Death and Taxes - The Blog

Florida Estate Planners Acting as Fiduciaries

This article talks about the Florida bar and how it might attempt to tighten professional responsibility laws as they relate to estate planners.  The problem in a nutshell:

Florida Supreme Court rules prohibit lawyers from being named as beneficiaries in the wills they draft for clients. But nothing stops them from being designated as personal representative or trustee. As the personal representative or trustee, an attorney stands to earn significant fees.

Illinois attorneys also aren't prohibited from being designated as a fiduciary, but the stakes are higher in Florida because of the state's ridiculous fee schedule for personal representatives (Florida's term for an executor or administrator). 

Florida law offers a sliding scale for fees of personal representatives -- ranging from 3 percent of the first $1 million in probate estate assets to 1.5 percent of everything above $10 million. The fee can rise to 6 percent if a lawyer agrees to serve as both a personal representative and counsel to the estate, according to trust and estate lawyers.

My own feeling -- which I've discussed before, here -- is that I would prefer not to act as a fiduciary for my clients, and will do so only if the client (1) initiates the request, (2) doesn't really have other options and (3) understands why it might be a bad idea.

From a client perspective, I'd think about this:

What time is it when your estate planning attorney asks to be appointed as trustee or executor in your documents?

Time to find a new estate planning attorney.

Fees for Real Estate Closings, Part 3: My Fees

STATEMENT OF FEES

As of May 15, 2005, I will charge clients for residential real estate matters as follows:

Part 1: For Purchasers of Real Estate

I charge for my actual time spent, at a rate of $200 per hour.  (See Part 3 below regarding how I bill for actual time spent.)

Part 2: For Sellers of Real Estate

I bill for my actual time spent, at a rate of $200 per hour.  (See Part 3 below regarding how I bill for actual time spent.)  However, I treat any commission I receive as attorney agent for a title insurance company (see yesterday's post) as a credit against my fees.  To take an example:

• I work for 10 hours representing a seller, so my fee is $2,000.
• I receive a commission of $850 from the title company for acting as attorney agent in the purchase of title insurance on behalf of the seller.
• Therefore, I am owed $1,150 (or $2,000 less $850) by the seller for attorney's fees at closing.

Part 3: Actual Time Spent - Billing Rules

I realize that billing for actual time spent can cause some concern for clients.  I try my best to address this concern by adhering to the following billing rules:

1. The smallest increment of time for which I charge is .25 of an hour, and I don't charge for a portion of .25 of an hour.  Instead of computing my time on a daily basis, I add up all of the minutes worked on your matter, and at the end of the representation, I charge based on those total minutes (again, without charging for a portion of .25 of an hour).  Another example:

I work 500 minutes on your matter, which amounts to 8 hours and 20 minutes.  You will be charged for 8.25 hours of my time (not 8.50 hours), so my fee will be $1,650.

2. Upon request, I am happy to provide estimates of my fees at each stage of the transaction, and to then follow up with the client by reviewing my actual time spent at each stage.  For instance, I might give a quote of 2.50 hours for my initial review of the contract and the negotiation of attorney modification and inspection issues.  Once this stage of the process is complete, I will follow up with the client and let him or her know (a) how much time I actually spent on this stage, and (b) if my actual time spent was more than or less than 2.50 hours, why this was the case.

3. In order to promote certainty, all closings will be deemed to take up 2.0 hours of my time.  This enables me to let my clients know the final amount of my fees prior to closing.  For what it's worth, I estimate that a "typical" closing actually takes about 2-1/2 hours, which doesn't include travel time.

Part 4: Retainers and Time of Payment

I don't require the payment of a retainer in order to represent the purchaser or seller of real estate.  I expect payment of my attorney's fees at the closing, with two exceptions: (a) if I perform work on a deal that subsequently is terminated (because the contract becomes null and void or because one of the parties defaults), I expect payment upon such termination; and (b) when I represent a purchaser or seller of new construction, where the time period between the negotiation of the contract and the closing may be a year or more, I expect payment for work performed in the negotiation of the contract when such negotiation is completed.

Part 5: Billing Rationale

1. I believe that my experience and legal abilities in the area of residential real estate provide my clients with real value.

2. My time is an important asset of my practice.  I am happy to spend as much time as is needed to compete a client's real estate transaction so long as I am compensated for doing so.

3. I realize that other Chicago-area attorneys may charge lower fees for residential real estate transactions than I do.  I believe that I offer a different level of service from many of these attorneys, and I believe that this level of service is appropriate for a major life transaction like the purchase or sale of real estate.  For instance, I will...

-review all aspects of the transaction with my client, in as much detail as the client wants, with a particular focus on costs, important dates and documents;

-handle the transaction by myself, so that my clients know their legal work is being performed by me (and not by some legal assistant or secretary); and

-make myself available for client questions and concerns.  When a client calls my office, I answer the phone (or if I'm not in the office, I return the call a.s.a.p.); when a client e-mails me, I respond as quickly as I can.

4. As yesterday's post indicated, I feel somewhat ambivalent about receiving a commission for acting as attorney agent for a title insurance company.  I believe that Part 2 discussed above addresses the attorney agent issue in a way that is fair to me and to my clients:

    a. Part 2 removes the potential conflict of interest in obtaining title insurance on behalf of a     client.  To use the above example of 10 hours spent representing a seller: the seller will pay a total of $2,000 for title insurance and attorney's fees regardless of whether the title insurance cost was $1,000 or $800.

    b. Part 2 also puts the focus on work I have actually performed, which seems appropriate to me.  It has always struck me as strange that a lawyer could be paid $500 for 10+ hours of attorney work and then receive $800 or more for 10 minutes spent filling out and faxing in an order for title insurance.

Fees for Real Estate Closings, Part 2: Title Insurance and Attorney Agents

I've spent a lot of time thinking about the issue of attorneys fees for real estate closings.  Tomorrow, I hope to explain how much I charge clients for these closings, and why I handle fees the way that I do.

But first, I think I need to talk about title insurance, and the role of the attorney as agent for a title insurance company.  Every residential real estate contract that I have ever seen requires the seller of real estate to provide evidence of clear title to the buyer, in the form of what's called an owner's title insurance policy.  This makes sense -- buyers need to know what they are buying.  Title insurance protects against what I call "Brooklyn Bridge" situations, where someone tries to sell you property that they don't own.  It also protects buyers from acquiring title to what may be considered "problem" property (property that is subject to mechanic's liens, property with unpaid taxes, etc.). 

Because owner's title insurance is purchased by the seller for the buyer, the seller's attorney arranges for the purchase of this insurance.  In most cases, the seller's attorney will purchase this insurance through a title company with which the attorney is affiliated.  In return for sending business to the title company, the affiliated attorney (a.k.a. "attorney agent") gets a commission.  If you have ever purchased a home, this shouldn't be a surprise to you -- you probably received a disclosure of the seller's attorney's arrangement with the title company (if any) at closing, or maybe even before.

The cost of title insurance (and the attorney agent's commission) is based on the sales price of the property -- the higher the sales price, the higher the title insurance cost.  Here are some examples from Chicago Title's latest Schedule of Rates:

$200,000 sales price: $870.00 for owner's title insurance

$400,000 sales price: $1,170.00 for owner's title insurance

$600,000 sales price: $1,470.00 for owner's title insurance

The attorney agent's commission will usually be close to (but a little bit less than) the cost of the owner's title insurance.  (My understanding is that the title company makes most of its money elsewhere, such as by acting as escrow agent for the buyer and seller at the closing.)

Is it unfair for an attorney to act as attorney agent? I think the answer to that question is "maybe."  Most real estate attorneys would tell you that the title insurance commissions allow them to keep their attorney's fees low.  It's fairly common to see attorneys charging a $500 fixed fee to represent the seller of residential real estate, and I think it's likely that, if attorneys stopped receiving a commission for title insurance work, this $500 figure would rise quite a bit.

However, the real question is this: does title insurance create a conflict of interest for the seller's attorney?  I think it can.  Not all title insurance companies charge the same fees for the same amounts of coverage, so an attorney agent may be tempted to align himself or herself with the company charging the highest fees (since higher fees mean higher commissions).  I've always felt that attorneys are important to the real estate transaction process because they are (or should be) working only for the benefit of their clients.  Does the attorney agent role work to undermine this?

Fees for Real Estate Closings, Part 1: An Introduction

Setting fees is a tricky business for any attorney in the real estate business.  Is it possible to be fair to both yourself and your client? 

There are two main ways in which a real estate attorney can charge for his or her services:

1. Fixed fee (e.g. "I will charge $500 to represent you in the sale of your home")

2. Hourly rate (e.g. "I will charge $200 for every hour I spend to represent you in the sale of your home")

Each of the above ways of charging has its good and bad points.

Fixed Fee

A fixed fee provides clients with cost certainty, but fixing a fee is also an inexact process.  If a "typical" real estate deal turns messy or complicated (or if the client is very demanding), then the attorney's fixed fee may be insufficient to compensate him or her for time spent on the deal.  On the other hand, if the deal comes off without a hitch, then the client may have overpaid. 

I'd estimate that a "typical" real estate deal -- from start to finish -- involves 5-7 hours of time for the buyer's attorney, and 7-10 hours of time for the seller's attorney.  (The extra time spent by the seller's attorney comes at the stage where the closing documents -- deed, bill of sale, title commitment, survey, etc. -- are prepared or ordered.)  Yet fixed fees are typically set very low -- my unscientific survey of Oak Park real estate attorneys reveals an average fixed fee of between $400 and $550 for representing a seller and $400 for representing a buyer.  (These fees would probably be higher for atypical deals, such as those involving new construction or "for sale by owner" properties.)

How can real estate attorneys keep their fixed fees so low for real estate transactions?  I think there are three reasons:

1. Sellers of real estate must purchase title insurance for their buyers, and a seller's attorney may obtain this insurance from a title company with which the attorney has a relationship.  If this is the case, then the attorney will receive a second payment (from the title company) at closing.

2. An attorney may treat real estate deals as "loss leaders," charging a low fee (and, presumably, doing a good job) in an attempt to encourage the client to use his or her services again in the future (or to recommend the attorney to friends and acquaintances).

3. The attorney may devote little actual time to the client's matter.  I suspect that many high-volume real estate attorneys -- who may handle 500 or more closings per year -- use this approach.  The attorney deals with the client initially and at the closing, but the attorney's assistant (secretary or paralegal) handles all other aspects of the deal (such as preparing the closing documents and even taking client telephone calls).  This can be an efficient way to run a law practice, but it also runs the risk of creating a disincentive for the attorney to interact with the client and devote sufficient time to the client's deal. 

Hourly Rate

Charging by the hour is the traditional method by which attorneys have sought to be paid.  The idea is that an attorney's primary value comes from the application of his or her skill to a specific matter.  As a result, if an attorney charging an hourly rate of $200 devotes 5 hours to your deal, then the attorney should be paid $1,000.

On its face, the hourly rate approach seems fair, since the client is paying for the attorney's actual time spent, rather than paying a fixed fee based on a estimate of time to be spent.  However, many members of the general public dislike being charged an hourly rate, for reasons having to do with uncertainty and the feeling that the attorney may be taking advantage.  This "taking advantage" can be either because the attorney is devoting too much time to the client's matter, or because the attorney is recording his time in an unfair manner, or both.  This latter concern stems from the fact that some attorneys bill on a quarter-hour (15-minute) basis, and may bill .25 of an hour for any amount of time they spend on a matter, even if it is only a couple of minutes.  I think clients hate to see items like this on a legal invoice:

3/10/05: Telephone conference with client regarding real estate closing (.25 hours)

3/15/05: Conference with paralegal regarding client's real estate closing (.25 hours)

Let's say that the billing rate for the above attorney is $200 per hour, and that each of the above conferences lasted 5 minutes.  The client would then be expected to pay $100 for 10 minutes of the attorney's time (thereby raising the attorney's effective billing rate to $600 per hour).

Later this week I'll discuss how I go about setting my fees for representing the seller or buyer of real estate.