If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. Of course, if a surviving parent lives with the minor children (and has custody over them) he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.
Estate Planning FAQ
When someone passes away, his or her property must somehow pass to another person. In the United States, any competent adult has the right to choose the manner in which his or her assets are distributed after his or her passing. (The main exception to this general rule involves what is called a spousal right of election which disallows the complete disinheritance of a spouse in most states.) A proper estate plan also involves strategies to minimize potential estate taxes and settlement costs as well as to coordinate what would happen with your home, your investments, your business, your life insurance, your employee benefits (such as a 401K plan), and other property in the event of death or disability. On the personal side, a good estate plan should include directions to carry out your wishes regarding health care matters, so that if you ever are unable to give the directions yourself, someone you know and trust can do that for you.
Sadly, many individuals don’t engage in formal estate planning because they don’t think that they have “a lot of assets” or mistakenly believe that their assets will be automatically shared among their children upon their passing. If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death or incapacity. This often results in the wrong people getting your assets as well as higher estate taxes.
If you pass away without establishing an estate plan, your estate would undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.
Your estate is simply everything that you own, anywhere in the world, including:
- Your home or any other real estate that you own
- Your business
- Your share of any joint accounts
- The full value of your retirement accounts
- Any life insurance policies that you own
- Any property owned by a trust, over which you have a significant control
A comprehensive estate plan should include the following documents, prepared by an attorney based on in-depth counseling which takes into account your particular family and financial situation:
A Living Trust can be used to hold legal title to and provide a mechanism to manage your property. You (and your spouse) are the Trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor Trustees to carry out your instructions in case of death or incapacity. Unlike a will, a trust usually becomes effective immediately after incapacity or death. Your Living Trust is “revocable” which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fact that it will avoid or minimize the expense, delays and publicity associated with probate.
If you have a Living Trust-based estate plan, you also need a pour-over will. For those with minor children, the nomination of a guardian must be set forth in a will. The other major function of a pour-over will is that it allows the executor to transfer any assets owned by the decedent into the decedent’s trust so that they are distributed according to its terms.
A Will, also referred to as a Last Will and Testament, is primarily designed to transfer your assets according to your wishes. A Will also typically names someone to be your Executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a Guardian as well as alternate Guardians in case your first choice is unable or unwilling to serve. A Will only becomes effective upon your death, and after it is admitted by a probate court.
A Durable Power of Attorney for Property allows you to carry on your financial affairs in the event that you become disabled. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.
There are generally two types of durable powers of attorney: a present durable power of attorney in which the power is immediately transferred to your agent (also known as your attorney in fact); and a springing or future durable power of attorney that only comes into effect upon your subsequent disability as determined by your doctor. Anyone can be designated, most commonly your spouse or domestic partner, a trusted family member, or friend. Appointing a power of attorney assures that your wishes are carried out exactly as you want them, allows you to decide who will make decisions for you, and is effective immediately upon subsequent disability.
The law allows you to appoint someone you trust to decide about medical treatment options if you lose the ability to decide for yourself. You can do this by using a Durable Power of Attorney for Health Care or Health Care Proxy where you designate the person or persons to make such decisions on your behalf. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent’s decisions as if they were your own.
A Living Will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment. In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.
Some medical providers have refused to release information, even to spouses and adult children authorized by durable medical powers of attorney, on the grounds that the 1996 Health Insurance Portability and Accountability Act, or HIPAA, prohibits such releases. In addition to the above documents, you should also sign a HIPAA authorization form that allows the release of medical information to your agents, your successor trustees, your family and other people whom you designate.
When drafting your estate plan, one of the most important decisions you will make is the selection of the personal representative for your estate and trust. This may seem like a very simple decision; many people will choose their spouse or oldest child by default, but there are many factors that you should consider before choosing your fiduciary(ies).
1. Financially savvy
Your fiduciary will be responsible for marshalling your assets, valuing them, and then distributing the assets to your beneficiaries. You fiduciary will also be responsible for paying any debts of your estate, including any bills associated with your funeral, burial, and last illness. The fiduciary will have to be comfortable being responsible for large amounts of money and know how to responsibly manage those assets. Your fiduciary will be responsible for managing and selling and/or distributing your real property, cash, stocks and bonds, brokerage accounts, and your life insurance and retirement accounts if your estate or trust is the named beneficiary. If you named your estate or trust as the beneficiary of your retirement plans, you need an executor who is cautious and prudent and who will immediately liquidate and distribute the plan assets upon your death but rather consult with a professional tax advisor on how to make distributions from the plan in a fashion that incur the smallest payment of income taxes.
If your fiduciary is managing the assets in a trust, he or she needs to be someone who can responsibly manage the funds of the trust so that the funds are available to the beneficiaries for many years or based on his or her life expectancy. Even if the fiduciary hires someone to manage the funds in the trust, he or she still must oversee the management of the funds as he or she is responsible to the beneficiaries of the trust for the funds.
2. Common Sense
As important as being financially savvy is knowing when you are in over your head and knowing to hire an attorney and other advisors for assistance. Many fiduciaries will need to hire an attorney or accountant to prepare your final income tax returns, your estate income and death tax returns, and for assistance preparing an accounting of the estate for your beneficiaries. Furthermore, if you have a large estate or trust, your fiduciary will likely need to retain someone to professionally manage the funds unless he or she has extensive experience managing and investing large sums of money.
3. Time and Availability
Your fiduciary will be required to devote a significant amount of his/her time to managing your estate and/or trust. For an estate, the first few months are the period which will require the most time from your executor. He/she will have to sort through your residence, safe deposit box, office and computers to find all documentation relating to your assets and debts and then sort through all of these documents, which can be a very lengthy process. Depending on how you bequeath your personal property, your executor will also have to go through all the items in your house so that the personal property can be divided among your beneficiaries or sold and added to your residuary estate. Another task that can require significant time from your executor is paying for the expenses of your funeral, burial, and final illness and dealing with the insurance company if there are any issues regarding coverage for those final expenses. Your executor will also have to get appraisals for your real property and any tangible personal property of significant value.
Appointing someone as trustee is asking them to make a significant time commitment and should be discussed with him/her before you name them in your trust document. A trustee will potentially have to serve for ten, twenty, or more years and must be willing to make such a time commitment. Furthermore, when picking a trustee who may have to serve for so long, you should pick someone who will live long enough to be able to perform his or her duties and you should also have at least one back up trustee if your first trustee dies or becomes incapacitated before the trust has terminated.
4. Emotionally capable
Your fiduciary must be capable of making sound decisions when confronted with difficult emotional situations. For your executor, you should pick someone who you believe will be able to act on behalf of your estate in the months following your death. Dealing with the loss of your presence in his or her life can be an emotionally trying time for your loved ones and if you believe someone will be particularly debilitated by your death, that person may not be a wise choice for your executor. Not only will he or she have to mourn you but he or she will also have to deal with the additional stress of administering your estate and dealing with the beneficiaries of your estate.
Both your executor and your trustee will need to have a strong constitution for dealing with the beneficiaries of your estate. Your executor will have to handle complaints from the beneficiaries about how long it is taking to administer your estate and demands for an advance and/or final distributions from the estate. Even if your estate administration is proceeding smoothly and on schedule, there will invariably be one beneficiary who will complain repeatedly about what he or she mistakenly perceives to be long delays and cause your executor additional stress. Your executor will also have to deal with disputes among the beneficiaries about who will receive certain tangible, sentimental personal property in your estate, such as articles of jewelry, or disputes about who will receive real property as his or her distribution from your estate if all the beneficiaries want a certain parcel of real property you owned.
Your trustee will also have to be emotionally capable of dealing with the demands of the trust beneficiaries over the life of the trust. A trustee must be able to say ‘no’ to requests from a the beneficiary for additional distributions if the trustee does not feel it would be a responsible use of the funds, either because it would deplete the trust too quickly or because such a distribution would not comport with your intentions for the trust. If the trustee also has a close personal relationship with a beneficiary, he or she might not feel like they can say “no” to the beneficiary’s demands without ruining the personal relationship.
5. Family Conflicts
You should be cognizant of the potential for conflict among your family members when choosing your fiduciary. Will one of your children feel slighted if you do not choose him/her? Do some of your children not get along? If you plan on selecting a family member to act as a fiduciary, be sure to pick someone who gets along with all of the beneficiaries of your estate or trust. You may think that your children get along sufficiently well that there will not be problems, but be aware that the dynamics of their relationship can change when one person is given more power than the others, when there is a large sum of money being handled by that one child or when the patriarch is no longer alive to control or check any sibling disputes. Moreover, emotions will be heightened in the period after your death and perceived slights can easily be blown of proportion.
6. Corporate Fiduciaries
Many of the potential issues discussed above can be avoided through the use of a corporate fiduciary. If you have a large estate, it might be wise to name a corporate executor or trustee above or along with an individual executor or trustee to assist with meeting all the requirements of serving as a fiduciary. The fees that must be paid to a corporate fiduciary may seem expensive; however, your corporate fiduciary will have significantly more expertise serving as a fiduciary than most individual executors or trustees. Moreover, the corporate fiduciary’s fees are normally balanced against the additional income an appreciation received from the professional management of your assets. A corporate fiduciary will have the resources and expertise to actively monitor and manage the assets of the estate and trust and can make prudent and professional investment decisions as issues arise.
An advantage of using a corporate fiduciary is the knowledge that your estate and/or trust will be professionally managed after your passing and that the needs of your spouse and children will be met. A corporate fiduciary will work with your beneficiaries to assess their needs and come up with an investment plan that is tailored to meet the needs of the individual beneficiaries.
As mentioned previously, your fiduciary will have to devote a significant amount of time to managing your estate and/or trust. A corporate fiduciary will have access to the accountants, lawyers, and other professionals to aid them in managing the funds, preparing the necessary tax returns each year, and handling requests from the beneficiaries for distributions. On top of all the record keeping that the fiduciary must do for the trust or estate, he or she will also stay current on changes in the tax code and estate and trust law. As a corporate fiduciary is in the business of being a fiduciary you can be sure they will be up to date and your estate or trust will be managed according to the current laws.
Finally, using a corporate trustee will ensure that you have a fiduciary who will be able to serve for the entire duration of your estate and/or trust. This is especially important for a trustee as the trust can last for several decades depending on the distribution scheme you have decided on and an individual trustee might not be willing or able to commit to serving for such a long period of time. A corporate trustee will be able to meet your beneficiaries’ needs and provide continuity in administration.
7. Use of Co-Fiduciaries
If you do think there is potential for family conflict, it may be advisable to name co-executors and co-trustees so that the spouse or child you name does not have to deal with the brunt of the complaints and dissension among the other beneficiaries. If your spouse is one of the trustees and you also name an independent corporate or individual trustee, your spouse might feel less pressure to accede to the demands of your children for unreasonable distributions from the trust. It is not unheard of for children to threaten or imply that the surviving spouse will not see their grandchildren anymore unless they agree to the child’s demand for a distribution that your spouse does not think is prudent or wise. Many children will immediately try to get their hands on their future inheritance and are not above using threats, explicit or implied, to do so. An independent corporate or individual fiduciary will save your spouse from having to deal with the stress of such demands because he or she can simply tell the child that it is out of her hands as the independent trustee has vetoed the request.
Naming a corporate co-fiduciary is another way to relieve your individual fiduciary from the stress of administering an estate or trust. The corporate fiduciary will be impartial when handling disputes among the beneficiaries and when responding to requests from the beneficiaries for additional distributions. The corporate fiduciary will not have the bias or knowledge of family drama that an individual fiduciary might be influenced by. Instead, it will make decisions based on the governing document, i.e. the will or trust, and the status of the estate or trust assets to be sure that the most prudent decision is made.
An experienced estate planning attorney should be consulted for all questions or concerns about creating an estate plan that fits your needs.
Just as with your life plan, business plan and your health, an estate plan is not something that can be addressed once, placed in a time capsule and ignored until your death. It is something that needs to be addressed periodically as important choices that were once desired may not now be so desirable due to changing circumstances. If there was a change in circumstances in any of the following life events, it is important to have an estate plan “check-up” to re-evaluate your plan to assure that the right individuals or institutions are administering your estate and the welfare and security of your family members are taken care of after your death:
- Change in health, life, or relationship with a fiduciary: A fiduciary is the person or institution who you appointed to administer your affairs either in the event of your disability or incapacity or after your death. Your may have originally chosen a spouse, child, sibling, friend or institution. This person may now be terminally ill with months to live, may have passed away, may now be in a different station of life and unable to manage your affairs, your once great relationship with him could have withered away or the institution has merged three different times since your choice was made. It is important to re-evaluate your choice of fiduciary to ensure you can trust this person and that they are still alive and/or competent to manage your affairs.
- Change in health, life or relationship with a beneficiary: Additionally, your beneficiaries may have a change in circumstances. Whereas your children may have been 10 and 15 years old when you wrote your current Will, these same children may be now married with children. One may be financially well off not needing the support you originally provided while the other may need such support if he chose a less lucrative but respected career such as teaching, serving in the armed forces, law enforcement or works for a non-for-profit entity. Additionally, the youngest child may acquired a drug addiction through his teen years where you may want to place restrictions on his inheritance to ensure your money does not feed, aid or foster such addiction. Further, both of your children may be financially secure where you may now want to provide a scholarship or fellowship at your alma matter. Thus, it is important to re-evaluate and be secure that your assets are being distributed to the right beneficiaries after your death.
- Change in your life: Your life may have changed. Things you once thought were important are not anymore. You may now spend most of your time in Florida, California or Arizona, away from your original home. You are living a new life. You may have wanted 100% of your assets for the support of your children and your children are now grown and financially secured. Therefore, you want to focus on giving back to the community through gifts or a charitable foundation. In other words, if a number of years have passed, you may have merely readjusted your priorities.
- New people in your life: You may have new people in your life that were not there before. You may now have a new significant other, new stepchildren, new grandchildren or a new niece or nephew you are extremely close to. It is important to consider whether or not you desire to include new beneficiaries within your estate plan.
- Change in wealth: A change in your life could be a great financial fortune or misfortune. An estate plan for $300,000 is going to look completely different than an estate plan for $30 million. At $300,000, your assets would be used to support your spouse or children. At $30 million, your spouse and children can be taken care of but you may desire establishing a charitable foundation and would certainly need federal estate tax planning. Also, previously, 80% of your $30 million may have been tied up in a closely held family business causing liquidity issues whereas now the business has been sold and it is invested in more liquid investment accounts. Any change in wealth and form of wealth will greatly affect your plan.
- Change in estate plan rules: If it has been a couple of years since you have addressed your estate plan, the federal estate tax rules changed substantially between 2009 and 2013. Further, there are constant IRS revenue rulings and tax court rulings that could affect your plan. It is important to re-examine your plan in relation to such rule changes.
- Amnesia: If you simply forgot the specific details of your plan such as whether your son John gets $35,000 or $375,000, your children get 25% or 95% of your estate in trust or outright at death or forgot at what age your children can withdraw principal from his/her trust or whether your wife and first son, or wife and daughter or what trust company will administer your estate or trust, it is time to refresh and re-evaluate. You do not want to die thinking you left your loved ones one thing, but in reality you left another.
Life is not static but constantly changing as good and bad events happen, you meet new people, people grow older, and the regulatory/tax environment is constantly changing. Estate plans are made given the situation at hand during drafting, but as things change, they need to be revisited periodically to ensure they are still current to meet your goals now and meet the needs of both yourself and your future heirs.
An unexpected catastrophic lawsuit against you or one of your family members has the potential to be financially devastating if the other party is awarded a judgment that exceeds your liability insurance coverage. For instance, in the case of automobile insurance, often times the normal coverage is $250,000 per person injured but only $500,000 overall. If the injured party in such a case learns that you have other significant assets, he may not be willing to settle for the policy limits and may be able to obtain a judgment for millions of dollars if they have suffered serious or catastrophic injuries. If this happened, you or your estate would be forced to pay the excess amount of the judgment from your personal assets. If the judgment is for several million dollars you may not even have enough left to retire comfortably, let alone having enough for estate planning to provide for your loved ones’ well being after your demise.
An umbrella policy can protect against unexpected large settlements or judgments against you in a host of situations that could threaten you net worth, future income and comfortable lifestyle. Options for umbrella policy coverage include automobile insurance, watercraft insurance, property damage, international coverage for instances abroad when home and auto policies do not provide coverage, uninsured/underinsured liability coverage, employment practices liability protection, director’s and officer’s coverage, defense counsel, retention of shadow private defense counsel to monitor the insurance company’s defense counsel, or public relations firm costs to protect your reputation.
Typically, the minimum amount of coverage should at least equal to your current net worth. It is especially important that your umbrella policy kick in exactly where your auto or homeowner’s policy ends or you will be forced to pay the difference from your own personal assets. The price for this additional insurance is relatively small compared to the significant estate/retirement planning protection it offers. The typical yearly cost from some insurers could be as low as $383.00 for $1 million in coverage for a client with one house, two cars and two drivers.
An experienced business or estate planning attorney should be consulted for all questions or concerns about how an umbrella liability insurance policy can be used as an estate protection tool.
For most Americans, the Federal Estate Tax will not be a concern at the time of their passing. The current amount that can be given by a person at death free of federal estate taxes is
$5,430,000 and for a married couple, this totals $10,860,000. Any amount that exceeds the exemption is taxed at a maximum federal rate of 40%. However, if you live in one of the nineteen states with an Estate or Inheritance tax, you may want to consider becoming domiciled in that state without either of these death taxes.
STATE DEATH TAXES
States that have no estate or inheritance tax at all include: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.
Tennessee’s estate tax will be phased out in 2016 and Maryland and New York will eventually have their estate tax exemptions mirror the federal exemption, which is scheduled to occur in 2019. Iowa, Nebraska, and Kentucky have only inheritance taxes which can range from 0% to 18% depending on who the bequest is made to.
New Jersey has arguably the harshest estate and inheritance tax regime in the entire country. For estates that exceed $675,000, estate tax must be paid and the rate can range from 0.8% to 16% depending on the size of the estate. Additionally, an inheritance tax must be paid based on the class of beneficiaries you have bequeathed your estate to. For example, children, parents, and spouses are exempt from inheritance tax but transfers to almost everyone else are subject to inheritance tax ranging from 11% to 16%.
Pennsylvania no longer has an estate tax but imposes an Inheritance Tax on transfers to everyone except your spouse. Transfers to lineal descendants (children and grandchildren) are subject to 4.5% tax, siblings are taxed at 12% and everyone else is subject to a 15% inheritance tax rate.
Even if you have an estate that will not be subject to the Federal Estate Tax, you could still save a considerable amount of your estate for your beneficiaries by considering being domiciled in a state where there are no death taxes, such as Florida. If you have a $5,000,000 net estate in Pennsylvania and you leave everything to your children, your death tax bill will be approximately $225,000 and that same estate in New Jersey would pay close to $290,000 in death taxes. If you think your estate will have to pay significant state estate or inheritance taxes, you may want to consider being domiciled in a state with no death taxes, especially if you have a winter home in the southern United States.
ESTABLISHING NEW DOMICILE
Almost every state in the southern half of the United States has neither estate nor inheritance tax so establishing one of those states as your legal domicile may result in significant tax savings for your estate. A person can be a resident of several states if they have homes in several states but you can only have one legal domicile. The key is making sure that you meet all the requirements for legally changing your domicile. It is not as simple as buying a house in Florida and spending a few months there each winter.
INTENT TO ESTABLISH NEW DOMICILE
You must have an honest and bona-fide intent to establish a new domicile and give up the other state as your legal domicile. Generally, a domicile is characterized as the place where you intend to make your permanent home and the place where you intend to return to after you have been absent. However, your desire to change your domicile can be for any number of reasons and still qualify as legal intent to create a new domicile. Reasons such as health, business, pleasure, better climate, better laws, or for any other reason whatsoever are sufficient reasons to desire to establish a new domicile. Regardless of why you are choosing to change your domicile, the burden of proof will be upon you or your estate if your new domicile status is challenged.
EVIDENCE OF INTENT TO ESTABLISH NEW DOMICILE
There are several steps that you should take in order to legally establish a new domicile. You should first establish a permanent residence in your new home state, for instance, Florida. If you own the home you live in Pennsylvania or New Jersey it is also recommended that you should own your home in Florida. Renting an apartment may make it seem like you do not intend to permanently move to Florida. One change to consider is selling the family home in Pennsylvania or New Jersey and downsizing to a smaller home in that state. You do not want it to seem like your Florida home is actually your winter vacation home because it is so much smaller in size than the home you are maintaining in your old state.
If you plan to split your time between the new and old state, you will need to avoid the appearance of intent to continue having your old state as your permanent home. Part of establishing domicile in Florida will be acquiring a new permanent residence there but you also must spend the “majority” of the year there. When assessing whether a person is domiciled in one state or another, tax auditors will always look at the number of days spent in a state. Most states operate under the rule that you are domiciled in their state if you are there for more than 183 days in a year. If you think you will be spending close to half the year in each state, you should keep a detailed calendar of when you arrived in and departed from each state as many states will consider any time spent in their state as a full day toward the 183 days necessary to tax you as a domiciliary of that state. If you are traveling from one state to another frequently, you should also keep records of your travel such as airline reservations or toll receipts.
After securing a residence in Florida you should obtain a Florida declaration of domicile, a Florida homestead exemption and a Florida drivers license. You should also be sure to name Florida as your domicile in your Will, Trust, Durable Power of Attorney and Health Care Proxy. Other records that support your domicile status in Florida include:
- Voter Registration Cards;
- Vehicle and Boat Registrations;
- Obtaining memberships in clubs, charitable organizations, and religious institutions in Florida and discontinuing affiliations in the old state;
- Transferring all bank accounts and safe deposit boxes to Florida;
- File income taxes and personal property taxes in Florida;
- Change to non-resident status for tax returns filed in old state for income still earned there;
- Transfer all professional licenses;
- Find medical providers in Florida;
- License pets in Florida;
- Change credit cards to Florida address;
- Affiliate with a church or temple in Florida; and,
- Change all document such as passports.
You may also want to consider having family and social gatherings in Florida and transferring all your valuable items of artwork and furniture to your home in Florida. Furthermore, if part of your decision to move to Florida permanently is for health reasons, you may want to have your physician document that he has given you that advice.
Making all these changes will work in your favor if you are ever challenged on your new domicile on your income tax return or if your Estate has to file an Estate or Inheritance Tax return for property retained in the state of your former domicile. It is more likely that your domicile status will be challenged on an income tax return filed during your lifetime as the old state will likely want to continue taxing all your income instead of just the income earned in that state. If you successfully overcome a challenge to your domicile during your lifetime, you will also likely prevail if there is a challenge on the taxability of your estate as your estate will be able to show that you have been filing income tax returns as a resident of Florida for several years.
If you are concerned about the estate or inheritance taxes in the state where you currently live, an experienced estate planning attorney can help you dete1mine how a move to a new state could affect your estate and reduce death taxes and how to establish domicile in your new state.
Traditionally, there are three parties involved when a trust is created: 1) the grantor, who is the party transferring the property; 2) the trustee, who is the person holding legal title and managing the property; and, 3) the beneficiary, the person for whose benefit the property is being held and managed. Ideally, those are the only parties necessary to the administration of the trust. However, unforeseen circumstances during the administration of the trust can cause problems that cannot be solved without court intervention. To avoid the time and expense associated with such a solution, an alternative is to appoint a party to act as Trust Protector when the trust is created so that certain issues can be resolved without the time and expense of court intervention.
A Trust Protector is a party who is not a trustee but who has certain enumerated powers over the trust. These powers can be numerous or very limited depending on what you, as the grantor, want your Trust Protector to be able to do. One of the most crucial powers given to a Trust Protector is the power to remove or add beneficiaries to a trust or change the nature of a beneficiary interest. Giving your Trust Protector this power can ensure that your trust benefits your family members in the way you desire even as your family dynamic changes over the years. For instance, additional beneficiaries can be added as new children, grandchildren, or great grandchildren are born or adopted. Your Trust Protector can also limit a beneficiary’s interest or remove him entirely in the event the beneficiary is being sued, develops a drug or gambling addiction, is under duress, mentally incompetent or is unable to manage his/her affairs or goes through a messy divorce to prevent the funds in the trust from being used for a purpose you never intended.
If you have a revocable trust, you are able to make changes to that trust during your lifetime and a Trust Protector is not necessary at that time. Once you die your trust becomes irrevocable and cannot be changed except by court approval or agreement between all beneficiaries and trustees. This is when having a trust protector is most useful. Your Trust Protector should be someone who knows your wishes and knows how you would have wanted to act if you were there yourself. If more grandchildren are born or the financial situation or financial stability of part of your family changes after your death, your Trust Protector can step in to ensure that these factors are taken into consideration prior to your beneficiaries receiving distributions from the Trust.
Other common powers that are given to a trust protector include changing trustees of the trust, amending the trust to take into account changes in the law, deciding disputes between beneficiaries and/or trustees, vetoing investment decisions, and terminating the trust. The powers that are given to a Trust Protector should be carefully considered because if you give him too much power he will be treated as a trustee.
An experienced estate planning attorney should be consulted for all questions or concerns about how a Trust Protector could be added to your Trust.
It may seem distastefully morbid to even discuss buying a life insurance policy on the life of your minor child but depending on a number of factors, it may be a wise decision to purchase such a policy.
Loss of Income Associated with the Death of a Child
The most important reason for purchasing life insurance on the life of a minor child that many people would not consider right away is the lost wages for time off from work and for counseling. If one of your children died, you would probably need to take time off from work for some length of time, from a couple weeks to months, depending on how you are able to cope with such a loss. If your child was ill for an extended period of time, you might not have any remaining paid time off from work and therefore would have no source of income while you deal with the loss of your child. This is especially true if you are self employed or work for a small business that offers limited vacation or sick time that can be used while you grieve.
Furthermore, most people would need counseling after the loss of a child. Depending on the coverage offered through your insurance provider, you may have to pay a large portion of these costs from your own resources.
If you are unprepared to incur such a loss of income and would prefer not to take out new debts to pay the loss of income, a life insurance policy can be a relatively low cost solution to the financial toll associated with such a loss.
Ensuring Future Insurability
Another factor that should be considered when evaluating whether you should purchase life insurance for your child is ensuring future insurability. Generally, if you buy a whole life insurance policy for your child, he or she will have the option of purchasing additional coverage at certain points in his or her life. The benefit of this option is that the additional coverage can be purchased at the same rating class as when the policy was initially issued. This could save your child a significant amount of money in the future if he or she develops a condition that would prevent more life insurance from being bought otherwise or if he or she would only be able to purchase it for a much higher rate. While the odds of a child developing a condition that makes him or her uninsurable in the future are low, if your family has a history of health issues, such as cancer, heart problems, or diabetes, it is something that should be considered.
Cash Value of Policy
If you choose to purchase a whole life insurance policy, the policy will build tax deferred cash value as you make payments. Some policies even give their owners the option of taking an interest free loan on the cash value up to your cost basis. Depending on how much cash value has accrued, your child may choose to use the funds for payment of college tuition or to make a down payment on a house. However, if you would not otherwise purchase the life insurance policy, building cash value is probably not the best reason to do so. There are many other ways to save for college or large purchases such as a house that would offer better returns and lower fees than those associated with life insurance policies.
One of the most common uses for life insurance on the life of a child is for the payment of funeral expenses. Depending on your available cash, the $10,000 to $15,000 in expenses associated with a funeral could be a significant financial burden.
If you are considering purchasing a life insurance policy for your child, an experienced estate planning attorney can help you determine if such a policy is right for you and your family.
Estate Planning for blended families is usually required in one of three situations: 1) when one or both spouses to a marriage have children from a previous union; 2) when there are children from one spouse’s previous union and the spouses in the current marriage also have children together; and, 3) when one of your children has a spouse who has a child from a previous marriage. In each of these situations, the estate planning goals of the two spouses may not align and extra care must be taken to ensure that assets do not inadvertently pass in a way you did not intend.
Blended families often require careful planning, both before the marriage in the form of a prenuptial agreement and after the marriage in an estate plan that provides for your loved ones in the way you intended. Before you enter into a marriage that will result in one of the blended family situations mentioned above, you and your future spouse need to have an open, frank discussion about how you plan to handle your assets during your marriage and how you would like your assets to be distributed after your death.
For example, one of the most common ways that assets can pass after death in an unintended way is by the titling of property. For instance, say you and your future spouse have agreed that the majority of your pre-marital assets will pass to your children from a previous union and your new spouse will receive a smaller sum in addition to the right to live in the family home you share for the rest of his or her life; this plan can easily be derailed by jointly titling the family home or your bank and/or investment accounts in the name of both you and your spouse. In that case those assets would pass to the surviving spouse by operation of law instead of according to the plan you created in your Last Will and Testament, Trust and/or Prenuptial Agreement.
In most states, a widow/er has the right to what is known as the elective share, which is approximately thirty percent of the deceased spouse’s estate. If it is your intention to leave your entire or the majority of your estate to your children from a previous marriage, you and your future spouse should execute a prenuptial agreement wherein you each waive all rights to an elective share in each other’s estate or come to an agreement about how you will limit your rights in each other’s estate. In this situation, simple wills wherein the surviving spouse receive the entire estate and then divides the estate equally among all of your children will not adequately protect your children’s interest. Your spouse may become estranged from your children after your death and leave the entirety of his or her estate only to his or her own children, effectively disinheriting your children.
Additionally, if either of you have children from a previous marriage and plan to also have children together, you need to discuss how you want assets to pass upon the death of the first spouse. One option to consider is the creation of an irrevocable life insurance trust funded by a life insurance policy wherein the children from the previous marriage will be provided for in a way independent of the surviving spouse leaving the children from your prior marriage an inheritance.
Finally, if you have a child of your own who enters into marriage with a spouse who has children from a previous union, you may want to craft your estate plan to ensure that no portion of your estate which you leave to your child passes in such a way that the child or children of your child’s spouse from a previous marriage will be entitled to any of your assets. For instance, you could leave the portion of your estate for that child in trust and after your child’s death the distributions or beneficiary(ies) of the trust will be made only to your bloodline descendants.
As implied above, blended families present some of the most difficult, emotional and grueling estate planning issues. Unfortunately, with one of two marriages ending in divorce, with knowledge, insight and sensitivity, these issues must and can be addressed to avoid unintended, unforeseen, unplanned and inequitable results.
If you have questions about creating or updating your estate plan for your blended family, an experienced estate planning attorney should be consulted.
ABLE Accounts are tax advantaged savings accounts that can be used only by disabled individuals. A disabled individual is someone who is unable to take part in any “substantial gainful activity” due to a medically determinable condition or someone who is blind. Only one ABLE Account can be opened for a disabled individual.
ABLE Accounts are held in the name of the disabled individual but the existence of the account does not disqualify the individual for benefits such as SSI, SNAP (food stamps), and Medicaid. Eligibility for each of these programs is dependent upon the applicant having no more than $2,000 in cash or items of significant value. However, having funds in an ABLE Account will not disqualify a disabled individual from continuing to receive these government benefits as long as the funds in the ABLE Account are used only for “qualified disability expenses”.
Qualified disability expenses include any expense incurred by the disabled individual as a result of living his or her life with a disability. This can include housing, education, transportation, assistive technology and personal support services, employment training and support, healthcare costs, and funeral and burial services. As long as the funds in the ABLE Account are used solely for these qualified disability expenses, the funds in the account can grow tax free and distributions are not subject to tax. If a distribution is made from an ABLE Account and the funds are not used for qualified disability expenses, the earnings portion of the distribution will be subject to tax and a 10% penalty.
Similar to Section 529 savings plans for college expenses, each state is responsible for setting up ABLE Account programs. A maximum of $14,000 can be contributed an ABLE account each year by all participating individuals including the disabled individual and his or her family and friends. This amount will be adjusted annually for inflation. Once the account has more than $100,000 in funds, the disabled individual will become ineligible for government benefits, except for Medicaid, until the account balance has been reduced under $100,000. At the death of the disabled individual, the funds in the account can be used to pay for funeral and burial expenses. Any remaining funds must be used to pay back Medicaid for benefits received by the disabled individual after the ABLE Account was established. Once that payback is complete, the funds can be distributed according to any designated beneficiaries or rolled over to other family members who are eligible to hold ABLE Accounts.
If you have questions about using an ABLE Account to help meet the needs of a disabled individual without losing government benefits, an experienced estate planning attorney should be consulted.
HOW INCORRECT TITLING OF ACCOUNTS AND BENEFICIARY DESIGNATIONS CAN RUIN YOUR ESTATE PLAN
Regardless of whether you have executed a will or just plan to let your estate pass according to the laws of intestacy, the titling of your property and updating of your beneficiary designations can completely derail your intended plans for how your estate will be distributed after your death. Simple and unintended errors have the ability to drastically alter how your property will pass after your death, override your will and cause significant family strife and discord.
Re-titling Property for Convenience
One of the most common do-it-yourself estate planning mistakes people make is to re-title bank and brokerage accounts or real property such that one child or a trusted individual is named as a joint owner of the property. This is most often done with savings, checking and brokerage accounts for the convenience of the elderly owner when he or she has reached a point in his or her life when handling day to day finances has become too much of a burden. In most cases, this is done in lieu of executing a power of attorney and providing that document to the bank or brokerage firm. Some individuals might feel that having the power of attorney prepared is too inconvenient or expensive at that time, but when compared to the potential costs of litigation after the death of the property owner, the attorney’s fee for the cost of preparing the document is insignificant.
The problems most often arise after the death of the property owner because the property owner has inadvertently made a gift to the co-owner of the property thereby overriding his or her will. By titling the property as joint tenants, the property owner has given the person named as the co-owner of the saving, checking and brokerage accounts the right to the entire account upon his or her death. This is true even if the property owner only added the second person to the account for the convenience of having help handling his or her finances because it can be very difficult to prove that the property owner did not intend to make such a gift. The property owner’s other children who were not added as joint owners of the accounts would understandably feel slighted or angry which could result in fights among the siblings if the sibling named as a joint owner does not equally share the money or assets in the accounts with his or her siblings. This is the case in the vast majority of instances. Additionally, the costs of litigating such an issue can quickly become prohibitively expensive.
It is especially important to note that even if you do have a will which equally divides your estate among your children, if you have re-titled savings, checking or brokerage accounts to add another person as a joint owner, even for convenience sake, the property will pass to that co-owner child outside of your will by operation of law. Unless the second owner is willing to divide the money with the intended beneficiaries under your will, the only way the transfer can be challenged is in court where the aggrieved children will have the burden of proving by clear and convincing evidence that a gift to the co-owner of the accounts was not intended.
Re-titling Property as Do-It-Yourself Estate Planning
Some people engage in do-it-yourself estate planning in order to avoid having to write a will or because he or she thinks that death taxes can be avoided by titling property in joint names. Unfortunately, titling property in joint names is not an effective method to avoid death taxes and is only partially effective for the Pennsylvania Inheritance Tax. If property has been held in joint names for more than one year prior to the property owner’s death, then only the property owner’s interest in the property is subject to Pennsylvania inheritance tax. For instance, if there are two joint owners for more than one year, only fifty percent (50%) of the value of the property is taxable for Pennsylvania inheritance tax purposes. For federal estate tax purposes, one hundred (100%) percent is included in the decedent’s taxable estate. However, re-titling accounts for this purpose can have unintended consequences if the co-owner (often a child of the property owner) predeceases the original parent property owner. In that instance, the parent would be subject to Pennsylvania inheritance tax on his or her child’s one-half interest in the parent’s own property. If the property that was re-titled was a primary residence of significant value, the inheritance taxes due could be quite large.
Furthermore, this kind of do-it-yourself estate planning can cause significant issues among your intended beneficiaries if you have not evenly divided the various accounts or assets among your children. Bickering and fighting among your children can occur when the accounts each child is named on does not result in each child inheriting the same amount of money. Unless you make it clear to your children that you intend to leave certain of your children more money or assets than others, they may come to resent the child or children who are joint owners of more valuable accounts if those children are not willing to take extra steps to ensure that all of your children have received an equal share. Moreover, if you intend that your estate be divided evenly among your children, it is especially inadvisable to name only one of your children as the joint owner of your accounts with the oral instruction that he or she should share the accounts equally with his or her siblings. Although you may believe that this child would follow your wishes, you cannot really predict how that child or his spouse will act once the money or assets are titled solely in his or her name. That child may convince himself or herself that you really intended for the money or assets to pass solely to that child for any number of reasons, including all of his or her assistance to you during your later years thereby resulting in your other children being disinherited.
It is much simpler to have a will and power of attorney prepared which will serve the same function as joint titling of accounts to ensure that your executor and attorney in fact will handle your finances as you intended if you are unable to do so.
Titling Property in a Second Marriage
If you are in a second marriage and have children from a prior marriage, how your property is titled is a crucial detail that must be attended to if you do not want to disinherit the children from your first marriage. If all of your property is held in joint names with your second spouse, your property will pass by operation of law to your surviving spouse regardless of whether you made any provision for the children of your first marriage in your will. Your surviving spouse can then choose whether to leave any of that property to your children at his or her death or leave all of his or her estate including your assets to entirely different beneficiaries including to his or her own children. Therefore, it is essential that your property remain in your name alone so that your children can receive it either immediately after your death, such as through an outright bequest, or after the death of your surviving spouse, through the use of a life estate as the remainder beneficiaries of a QTIP trust.
Updating Beneficiary Designations
Another way your estate plan could potentially be derailed is by failing to update your beneficiary designations on your life insurance, retirement plans, or pay on death accounts as your situation in life changes. Beneficiary designations need to be updated after a divorce to remove your former spouse and name new beneficiaries. Although state law may provide that life insurance or retirement plan beneficiary designations or bequests in a will are revoked upon the entry of the final divorce decree, these laws do not apply to all of your beneficiary designations. Retirement plans that are governed by federal law are not required to follow such state laws and therefore the beneficiary designations on your workplace retirement plan will not be automatically revoked. Unless you are required to maintain your spouse as the designated beneficiary pursuant to a Qualified Domestic Relations Order, it is strongly advisable to name a new person or persons, including your children as your designated beneficiary. Some retirement plans provide that designations in favor of a former spouse will be automatically revoked upon the entry of the final divorce decree but you should not rely on such a provision. It is better to take the affirmative step of naming a new beneficiary in case the terms of the retirement plan are amended and the automatic revocation provision is removed.
If your estate plan utilizes a trust for your intended beneficiaries, you must be certain sure that your beneficiary designations are updated to reflect that you want the funds in your retirement plan or your life insurance policy proceeds be distributed according to the terms of the trust. The trust should be expressly named as the beneficiary instead of naming the individuals who are the beneficiaries of the trust. If your trust contemplates making gradual distributions to the beneficiaries so that the money is received over several years instead of all at once, your estate plan could be essentially meaningless if your beneficiaries instead receive hundreds of thousands of dollars immediately from a life insurance policy or retirement plan at your death. Your beneficiary designations must be updated to ensure that the other aspects of your estate plan are not unintentionally negated.
If you have questions about titling your property and updating your beneficiary designations as part of your estate plan, our experienced estate planning attorneys are here to help.
Regardless of whether you are accessing a decedent’s safe deposit box as the personal representative (the Executor or Administrator) of the decedent’s estate or as a joint owner of the safe deposit box, in Pennsylvania you must comply with certain legal requirements when accessing the safe deposit box owned by a deceased individual. There is a possibility that Pennsylvania Inheritance Tax will be due depending or attributable to the relationship of the Decedent to the person or entity who will ultimately be receiving the contents of the safe deposit box. Because of this possibility, the Pennsylvania Department of Revenue requires that an inventory of the safe deposit box must be taken, along with other procedural requirements.
Prior to the time when the safe deposit box is being inventoried, no one can enter the safe deposit box. This includes the joint owner, unless the sole surviving joint owner is the surviving spouse of the decedent. The only reason the safe deposit box may be opened prior to the inventory is to remove the decedent’s will or burial instructions. However, this must be done in the presence of a bank employee, who must then make a record of the entry into the box and provide formal notice to the Pennsylvania Department of Revenue.
If the safe deposit box was owned solely by the Decedent or jointly owned with a person other than the Decedent’s spouse, notice that the safe deposit box will be opened must be provided to the Pennsylvania Department of Revenue at least seven days prior to the date the box will be opened. It is the responsibility of the personal representative of the Estate to provide this notice by certified mail, return receipt requested even if the box was jointly owned and therefore not subject to probate. If the Decedent jointly owned the safe deposit box with a spouse then no notice is required to be given to the Pennsylvania Department of Revenue. In the notice, the personal representative must include: 1) the name of the estate; 2) the name of the person entering the box; 3) the name and address of the financial institution where the box is located; and, 4) the date and time of the intended entry of the box.
Once notice has been given to the Pennsylvania Department of Revenue, the safe deposit box can be entered and inventoried. At the time of the inventory, the personal representative must provide a copy of the notice given to the Department of Revenue to the financial institution where the box is located. Additionally, the personal representative of the estate must provide a statement to the financial institution verifying that the notice was provided to the Department of Revenue. Once the financial institution receives this notice, they are then required to permit the Personal Representative to enter and remove the contents of the box without the presence of a department or bank employee. Within twenty (20) days after entering the safe deposit box, the personal representative of the estate must complete form Rev-485, Safe Deposit Box Inventory, and mail in the form to the Department of Revenue Safe Deposit Box Unit.
If you have any questions about complying with the procedural requirements for completing an inventory of a safe deposit box, our experienced estate attorneys should be consulted.
A new law recently went into effect in Pennsylvania that will change when property is considered to be “abandoned” and required to be transferred to the Pennsylvania State Treasury. The updates to the law establish requirements for a formal, written due diligence notice to be given to property owners prior to transferring the property to the State Treasury and also modify the presumed abandonment rules for fiduciary and tax deferred retirement accounts.
Pennsylvania Unclaimed Property Law
The Pennsylvania Unclaimed Property Law created a presumption that property of a person which is in the possession, custody or control of another becomes abandoned and unclaimed after a certain period of time, unless the party holding the property can overcome the presumption of abandonment. One way to overcome the presumption is for the property holder to show records indicating that the owner of the property engaged in transactions relating to the property, contacted the property holder or showed an interest in the property in some other way. If the presumption cannot be rebutted, then the property will be deemed to be abandoned and must then be transferred to the State Treasury. The amount of time that must elapse before property will be considered abandoned ranges from one year to fifteen years depending on the type of property. Most tangible person property is presumed abandoned after one year but most other types of property are presumed to be abandoned after three years absent any evidence to the contrary.
The owner of the property will then be able to claim the property by searching on the state’s unclaimed property website. Prior to the rightful owner making a claim for the abandoned property, the Treasurer has the option of retaining possession of the property or, after a “reasonable time,” selling the property at public sale to the highest bidder. However, in the event the property is sold, the sale proceeds must be returned to the rightful owner once he or she provides evidence to the Treasurer of his or her ownership rights in the property. Not everyone whose property is transferred to the State Treasury makes a claim for the return of their property. Any property which is not return to its rightful owner is transferred to the General Fund of the Commonwealth, save for a reserve equal to twenty percent of the amount transferred to the Treasurer in the prior year to pay for any claims.
Notice to Property Owners
Pennsylvania is one of the states that require formal written due diligence notice be given to a property owner before it can be transferred from the property holder to the State Treasury. Under the new law, property holders must give notice to the property owner that, under the Pennsylvania Unclaimed Property Law, the property is required to be transferred to the state between 60 and 120 days before the property is actually transferred to the State Treasury.
The notice to the property owner must include a description of the property, a description of the property’s ownership, the value of the property to the extent known, and the information necessary to contact the property holder to prevent the property from being transferred to the State Treasurer. The notice must be sent by first class mail unless the property owner has previously agreed to receive notices by electronic mail. Until the time the property is transferred to the State Treasury, the property owner can assert their continued interest in the property and it will not have to be transferred to the State Treasury.
Presumed Abandonment Rules for Fiduciary and Retirement Accounts
Prior to the most recent update to the law, Pennsylvania law presumed that property held by a fiduciary was deemed to be abandoned unless the owner has, within five years of the property becoming payable or distributable, either: 1) increased or decreased the principal; 2) accepted payment of an interest therein; 3) corresponded with the property holder; or, 4) otherwise indicated an interest in the property. For most retirement accounts, the Pennsylvania Treasury did not treat those accounts as payable until distributions were required in order to avoid tax penalties for failure to make a minimum withdrawal but the prior law did not address Roth IRAs, which are not subject to such penalties. For such accounts, they were presumed to be abandoned three years after the property owner reached the Required Minimum Distribution (RMD) age, currently 70.5 years of age, or three years after the property owner last indicated an interest in the account. There was considerable confusion about the application of these requirements so Pennsylvania has further amended the law.
Under the new law, all types of retirement accounts are presumed to be abandoned three years after the property holder has lost contact with the property owner. However, there does not appear to be any requirement that the owner must also reach the age of RMD (i.e., April 1st after the year in which the owner turns 70 ½ ) in order for the IRA to be presumed abandoned, which was a feature of the prior law. Thus, under the new law, if a holder receives two consecutive instances of returned mail from a first class letter notice to the owner, the IRA will be escheatable three years later, assuming no contact/activity by the owner. Accordingly, the main purposes of this e-newsletter is to warn you that a lack of communication with your fiduciary retirement account holder could subject you, the owner of the retirement account, to tax penalties by virtue of an escheat distribution that will be deemed by IRS to be an early withdrawal/ distribution.
This presumption is rebutted if during that time the fiduciary IRA holder is in possession of your retirement account, you, the owner, have: 1) increased or decreased the principal in the account; 2) commenced receiving distributions; or, 3) otherwise indicated an interest in the account or plan or other property of the owner in the possession, custody or control of the owner. For instance, an IRA owner might not have any activity on his/her retirement account held with the fiduciary holder but might have engaged in transactions during the relevant time period on other accounts held with that property holder. This would be sufficient to rebut the presumption of abandonment.
A property holder is deemed to have lost contact with a property owner if mail sent to the owner by U.S. Postal Service is returned to the holder as undeliverable. If the property owner has elected to be contacted only by electronic communications, the property holder must attempt to confirm by those means that the property owner is still interested in the property.
In order to avoid having your property escheat to the State Treasury under the updates to the law, we strongly and firmly recommend periodically contacting the holders of your various accounts, especially retirement accounts, that you assume will be safe until your RMD age of 70 ½ years and making sure that each property holder has your current physical address and current email address. The contact can take one of many forms such as by phone, email, verbal contacts, communications or transactions, or by electronically logging on to your account online at least once a year, all of which the fiduciary holder takes reasonable action to verify the identity of the owner. That contact should be sufficient in Pennsylvania to protect your assets from being turned over as unclaimed property.
If you have questions about when property you are the owner or holder of is subject to Pennsylvania’s Unclaimed Property Law, our experienced attorneys can help.