the less profitable the exercise becomes for the genealogist. Where is the incentive to continue work?
The genealogist’s conflicted position (ii)
Secondly, should researching a case become unprofitable, or less profitable than other, more commercially attractive cases (i.e. larger estates), the incentive for the genealogist to complete research diminishes. He might still submit his report to the PR, or to the solicitor acting, even if incomplete. How can the PR distribute with confidence?
The genealogist’s conflicted position (iii)
Most genealogists with any track record in locating missing beneficiaries are good at the job, and will usually be able to demonstrate a success rate in excess of 90%
Given their expertise and success rate, there seems little justification for charging beneficiaries a “contingency fee” when the genealogist could have located them just as easily regardless of the charging method. The cost to the genealogist of finding any particular beneficiary remains the same, regardless of how, and how much, he is paid.
The genealogist’s conflicted position (iv)
In some cases the genealogist will need to be circumspect with heirs wanting information about the size of the estate, or of their share in it, or the identity of the deceased. If the genealogist is circumvented by the heir he’s located before securing a signed “contingency fee” agreement from him, he will probably go without his fee.
However, not to provide this information not only goes against the grain of transparency in professional dealings, but also creates an imbalance between the parties – the consumer (the located heir) is necessarily in a much weaker bargaining position than the genealogist.
The genealogist’s conflicted position (v)
Furthermore, should the beneficiary not sign the “contingency fee” agreement, the genealogist might easily suggest that the heir’s details will not be presented to the PR. This places the PR in an invidious position as he may know that the heir exists, but cannot distribute to him. Sharp-eyed readers will probably have noticed the use of inverted commas around “contingency fee”. I’ve used these because this way of charging fees does not look like a true contingency fee (unencumbered with inverted commas). A true contingency fee will usually involve a litigator speculating on the outcome of a trial, or on how much an action might settle for. In missing beneficiary cases, there is no such speculation – the only uncertainty is as to whether the beneficiary will agree to sign the “contingency fee” agreement. And there is no question of “presenting the beneficiary’s claim” to the estate – the only reason the heir has been approached is because he’s entitled.
The PR’s conflicted position
A PR to an intestate estate is highly likely to be a beneficiary as well. Thus the conflict of interest: to instruct or authorise (or even condone) a genealogist to locate missing beneficiaries operating on a “contingency fee” basis will almost always mean that, because the fees will be taken from the missing heirs’ entitlements, the PR’s share of the residue will not be affected – he is not a missing beneficiary. The PR’s duty to locate the beneficiaries conflicts with his financial interest as a beneficiary himself in the funding of the costs of research. This means that the PR is conflicted out of instructing or authorising a “contingency fee” approach to locating missing beneficiaries – the costs should fall on residue.
Best practice
Given the transparent and accountable stance taken by solicitors as to their own fees, it seems strange that the costs of locating missing beneficiaries should be funded differently. Best practice and prudent risk management surely requires that all the costs associated with the administration of an estate should be clear and easy to monitor. Given the leverage of fee budgets referred to above, PRs should also realise that the cost of finding beneficiaries will almost always be lower when time is recorded and billed for than otherwise – and this will be directly reflected in the fees payable.
Nicholas Beetham
nicholas.beetham@titleresearch.com
© Title Research 2007
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