Estate Planning

What is Estate Planning?

Your “estate” is another name for your property, and “estate planning” is simply planning ahead to make sure that your property passes according to your wishes about who should inherit your property. Many people think estate planning applies only to very wealthy people. Nothing is further from the truth. Regardless of how little property you own, you should plan ahead to make sure the desired people or institutions receive your property after your death.

Your estate planning decisions will be reflected in various documents. Your Will is the most fundamental document, as it selects the personal representative who will carry out your wishes and determines who will receive your “probate” property. Examples of probate property, which is distributed according to your Will, include your home (if solely in your name or held as a tenant in common), any bank accounts or securities solely in your name, your car and your jewelry and other personal effects.

Other important documents will determine the recipients of your “non-probate” property, which is property that passes outside of your Will based on decisions and transactions made during your life. Examples of non-probate property, which will be discussed in greater detail below, include a home held as joint tenants or tenants by the entireties, joint bank accounts, life insurance, annuities, IRAs, and revocable trusts.

The existence of a well-considered estate plan, most importantly a Will, can help avoid disputes among your heirs and give you the peace of mind of knowing that your final wishes will be carried out.

It is best to consult with a local attorney whose practice includes or concentrates in estate planning. You should select an individual with whom you feel comfortable and who will help you in designing a plan to suit your needs, wishes and budget. The cost of planning usually is far less than the expenses your family could incur in the future without proper planning.

Do I Need a Will?

A Will is an important legal document and the cornerstone of most estate plans. In a Will, you name a personal representative to administer your estate and direct how your property is to be distributed.

Half of all Pennsylvanians die without a Will. If you die without a will, your assets, including your home, money and other property, will be distributed to your heirs according to Pennsylvania’s “intestacy” laws. The intestacy laws were created to distribute property according to the supposed wishes of an average person, and they cannot take into account your unique situation.

Even if you are satisfied that the intestacy laws provide an appropriate distribution, you should have a Will to select a personal representative to administer your estate. The personal representative named in a Will is commonly referred to as the “executor.” The executor collects estate assets, pays the estate debts and inheritance taxes, and makes distributions to the beneficiaries you have designated in your Will. Even if all of your assets were to pass outside of probate, your estate needs to have a personal representative to file the inheritance tax return and arrange for payment of the inheritance tax.

Non-Probate Property

Your Will distributes “probate” property that you own outright but does not apply to “non-probate” property that is said to pass “outside” your Will. You need to be aware that jointly-held property, accounts held “in trust for” (“ITF”) another person, life insurance policies, annuities, IRAs and many retirement accounts and do not pass according to the provisions of your Will. Rather, these items pass by law to the survivor listed on the account or to your designated beneficiaries. Be sure these beneficiary designations are carefully reviewed when developing your estate plan.

Joint Property

People often transfer their property into joint name with family members, or even friends, with the mistaken belief that this will reduce estate administration costs, avoid probate, avoid inheritance taxes, and generally “make things easier.” While joint ownership may be appropriate in some situations, it often results in unexpected outcomes, bad feelings, and hardships. When you transfer your property so that you own it with another, you are exposing your property to the creditors of that person. There also may be income tax, federal estate and gift tax, and Pennsylvania inheritance tax issues. There are several ways of owning property jointly with another person: Tenants in Common, Tenants by the Entireties, and Joint Tenants with Right of Survivorship. You should not transfer your property into joint names with another without obtaining legal advice from an attorney who is able to explain the tax and other consequences.

Putting your home in joint names with your children is sometimes appropriate, but the risks and costs often outweigh the benefits. Adding your children to the deed is considered to be a gift, which can have adverse income tax consequences and also may prevent you from receiving Medicaid benefits it you must enter a nursing home within a few years after the gift. Once the property is in joint name, you lose control over future sale or mortgage of the property, and the property is vulnerable to claims by your children’s creditors. Hence, you consult with an attorney and give careful thought before putting your home in joint names with your children.

Titling bank accounts, CDs, and stock in joint names is easy to do, but it also could be a mistake. Banks and other financial institutions may provide forms but are not capable of advising of the potential dangers. How you end up owning your property may depend upon the forms you are given to sign by an employee who does not understand the various types of joint property or know anything about your situation.

If you want certain property to go to a particular person after your passing, you should discuss with your lawyer whether this should be done by putting the property in joint names, by passing it through the Will, or making some other arrangement in your estate plan. If your goal is to provide for the management of your affairs in the event you become incapacitated, an attorney can advise you of the merits of a general power of attorney or a revocable living trust.

Trusts

Your attorney might recommend the use of a “trust” in larger estates, estates with young beneficiaries and in situations with special circumstances. What is a trust? Some estate planners explain that a trust is like a box where you can place your property. A person places money in the box, the trust, and designates a manager, known as the “trustee,” to safeguard the contents of the box. The trustee then distributes trust assets to the beneficiaries you select, at such times and in such amounts as you direct. Of course the money is not really put in a box. The “box” is usually a brokerage account or a bank account where the funds are invested by your trustee. The rules governing investment and distribution of trust funds are controlled by a written trust document.

Trusts can have several important advantages, including professional management, protection against overspending, and possible tax advantages. They are not right for everyone’s situation, however.

Trusts can be created by Will (“testamentary” trusts) or during the life of the person creating the trust (“inter vivos” or living trusts). Living trusts and Wills that contain testamentary trusts usually cost more money to create than simple Wills because they are more complicated and must be customized for each particular situation.

A supplemental or special needs trust can be used by a parent or grandparent who wishes to set aside money for a disabled child but hesitates to do so for fear of disqualifying that child from certain government benefits. A parent or grandparent could place the money in a carefully drafted trust, designate a trustee to invest and safeguard the funds and enable the disabled child to benefit from the trust while maintaining eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI) payments.

In addition to the costs of drafting a trust, there may be continuing attorneys’ fees and trustees’ commissions over the years as a trust is administered. Many trusts must file yearly fiduciary income tax returns, requiring the cost of an accountant or attorney to help prepare and file these tax returns. When deciding whether it makes sense to create a trust, you consider whether the benefits of the trust are sufficient to justify the added costs of creating and administering the trust.

Testamentary Trusts

A testamentary trust often is used to provide asset management for family members who are not capable of managing it themselves, such as children, persons suffering from disabilities, or persons who are not good at managing money. Discretionary trusts and “income only” trusts can be written to protect spendthrift beneficiaries from squandering their inheritance through wasteful spending habits. Trusts also can be used to set aside money for designated purposes, such as for education. “Credit shelter trusts,” also called “by-pass trusts,” are commonly used to help protect large estates from federal estate taxes by taking advantage of the unified credit of the first spouse to die.

Living Trusts

Rather than creating a trust at your death through your Will, you may want to consider creating a living (“inter vivos”) trust during your life. The creator of a living trust is known as the “grantor” or “settler” of the trust. A living trust can be either revocable or irrevocable.

Irrevocable Living Trusts

When you create an irrevocable living trust, you are making a current gift and giving up control of the property you give to the trust. An irrevocable living trust may make sense if you want to reduce the size of your estate to avoid estate or inheritance taxes. An irrevocable trust can be used to make a large gift during your lifetime to someone who is not capable of managing the money, such as a child or someone suffering from a disability. An irrevocable living trust also can be used to own a life insurance policy so that the death benefits are not included in your estate. Ordinarily, though, when people think about living trusts, they have in mind revocable living trusts.

Revocable Living Trusts

A revocable living trust can be revoked or amended during your lifetime. Because you still have control over property in the trust, the trust property is still “yours” for most practical purposes (including for estate and inheritance taxes), but it has the possible advantage of being administered by the trustee outside of probate.

A revocable living trust is appropriate and may be the best choice if you own real estate in another state, such as a second home in New Jersey or Florida. If you own property in another state at your death, it ordinarily must go through separate probate administration (“ancillary probate”) in the other state. Property transferred to a revocable living trust will not be subject to ancillary probate in that other state at your death, which will save considerable cost and simplify the administration of your estate.

You also might consider a living trust for management of your assets in the event you become incapacitated. You can be the trustee of the trust so long as you are capable of managing your assets, and when you become incapacitated the successor trustee can step in to continue in your place. Asset management in the event of incapacity can be accomplished without a trust, however, at lower cost and with greater flexibility by using a well-drafted durable general power of attorney.

Many people have been led to believe that a revocable living trust should be used to avoid the supposed cost and delay of the probate system. Although this may be true in some states, the probate system in Pennsylvania is neither costly nor inefficient for the estate of a person who had a well-drafted Will.

In sum, for Pennsylvania residents who do not own property in another state, a revocable living trust generally has no substantial advantages over a properly drafted Will coupled with a durable general power of attorney. Nevertheless, in an appropriate situation, a revocable living trust can be an important part of your overall estate plan. Before preparing a living trust, you must determine whether it will be useful for your situation.

In recent years, living trust scams have become increasingly common. Promoters of such scams frequently target seniors through free seminars and mail solicitations. These promoters know that seniors are concerned about making sure their “affairs are in order” and can be susceptible to high pressure sales techniques. Living trust scam promoters emphasize the allegedly high probate fees, the delays and supposedly damaging psychological impact of the probate process, and they suggest you can avoid all of these fees and problems by using a revocable living trust. What they don't tell you is that the costs, taxes and time commitment involved in administering a trust are, in most respects, virtually identical to those involved with probating and administering an estate. Living trust scam promoters also sometimes promise, falsely, that a revocable living trust will allow you to avoid death taxes and eliminate the possibility of a challenge by disgruntled heirs.

If you are contacted by anyone trying to sell you a revocable living trust, here are some of the warning signs that may indicate that this is a scam:

• unsolicited sales visits
• use of pre-printed, “one-size-fits-all” forms
• excessive prices for the trust and related forms
• suggestion that the Living Trust is the “only document you’ll ever need” and other high-pressure sales tactics
• suggestion that “attorneys don’t want you to know this information”

Before signing any documents to create a living trust, you should get an opinion from an attorney of your own choosing. If you wish to get a low-cost second opinion from an estate planning attorney before proceeding with a living trust, call the Delaware County Bar Association Lawyers Reference Service at 610-566-6625. Tell the service representative that you would like to meet with an estate planning attorney before going forward with the preparation of a living trust to make sure that it is right for you. A half-hour consultation costs only $20. This meeting might save your money and your peace of mind by making you aware of options not mentioned by the salesperson.

Inheritance, Estate and Gift Taxes

Over the years, senior citizens have watched tax regulations at all levels grow more and more complicated. Guideline information is offered below with the advice to consult with a professional if you have questions.

Pennsylvania Inheritance Tax

Pennsylvania's Inheritance Tax is a tax imposed upon the transfer of property at the time of an individual’s death. Assets titled in the decedent’s name and real estate located within the Commonwealth of Pennsylvania are subject to the tax. Unlike the federal estate tax, there is no exclusion for small estates.

The rate of tax is determined by the relationship of the beneficiary to the decedent. Property passing to a surviving spouse or from a child under the age of 21 to a parent is not subject to tax. Transfers to a child or grandchild (or to a parent or grandparent) are taxed at 4½%, while property passing to a sibling is taxed at 12%. All other transfers are taxed at a rate of 15%. The tax must be paid within nine months of the date of death to avoid a penalty. If you pay all or part of the tax within three months of death, you will receive a 5% discount.

Federal Estate Tax

The federal government still imposes a tax “on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” Federal estate taxes apply only to very large estates. A tax credit, known as the “unified credit”, allows smaller estates to escape taxation by establishing an exemption amount that passes free of federal estate taxes.

For many years, the exemption amount was $650,000, but the Economic Growth and Tax Relief Reconciliation Act of 2001 substantially increased the exemption amount while at the same time reducing the rate of tax according to the following schedule:

For individuals dying in 2006, 2007 and 2008, the unified credit permits the first $2,000,000 of an individual’s estate to pass to heirs without having to pay federal estate tax. Although the federal estate tax has been repealed for individuals dying between January 1 and December 31, 2010, the repeal expires at the end of that year. If Congress does not renew the repeal by December 31, 2010, the estate tax will revert to the 2002 rules.

Federal estate taxation is not a concern for estates with assets below the exemption amount. For individuals with assets in excess of the exemption amount, taxes can be reduced or avoided through appropriate planning. For married couples, each spouse can take advantage of the exemption amount by creation of a "bypass trust." Estates in which combined assets are more than the exemption amount require complex planning by a professional estate planner. If you anticipate that your estate, including life insurance benefits, will be larger than $1,000,000, you should ask an estate planning attorney to consider ways of reducing exposure to the federal estate tax.

Pennsylvania Estate Tax

The Pennsylvania Estate Tax applies only when the size of the estate requires filing of a federal estate tax return. The IRS allows a state death tax credit against the federal estate tax, based on the value of the estate. If the allowable state death tax credit is greater than the amount of the Pennsylvania inheritance tax, the Department of Revenue imposes a Pennsylvania Estate Tax on the difference. This is called a “make-up” or “pick-up” tax, because it picks up revenue for the state without increasing the total amount of estate taxes.

Federal Gift Tax

The federal government also imposes a tax on gifts. The Internal Revenue Service defines a gift as any voluntary transfer of property from a donor to a donee without what is called full and adequate consideration. A gift has been made when the donor gives up control over the transferred asset. The value of a gift for federal gift tax purposes is the “fair market value” of the property transferred. Fair market value is defined as the “price which would probably be agreed upon by a seller willing to sell and a buyer willing to buy where both have knowledge of the facts.”

The amount of gift tax is based on the total amount of lifetime gifts. Under current law, which is subject to change, no tax is owed until total lifetime gifts exceed $1,000,000.

Fortunately, the federal gift tax applies only to gifts to any person in any year that exceed the annual exclusion amount. With a cost-of-living adjustment, the annual exclusion amount has just increased to $12,000. Thus, a person can make annual gifts of up to $12,000 per donee without having to file a gift tax return. For gifts in excess of $12,000 per donee, a gift tax return must be filed, but no gift tax must be paid until total lifetime gifts exceed $1,000,000.

For a married couple, the husband and wife each can take advantage of the annual exclusion. Together, they can transfer up to $24,000 to each donee (for example, $24,000 to each of their children) in any year without being subject to federal gift tax and without having to file a gift tax return.

Planning For Gifts

If you plan to make substantial gifts, important decisions need to be made about the timing of the gifts and the selection of which property to give. To make these decisions, you need to know something about federal estate and gift taxes, income taxes, estate law, real estate law and divorce law. Your first step should be to consult an attorney. Your attorney will ask you to gather copies of all federal income tax and gift tax returns, gift checks, recorded and unrecorded deeds, copies of gift letters and trust agreements. After a review of all the documents and a discussion of your goals, you will be ready to select the property to be gifted and the timing of your gifts.

You may want to consider a gift to charity. Many not-for-profit institutions have resources to aid you in making gifts, particularly in setting up a charitable gift annuity that allows you to give cash or securities while providing you with a guaranteed, lifelong income. Under certain conditions, you could enjoy a significant charitable tax deduction without incurring a capital gains tax if you give appreciated securities with a low cost basis. You should ask your attorney to help you review all of your options.

Preparing to Meet with Your Attorney

Perhaps the most difficult part of the estate planning process is overcoming procrastination and scheduling an initial consultation. For best results, you should deal with an attorney who provides estate planning services on a regular basis.

When you call to schedule your appointment, be sure to ask whether there is a fee for the initial consultation. At your first conference, be sure to ask about the total cost to have your documents prepared. Some attorneys charge for documents on a flat fee basis, while others bill at an hourly rate. In either case, reputable attorneys always discuss fees up-front at the initial consultation, and they will put the agreement in writing.

Before you visit your attorney, you can make the initial meeting more productive by writing down the following information:

• a list of your intended beneficiaries, with their names, birth dates, and addresses;
• your choice of executor and at least one alternate, with their addresses;
• a list of your substantial assets; and
• a list of any questions you have about estate planning.

With this information in hand, your attorney will be able to spend more time developing a plan with you and less time writing down basic information.

It generally is advisable to nominate one executor and an alternate rather than naming two individuals to serve as co-executors. Co-executors frequently have difficulty getting paperwork signed in a timely manner, which can delay estate administration and increase administration costs. Moreover, disagreements between co-executors can substantially increase the time and costs of administration.

In distributing your estate, you should be prepared to consider the possibility that the persons to whom you wish to leave your estate may die before you do. You may find it upsetting to plan for the possibility that you could outlive your children or even your grandchildren. Nevertheless, a thoughtful attorney will ask you to imagine these possible scenarios and to decide who should receive your property if one or more of your intended beneficiaries is not alive at your death.

If you suspect trouble in your the family or the family of a beneficiary, such as a disability, a problem with alcohol, a potential divorce or a dispute between beneficiaries, mention this to your attorney so the issues can be addressed in a way that carries out your wishes and minimizes conflict.

In listing your assets, consider both your probate and non-probate property. Bring copies of recent statements, which contain important information about the assets and their value. For life insurance, annuities, IRAs, and other such assets, make sure you know who has been designated as the beneficiary at your death.

Remember that anything you discuss with your attorney is confidential client information. While your children may accompany you to meet with your attorney, the attorney may wish to meet with you alone to preserve confidentiality and to protect against claims that your children influenced the content of the Will.

After working with you to develop your plan, your attorney will prepare the necessary documents. It is very important that you understand all papers you sign. You should ask your attorney to forward drafts for your review in advance of the meeting at which the documents will be signed.

Protecting Your Will

Keep your original Will in a secure place, such as a fire-proof box, a safe deposit box at your bank or with your attorney. (For your powers of attorney and living will, it is best to keep the originals where they will be readily accessible and not at a bank or with your attorney.) If you do not want others to know the contents of your Will or are afraid that people might tamper with or destroy your Will if they were to read it, you can leave it with your attorney or place it in a safe deposit box where its contents will be kept private. If your attorney is holding your Will, ask whether it is being held in a fireproof vault or other protected location.

In Pennsylvania, a safe deposit box is “frozen” or sealed upon death of the owner except for the limited purposes of retrieving the decedent's Will and cemetery deed. The safe deposit box is not frozen at all, however, if the co-owner of the box is the surviving spouse.

You have the right to request your original estate planning documents from your attorney at any time. The documents belong to you, not your attorney.

Updating Your Will and Estate Plan

You have the right to revoke your Will and write a new one at any time you choose, providing you have the mental capacity to do so. To make small changes to your Will, you can amend it by making a “codicil.”

If you already have a Will, take it out and re-read it. Do you understand what it says? Do you agree now with the arrangements you made earlier?

You may need to update your Will if circumstances have changed. Marriage, divorce, death, birth, asset growth, retirement, moving to a different state or a change in estate tax laws are events that may trigger the need to revise your Will. A good rule-of-thumb is to review your Will at least once every five years.

Just as you need to review your Will periodically, you should check the beneficiary designations on your life insurance and retirement accounts to make sure they are up to date. Many people select beneficiaries when purchasing a life insurance policy or opening their retirement accounts but never re-check these decisions. It is particularly important to do so as families change over the years.

Transferring Property from An Estate Or Trust

When conveying property from an Estate or Trust to the heirs or beneficiaries, or upon sale, unique issues often arise that require careful attention. Individuals involved in such matters must be aware of potential pitfalls. It is important to seek an attorney who possesses the knowledge to implement the appropriate alternatives and solutions.