Tips for Managing Liability In Closing An Estate Administration 1

Fiduciaries use labels in different legal instruments . Thus, the fiduciary of a will is a personal representative or executor, the fiduciary of a trust is the trustee, in a power of attorney, the agent and so forth. Central to all

fiduciaries is the responsibility to faithfully employ and administer the legal instrument. The underlying policy is typically the fiduciary is making To enhance the fiduciaries‟

financial or health decisions for another.

performance, the fiduciary, absent indemnification, bears personal liability for its decisions and actions. Tip-The first step in limiting liability for a fiduciary is to retain knowledgeable and experienced counsel. The second step is to read, and then re-read, the will or trust or other legal instrument. The will or trust is the roadmap the fiduciary is obligated to follow, absent court intervention, to closing an estate administration. The third is to limit third part claims

against the estate for which the fiduciary is responsible by running the Statute of Limitations. Statute of limitations bars bar stale clams. However, death tolls the statute of limitation for causes of action accruing both before and after death. Va. Code Section 8.01-229.B 1 encourages swift qualification of the fiduciary to restart the statute.

1 " Tips for Managing Liability in Closing an Estate" prepared and presented to NBI
seminar Probate-Beyond the Basics for lawyers and accountants by Dick Mayberry, Trusts and Estates attorney in McLean, Virginia. Email Mayberry@MayberryLawFirm.com or call 703.915.1488 to contact Dick. 1

The Commissioner of Accounts Manual provides a short synopsis of the statute, Va. Code § 8.01-229.B, which the author and most lawyers find difficult to apply with certainty: "If the cause of action accrued before death, the action must be brought within the , applicable limitations period, or within one year after the qualification of the fiduciary, whichever occurs later. If the cause of action accrues after death, the action is commenced against the fiduciary before the expiration of the applicable limitation period or within two years after the qualification of the decedent‟s fiduciary, whiche ver occurs later. If there is a delay in the qualification of the fiduciary, and the delay is more than two years after the date of death and before the qualif ication, for the purposes of the statute of limitations, the fiduciary shall be deemed to have qualified on the last day of the two -year period.” Tip-When appointed fiduciary, file a written notice with the IRS using. Form 56 identifies your self as fiduciary when the EIN is secure identifying the estate as a separate taxpayer.. It notifies the IRS that, as the fiduciary, you are assuming the powers, rights, duties and privileges of the decedent, and allows the IRS to mail to you all tax notices concerning the person (or estate) you represent. The notice remains in effect until you notify the appropriate IRS office that your relationship to the estate has terminated. A. Final Accounting and Distributions 2

Since the fiduciary may bear personal responsibility if there are not sufficient estate assets to cover its debts, especially taxes, a challenging aspect of estate administration is to ensure all debts are covered prior to final distribution of estate assets. Known and unknown claims may exist against the estate in its closing. The fiduciary can bring more certainty to risk ex posure by requesting a proceeding before the Commissioner of Accounts [the "Commissioner"
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or "Commissioner of Accounts"] for a final accounting and distribution to secure its „blessing.‟ . Standing is conferred upon the fiduciary of the decedent, any creditor, legatee or distributee of a decedent . Va. Code § 64.1-1713. In assessing use of the procedure, the fiduciary

should realize it is a dual edged sword for the Commissioner of Accounts may direct the fiduciary or the claimant or either of them to institute a proceeding at law or in equity to establish the validity or invalidity of any claim or demand - irrespective of what is otherwise proved at the hearing. This mean additional costs and uncertainty of ultimate disposition. Tip-consider tactical and strategic factors prior to commencement of a final accounting and distribution. Prior to the final accounting and distribution hearing, the Commissioner of Accounts publishes notice once in a newspaper of general circulation in the county or city wherein the fiduciary qualified . At least ten days before the date fixed for the hearing the Commissioner of Accounts posts a notice of the time and place at the front door of the co urthouse of the court. The content of the notice informs claimants of the right to attend and present their case at the proceeding, the right to obtain another date if the Commissioner of Accounts finds the initial date inappropriate, and the consequence that those with claims will be bound by an adverse ruling. The fiduciary shall also provide notice to known claimants to extinguish their claim. right to file exceptions with the court in the event of an adverse ruling At the hearing, the fiduciary proffers evidence to show payment of the debt of the estate, which are called “Vouchers" and a statement of cash on hand or in a bank and all investments . Va. Code § 26-17.9.

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A copy of the endorsed check with corresponding bank statements is the most common voucher even though a receipted bill is the best evidence. The Commissioner of Accounts Manual identifies vouchers for various estate assets: 1 Real Estate .If a sale of real estate is made, a copy of the signed HUD-1 or other settlement statement, and a copy of the appraisal (or, in the absence of an appraisal, the current local real estate tax assessment); 2. Securities If a sale of securities is made through a securities dealer who provides a confirmation statement, the original st atement;2 3. Business If a sale of a closely held entity is made, the sales price must be justified by adequate documentation. 4. With regard to distributions to beneficiaries: a. Original receipts executed by legatees or distributees for tangible personal property; b. Original receipts for payment of money except as waived by Va. Code § 26-17.9, in which case the requirements of that § must be met." 5. Debt, tax and expenses paid. Copies of " a properly endorsed cancelled check, bill marked paid or receipt for each debt, tax, and expense paid except as waived by Va. Code § 26-17.9.D for corporate fiduciaries. The front side of the check and the periodic statement from the financial institution, showing check number and amount, if the copy was made in the regular course of business are preferred to the commissioner. 6. Note If a promissory note of a decedent is paid off, the signed note marked “paid.” If payment is made pursuant to the guaranty of a decedent, ward or beneficiary, a copy of the guaranty and the beneficiary; 7. Reimbursements If a party is reimbursed for any proper charge against an estate or trust, the underlying vouchers –copies of cancelled checks or receipted bills to support payment;
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8. If a check or receipt submitted as a voucher is endorsed by an attorney-in-fact, the original or a certified copy of the executed power of attorney; 9 .If payments are made to the fiduciary or guardian for a legatee or distributee, a copy of the payee‟s certificate of qualification; 10-.If payment is made pursuant to a court order, an attested copy of the order; 11. If payment or distribution is made pursuant to an assignment, a copy of the executed assignment document; 12. If an estate settlement agreement has been reached between those having an interest in an estate, a copy of the agreement; 13. If requested by the Commissioner: a. Copies of 1099 form for each security and interest bearing account; b. Copies of 1041 and 706 forms filed; c. Copies of monthly or periodic statements issued by banks or other depositories of estate funds for the period of the account; d. Copies of memoranda or computations of distribution shares funding under marital deduction formulas;

and

e. Any relevant documents that relate to assets, income, liabilities, claims against or assets of an estate or trust. 14. A memorandum setting forth a calculation of the fiduciary‟s fees and a justification for attorney‟s fees paid.

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B. The

Compensation and Discharge fiduciary may be paid "reasonable" compensation, unless

prohibited in the legal instrument, for services rendered. Va. Code § 26-30. A commission of five percent of receipts was reasonable compensation for an executor in Grandberry‟s Ex‟r v. Grandberry, (1 Va. (1 Wash.) 246 (1793). The law has not substantially changed since 1793 although the court clearly has discretion to adjust the percent depending upon various factors, such as complexity of the matter.. A substantial change occurred in 2004 when the Judicial Council of Virginia in issued its Fiduciary Fee Guidelines which are reproduced in their entirety for fiduciary fees for both estates 4 and trusts5 Tip-payment of fiduciaries encourages focus on estate administration as a job rather than family moral obligation. C. Red Flags in Preparing Final Year of Income Tax

A fiduciary (fiduciary) is responsible for filing certain tax returns for a person who has died, and for the decedent's estate. The fiduciary may be required to file the final income tax return and any returns not filed for preceding years. They also may have to file the income tax return for the estate, and the estate tax return. Consequently, the fiduciary needs to ensure the final year of the administration all tax returns have been filed with the federal government and commonwealth of Virginia. The fiduciary is responsible for filing the federal income tax return and is personally liable for payment of the tax. Treas. Reg. § 1.641(b)-2. Tip-File a Termination notice with the IRS when the estate closes. When you are relieved of your responsibilities as fiduciary, you must advise the IRS office where you filed the written notice (or Form 56) either that the estate has been terminated or that your successor has
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been appointed. Use Form 56 for the termination notice by completing the appropriate part on the form. If another person has been appointed to succeed you as the fiduciary, you should give the name and address of your successor Tip-.Request for discharge from personal liability for tax. An executor

can make a written request for discharge from personal liability for a decedent's income and gift taxes. The request must be made after the returns for those taxes are filed. It must clearly indicate that the request is for discharge from personal liability under § 6905 of the Internal Revenue Code. ...an executor is an executor or administrator that is appointed, qualified, and acting within the United States. Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. If the IRS has not notified the executor, he or she will be discharge d from personal liability at the end of the 9 -month period. Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies against the executor to the extent that he or she still has any of the deceden t's property. D. Requirements for Federal and State Tax Returns 6

The Virginia Foundation‟s Manual Estate Administration in Virginia sets for the in § 3.8 the tax filing requirements-“The fiduciary must file federal and state income tax returns for the decedent for any year in which the decedent had taxable income and for which a tax return has not been filed. This duty may require consultation with a decedent is surviving spouse to obtain necessary information and to determine whether the spouse wishes to file a joint
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return for the year of death. Demands for delinquent taxes based on audits of the decedent‟s prior tax returns may also be directed to the fiduciary. Estate Tax. For the year in which the decedent died, the fiduciary must file an estate tax return (IRS Form 706) if the value of the gross estate (less allowable deductions) exceeds the applicable exclusion amount. The applicable exclusion amount is $1,000,000 for decedents dying in the year 2002 or 2003 and is scheduled to be increased in subsequent years. Estate Income Tax A decedent‟s estate is a separate taxable entity that comes into being automatically upon the individual‟s death.
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A

fiduciary income tax return, IRS Form 1041, must be filed for income that exceeds $600 earned by the estate for each year of the estate‟s existence. This tax is distinct from the estate tax mentioned in paragraph 3.802 above, which is a “transfer tax,” generally based on the value of assets owned by an individual at death. For income tax purposes, an estate lasts as long as the period of administration or settlement actually required by the fiduciary to perform ordinary duties, such as collecting assets and paying taxes, legacies, and bequests. ” Tip-retain a CPA to handle all tax filings unless you have the capability to do so yourself. E. The Insolvent Estate under the Uniform Trust Act in Virginia

Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due the Unit ed States must be paid first, such as the decedent's federal income tax liabilities at the time of death and the estate's income tax liability.

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The fiduciary of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or had failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. The extent of such personal responsib ility is the amount of any other payments made before paying the debts due the United States, except where such other debt paid has priority over the debts due the United States. The income tax liabilities need not be formally assessed for the fiduciary to be liable if he or she was aware or should have been aware of its existence. Virginia‟s Uniform Trust Code, Va. Code Section 55 541.01 et seq. F. Terminating the Representation with Closing letters The fiduciary secure closing letters for the estate and the IRS when transfer tax liability. Tip-The fiduciary‟s counsel sends a letter terminating the

representation upon receipt of the closing letters. beneficiaries.

and copy all

In Keller v. Denny, the Virginia Supreme Court address the statute of limitations for legal services “[W]hen malpractice is claimed to have occurred during the

representation of a client by an attorney with respect to a particular undertaking or transaction, the breach of contract or duty occurs and the statute of limitations begins to run when the attorney‟s services rendered in connection with that particular undertaking or transaction have terminated, notwithstanding
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the

continuation

of

a

general

attorney-client relationship, and irrespective of the attorney‟s work on other undertakings or transactions for the same client. Keller v. Denny, 232 Va. 512, 517-18, 352 S.E.2d 327, 330 (1987).” Tip-In your engagement letter includes provisions addressing effective dates of representations and responsibility for estate files. The author includes his language in the last endnote.
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End Notes
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B. Effect of death of a party. - The death of a person entitled to bring an

action or of a person against whom an action may be brought shall toll the statute of limitations as follows: 1. Death of person entitled to bring a personal action. - If a person entitled to bring a personal action dies with no such action pending before the expiration of the limitation period for commencement thereof, then an action may be commenced by the decedent's personal rep resentative before the expiration of the limitation period including the limitation period as provided by subdivision E 3 or within one year after his qualification as personal representative, whichever occurs later. 2. Death of person against whom person al action may be brought. - a. If a person against whom a personal action may be brought dies before the commencement of such action and before the expiration of the limitation period for commencement thereof then a claim may be filed against the decedent's estate or an action may be commenced against the decedent's personal representative before the expiration of the applicable limitation

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period or within one year after the qualification of such personal representative, whichever occurs later. b. If a person against whom a personal action may be brought dies before suit papers naming such person as defendant have been filed with the court, then such suit papers may be amended to substitute the decedent's personal representative as party defendant before th e expiration of the applicable limitation period or within two years after the date such suit papers were filed with the court, whichever occurs later, and such suit papers shall be taken as properly filed. 3. Effect of death on actions for recovery of realty, or a proceeding for enforcement of certain liens relating to realty. - Upon the death of any person in whose favor or against whom an action for recovery of realty, or a proceeding for enforcement of certain liens relating to realty, may be brought, such right of action shall accrue to or against his successors in interest as provided in Article 2 (§ 8.01-236 et seq.) of this chapter. 4. Accrual of a personal cause of action against the estate of any person subsequent to such person's death. - If a personal cause of action against a decedent accrues subsequent to his death, an action may be brought against the decedent's personal representative or a claim thereon may be filed against the estate of such decedent before the expiration of the applicable limitation period or within two years after the qualification of the decedent's personal representative, whichever occurs later. 5. Accrual of a personal cause of action in favor of decedent. - If a person dies before a personal cause of action, which survives, would have accrued to him, if he had continued to live, then an action may be commenced by such decedent's personal representative before the expiration of the applicable
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limitation period or within one year after the qualification of such personal representative, whichever occurs later. 6. Delayed qualification of personal representative. - If there is an interval of more than two years between the death of any person in whose favor or against whom a cause of action has accrued or shall subsequently accrue and the qualification of such person's personal representative, such personal representative shall, for the purposes of this chapter, be deemed to have qualified on the last day of such two-year period.

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See generally .Estate Administration in Virginia© [EAV] and the

Commissioner of Accounts Manual © [COAM], and Estate Planning in Virginia© Foundation For Virginia Supreme Court estate administration forms, go to [EPV]Manuals may be purchased from the Virginia Law

www.courts.state.va.us.
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§ 64.1-171. Proceedings for receiving proof of debts by commissioner s.

Any commissioner of accounts who has for settlement the accounts of a personal representative of a decedent shall when requested to so do by a personal representative or any creditor, legatee or distributee of a decedent, or may at any other time determined by the commissioner, even though no accounting is pending, appoint a time and place for receiving proof of debts and demands against the decedent or his estate. The commissioner s hall publish notice thereof once in some newspaper of general circulation in the county or city wherein the fiduciary qualified at least ten days before the date set for the hearing. At least ten days before the date fixed for the hearing the
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commissioner shall also post a notice of the time and place at the front door of the courthouse of the court of the county or city wherein the fiduciary qualified. The fiduciary, shall give notice, in writing, to any claimant of a disputed claim known to the fiduciary at the last address of the claimant known to the fiduciary. The notice may be by regular, certified or registered mail, or by personal service at least ten days prior to the date set for hearing. The notice shall inform the claimant of his right to attend and present his case, of his right to obtain another date if the commissioner of accounts finds the initial date inappropriate, and of the fact that he will be bound by any adverse ruling. The fiduciary shall also inform the claimant of his right to file exceptions with the judge in the event of an adverse ruling. Evidence of any mailing of notice by the fiduciary shall be filed with the commissioner. The commissioner may in a case deemed appropriate to him direct the fiduciary or the claimant or either o f them to institute a proceeding at law or in equity to establish the validity or invalidity of any claim or demand, which he deems not otherwise sufficiently proved.
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GUIDELINES FOR FIDUCIARY COMPENSATION

INTRODUCTION The Judicial Council of Virginia, in establishing the Standing Committee on Commissioners of Accounts in 1993, charged the Standing Committee with promoting uniformity of practice among commissioners of accounts. Mindful of the Supreme Court‟s consistent holdings that the circumstances in e ach case determine the allowance of fiduciary compensation, the Standing Committee recommended to the Council
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for

approval

the following

Guidelines for Fiduciary Compensation in order to promote a degree of

uniformity among the Commissioners of Accounts in Virginia in their task of determining compensation to be allowed fiduciaries. The guidelines are not intended as a substitute for the analysis the Commissioner must do to determine the statutory “reasonable compensation” in each case. The Judicial Council approved the Guidelines in December 2004. DECEDENTS‟ ESTATES 1. Where the will clearly sets out compensation in a specific dollar amount or a specific percentage that the Executor is to receive, the will controls, and the Executor is entitled to the amount set out. 2.Where the will states that the Executor shall receive for services the compensation set out in a referenced published fee schedule in effect at the time such services are rendered, fees as set out in the fee schedule shall be presumed to be reasonable, as that term is used in §26 -30. The burden of persuading the Commissioner that fiduciary compensation taken according to such a fee schedule is not reasonable would be on an objecting party . The ultimate responsibility of determining the reason ableness of the

compensation rests with the Commissioner. 3. Paragraph 2. above does not apply in the case where the will is silent as to the Executor‟s compensation. In such a case, if the Executor (corporate or otherwise) uses a published fee schedule to determine compensation, the other guidelines set out herein apply. There is, however, no presumption that such a published fee schedule is not reasonable. 4. Where all parties affected by the amount of the compensation are (i) competent to contract (ii) understand the issues involved (i.e., can give
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“informed consent”) and (iii) agree in writing as to the amount of the compensation to be paid, then the agreement should be honored by the Commissioner. 5. Unless determined as set out in paragraphs 1., 2 . or 4. above, the fee to be allowed the Executor on all property in the decedent‟s probate estate (calculated on the inventory value, including amended inventories) is as follows: (a)5% of first $400,000. 4% of next $300,000. 3% of next $300,000. 2% over $1,000,000. Over $10,000,000. -by agreement with the Commissioner (prior consultation is required). AND (b)5% of income receipts (not including capital gains). 6.The value of real estate will be included as property in the decedent‟s probate estate for fee purposes only if the Executor is given the power to sell real estate and (i) is instructed to sell real estate in the will, or (ii) is requested to sell real estate by all affected beneficiaries or devisees, or (iii) is required to sell real estate to pay taxes or other charges against the estate, or (iv) the Commissioner determines that such sale is clearly in the best interest of the estate and the devisees or beneficiaries as a whole.

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7.If the Executor employs an attorney or accountant to perform duties that should be performed by the Executor, the fees of those persons should be deducted from the compensation due the Executor . Note that this does not apply to reasonable fees paid to attorneys or accountants for tax work or litigation or other legal services reasonably necessary for the orderly administration of the estate. 8.If the Executor employs an investment advisor, the advisor‟s fees, if reasonable, should generally not be deducted from the Executor‟s

compensation. 9.The Commissioner may also incre ase or decrease the otherwise allowable compensation in exceptional circumstances . Factors to be considered in

determining the compensation include the nature of the assets, the character of the work, the difficulties encountered, the time and expertise r equired, the responsibilities assumed, the risks incurred and the results obtained. A consideration of these factors could result in a decrease or an increase of the compensation that would otherwise be determined using the standards set out elsewhere in these guidelines. 10.As a general rule, an Executor is not allowed compensation based on the value of assets not includable in the probate estate. The Commissioner may allow such compensation in circumstances where it is necessary for the Executor to assume some responsibility for the asset. The Executor is advised to make separate fee arrangements with the beneficial owners of non -probate assets. 11.If, after examining these “Guidelines,” the Executor has any questions about the fee to be taken in a specifi c estate he or she should be encouraged to consult with the Commissioner in advance of taking any fee. NOTE: The
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use of the word Executor above includes all fiduciaries charged with administering decedent‟s estates. The words “fee” and “compensation” are used interchangeably.
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B. TRUSTS

With respect to Trusts, the specific guidelines for compensation are: 1. Compensation should be taken on an annual basis based on the fair market value of the trust assets (i.e., principal and undistributed income) at the beginning of the accounting period. Previously distributed income, of Where the

course, is not to be counted in determining compensation.

required accounting is for a period of less than one full year (see, for example, § 26-17.6.A.), the compensation should be pro-rated. 2.Paragraphs A. 1. through A. 4. apply as well to trusts. 3.Undistributed income and principal should be treated alike in determining the fair market value of the trust assets at the beginning of the accounting period. The fee schedule set out below applies to undistributed income and principal combined, with no compensation to be calculated on income received and distributed during the year. 4.The schedule of fees is as follows: 1% of the first $500,000. (.01) ¾ of 1% of the next $500,000. (.0075) ½ of 1% over $1,000,000. (.005) $10,000,000. or more -by agreement with the Commissioner (prior consultation is required).
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5.The guidelines set out in A. 7., 8., 9. and 11. above also apply to Trustees. In addition, the Commissioner may reduce th e allowable compensation in certain circumstances, such as where the Trustee has delegated total investment responsibility to professionals or is not making any discretionary distributions.
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see

generally,

Publication

559

(2007),

Survivors,

Executors,

and

Administrators, at http://www.irs.gov/publications/p559/index.html
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Effective Dates of our Representation My representation as your attorney

for your estate planning begins when we receive your first payment of the fee and terminates the date the plan is signed by you, or is ready to be signed by you if the plan is not signed at the delivery meeting. Retention of your Legal Files Unless you direct us otherwise today, or in writing within 3 years, we shall destroy the copy of your estate plan and other documents we prepared for you three [3] years from the date on this retainer. We shall maintain a copy of your estate plan for updating uses, provided you contact me to update your estate plan within 3 years of this retainer. To the extent we have a copy of a document and you request it in the future, we charge my prevailing hourly rate to retrieve copies of doc uments not involved in a future engagement. You are provided the signed original of your estate plan and returned all original documents you provided to us for the planning process. We do not maintain a signed original or a conforming signed copy of the in struments in your estate plan.

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You should assume any copies we may have are inadmissible or un -usable in a court of law or for any other purposes if your original estate planning instruments are lost, destroyed or otherwise unavailable when you or your family needs them at any time, including disability, medical emergency or death. We counsel you instead on safe storage techniques with a bank safe deposit box and secure file boxes to avoid lost or destroyed documents; and the use of locator lists so that fiduciaries and family members know where you stored your signed estate plan.

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