(U.S. Naval Institute) - Military Legal Assistance attorneys should either be properly trained and permitted to draft inter-vivos trusts or exit the estate planning business entirely.
An inter-vivos trust is an essential part of almost every civilian estate plan because it can reduce taxes and fees. Military planning should be no different. This is especially true in California, given its 32 military installations—more than any other state. There are about 280,000 active-duty military personnel stationed there, along with many reservists, retirees, dependents, and other individuals eligible for military legal assistance. For every California testator (person making a will) with assets of more than $150,000, a military testamentary instrument will cause the testator’s beneficiaries to inherit less money.1 All military testamentary instruments are wills (and or testamentary trusts), as inter-vivos trusts are not permitted as part of the Marine Corps Legal Assistance Program.1 For estates exceeding certain values, varying by state, a will guarantees that a probate estate will be opened and guarantees that those fees and costs associated with probate will be paid by a decedent’s heirs.
The Problem of Inter-Vivos Trusts
Put simply, the Navy’s policy prohibiting the use of inter-vivos trusts is potentially causing servicemembers’ heirs to incur unnecessary probate fees and costs. As such, servicemembers’ heirs will inherit less than they otherwise would if legal assistance attorneys were permitted to draft inter-vivos trusts. Without more substantive knowledge of this area of the law, many judge advocates are not properly educated to advise clients of this drawback of a traditional will.
The rationale for the use of inter-vivos trusts is not complex. All practitioners should understand what a probate estate is, when probate is required, and the fees and costs associated with such court proceedings. These consequences should be explained to the client.
Exploring Probate Estate
A probate estate, the court proceeding following a person’s death, provides a formal mechanism for the administration of the decedent’s estate. Under the supervision of the court, debts of the decedent can be formally acknowledged and paid (or creditors’ claims can be adjudicated). The decedent’s assets will be marshalled, sold, distributed, or retitled to reflect the new ownership. Legatees (people who are to inherit assets) can challenge a will and have their share determined judicially should there be a dispute.
A probate estate also requires fees to be paid to various service providers, some of which can be unexpected to laypersons. In the aggregate, such fees can materially affect the amount that a legatee receives. These fees and charges include: a payment to the publisher of formal notice of the case, bonding costs, court filing fees, possible court reporter fees, the fiduciary fees payable to the personal representative or executor, possible fees payable to the public administrator, attorneys’ fees, accounting fees, and possible charges by guardians ad litem.
As a general rule, the more assets payable to or included in a probate estate, the higher the cost of administration. A probate estate consists of all assets held in the name of the deceased individual or assets payable to such individual or his or her estate. Examples of assets that could be in a person’s probate estate include: a house, car, boat, bank account, investment account and tangible personal property, such as guns or art. Retirement accounts, annuities, or insurance payable to the decedent or their estate, add to the probate estate. In California and New York (and some other states), the personal representative is paid according to a statutory schedule. In California, currently 4 percent of the first $100,000 is paid to such a fiduciary on a graduated scale. An estate of $1,000,000 generates fees of $23,000 for the personal representative alone.3 Attorneys’ fees can be substantially higher. Both the attorney and personal representative may be paid pursuant to that fee schedule, which would double those fees. Another consideration in California is that debts are not included against the value of assets. A $700,000 home with a $500,000 mortgage lien is valued by a California probate court as a $700,000 asset, potentially incurring $34,000 in probate fees.4
Reducing Fees Through Trusts
As an alternative, individuals can easily reduce their probate estate and associated fees to zero. If all an individual’s assets are transferred to a trust before the person dies, those assets would not be subject to probate. Retirement and insurance can be made payable to a loved one or a trust. With this careful and important planning, the fees and delays associated with probate could be completely avoided. Payable-on-death accounts, joint tenancy, “community property with right of survivorship,” transfer-on-death accounts, inter-vivos trusts, and multiparty accounts can also be used to avoid probate. Such titling of assets can avoid probate, its concomitant fees, maintain privacy in many cases, and avoid the inevitable delays associated with court proceedings. Estate planning that avoids probate also can—and often does—reduce the risk of estate litigation for a minimal fee. A jilted heir can challenge a will but cannot so easily challenge a lifetime transfer of funds into a payable on death account.
The Need for Proper Planning
The advantages of inter-vivos trusts are not taught at the Naval Justice School’s Basic Lawyer Course, and estate planning is not a required class in law school. Furthermore, it is not a widely offered course given the rapid increase in the exclusion amounts in the Federal Estate Tax—along with portability and other taxpayer-friendly developments over the past decade.5 Before the exemption amounts increased and portability was permitted (reducing transfer taxes to zero except for the ultra-wealthy), estate tax planning was a lucrative business in the civilian sector. The focus has shifted to income tax planning, creditor protection, and other wealth management strategies.
Complex estate planning for ultra-high net worth clients is a niche area of law, and the vast majority of servicemembers do not require creative estate planning strategies to avoid the Federal Estate Tax.6 It is precisely because servicemembers are not ultra-wealthy that Military Legal Assistance attorneys need to take the utmost care when they recommend strategies to safeguard servicemembers’ wealth. Many military members do need an inter-vivos trust to avoid probate, and this is especially true in California. Going to a Military Legal Assistance attorney for a free will in California—and elsewhere—may be penny-wise and pound-foolish. For a testator with even a modest estate, the member may be saving a few thousand dollars on a will now only to pay many thousands more at death.
There are non-financial reasons to create a will that are not addressed in this article.7 Even estate plans that contain trusts can also involve the execution of a “pour over” will, which among other things, gifts all probate assets to the decedent’s trust. Inter-vivos trusts operate during a testator’s life to remove assets from the probate process and save taxes, fiduciary fees, and in California, probate fees. They are bread and butter for even novice estate planners. If judge advocates are not permitted to provide this simple planning, a disservice is being done to clients who need it. The issue is exacerbated when judge advocates are unaware that a trust may be a better option, provided by an attorney outside the main gate. Drafting a will for a client in California who has more than $150,000 in assets at his or her passing is placing a stumbling block in front of the blind. Judge advocates practice in almost every imaginable area of law, notwithstanding their military duties.
Understandably, there would be efficiency issues if new judge advocates were trained to become experts in every area of law. Emphasis on more effective estate planning would come at the expense of other capabilities. The Marine Corps’ MCDP 1 Warfighting instructs readers to focus their combat power at the decisive point. Federal and state taxing authorities are adversaries that maneuver warfare seeks to bypass and exploit gaps in. There is plenty of low hanging fruit, such as preventative law, that judge advocates can engage and achieve meaningful effects on target. If Military Legal Assistance attorneys cannot draft trusts, perhaps they should withdraw from that battlespace entirely and allow specialists in the private bar to execute that mission so JAGs can focus more on other areas of legal assistance. If the JAG Corps cannot do that, it should at least prepare legal assistance attorneys to give informed advice to its valued clients regarding other options that may be appropriate.
1. Depending on the cost of a civilian estate plan, usually from $2,500 and up.
2. See JAGINST 5801.2B, MCO 5800.16, and the MCLAP Practice Manual.
3. California Probate Code § 10810.
4. The median home value in San Diego County is $632,000 according to Zillow.com; §10810(b), $17,000 each to the personal representative and attorney.
5. The amount of an estate that is excluded from the FET, any assets above the exclusion amount is taxable.
6. There is currently no state estate tax in California; however, a bill to levy such a tax is being considered.
7. The author is not suggesting that wills are useless or that military estate planning is ineffective, just that lawyers and military members should be aware of relevant capabilities and limitations of each COA.
By First Lieutenant Michael Held, U.S. Marine Corps
December 2021
First Lieutenant Held currently serves as the officer-in-charge of the legal assistance office at Marine Corps Air Station (MCAS) Miramar and the VITA Tax Centers at MCAS Miramar and Marine Corps Recruit Depot (MCRD) San Diego. Before joining the Marine Corps, he was an associate at Harrison & Held LLP, the largest estate planning law firm in Chicago
