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Estate Planning Considerations (click to expand)
Estate Planning Considerations
by Dana M. Breslin, Esquire and Robert J. Breslin, Jr., Esquire
BASIC ESTATE PLAN
Your basic estate plan should consist of at least the following:
1. Will – written, signed and dated declaration of how you want your assets distributed upon your death. You will name an Executor who is the person to carry out the terms of your Will. You can also set up a Trust for special circumstances and name a Trustee and/or Guardian.
2. Advanced Medical Directive (Living Will) – This is a written declaration expressing your wishes concerning life sustaining treatment in the event you are in a persistent vegetative state and/or terminal condition. You may also name a healthcare agent who will help to carry out your wishes. Effective January 29, 2007, Pennsylvania has an optional statutory Living Will document.
3. Durable Power of Attorney – written document whereby you designate an Agent who shall have the power to make financial and/or medical decisions on your behalf. Every Power of Attorney executed in Pennsylvania after December, 1992 is considered to be durable which means that it will continue in effect if you become mentally incapacitated. This avoids the expense and delay of Court proceedings in order to obtain guardianship if you become incapacitated. While the Power of Attorney is very useful, you must be careful that the person you name is someone that you trust since it can be misused by the Agent. In January of 2015, Pennsylvania law changed dramatically so you must be careful that your power of attorney document is prepared to comply with the law.
Provisions dealing with Healthcare Powers of Attorney became effective January 29, 2007. One of the most significant changes is the law now establishes default healthcare representatives for individuals lacking a Healthcare Power of Attorney with named healthcare agents. In effect, an individual lacking a Healthcare Power of Attorney with a named healthcare agent may have their healthcare decisions made by an individual other than someone the incapacitated person may desire.
4. Living Trusts – In some cases, but not all, a Living Trust is appropriate. A Trust is a legal management tool set up by a person to hold and manage assets. If it is done during your lifetime, it is an Intervivos or Living Trust. If the Trust is set up by your Will, then it becomes a Testamentary Trust. A Living Trust can be revocable meaning it can be canceled or changed at any time during your lifetime. When you set it up, you are called the Settlor or Grantor. If the Trust cannot be changed during your lifetime, then it is an Irrevocable Trust. Under the Trust, you can specify how it will terminate, usually upon your death, and who the beneficiaries will be when the Trust terminates. In this respect, it acts much like a Will. Assets in a Revocable Living Trust are taxed for death tax purposes just as assets distributed by your estate.
Probate (click to expand)
1. What is probate?
Probate is the process by which property (real estate, securities, bank accounts, etc.) of a decedent is passed to his or
her heirs. Pennsylvania has what is called simplified probate.
This means that the assets are not frozen upon death and the process can move quickly.
On your death, your Will is filed with the Register of Wills and if approved, the Executor is appointed. If you have no Will, someone is appointed to administer your estate. This person is called the Administrator. By statute, certain family members have a primary right to be appointed Administrator – spouse, children, etc.
The Executor/Administrator’s job is to “marshall” the assets of the decedent, pay outstanding bills of the decedent, funeral bills, administration expenses, etc., prepare tax returns, pay death and any other taxes and then distribute the balance of the estate to the heirs either pursuant to the Will or pursuant to the statute in the event of death without a Will (this is called intestacy).
The Executor will prepare an accounting to give to the heirs and if they approve, the assets are distributed accordingly. If the heirs object, then the Court will decide the questions and approve the final distribution.
2. How can you avoid probate?
Probate is avoided if your assets are transferable upon your death automatically such as joint ownership with right of survivorship, named beneficiaries on life insurance, IRA’s, annuity or other benefit plans, payable on death assets, and Trusts if the Trust instrument establishes distribution upon death.
3. If you avoid probate, do you avoid taxes?
Most people think that if you avoid probate, then you avoid inheritance tax or death taxes. This is not the case. The estate for probate purposes is very different than the estate for taxable purposes. The joint ownership, Revocable Living Trust, payable on death assets, etc., will all be included at least to some extent in the taxable estate for death taxes. Some people will change the title to their assets just to avoid probate without considering all the ramifications. There can be grave consequences as well as benefits. All options should be considered. Remember, you must look out after yourself first and your heirs secondly. A properly prepared estate plan can best minimize your death taxes.
4. What are the costs of probate?
There is a filing cost at the Court House. Depending on the size of this estate, this can range from $50.00 to several hundred dollars. The Executor is entitled to a commission although this
may be waived especially if it is a family member. There are legal fees if the Executor seeks legal counsel in administering the estate. The fee that the attorney charges depends on the arrangement established with the Executor. This may be a percentage of the estate, an hourly basis or a flat fee. The Executor can ask an attorney prior to retaining counsel what they will charge. The Executor does not have to go back to the attorney who drew up the Will or even the attorney named in the Will. (If an attorney is named in the Will, this is considered to be the decedent’s wish although not mandatory.)
1. Who are the cast of characters in a Trust?
A. Grantor/Settlor – this is the person who sets up the Trust.
B. Trustee – this is the person who will manage the assets and follow the terms of the Trust. The Trustee can be the Grantor/Settlor.
C. Beneficiary – this is the person who benefits from the Trust. There are different types of beneficiaries – income; current, contingent, remainder, for example.
2. When is a Trust beneficial?
A. For large estates, it is possible to reduce federal estate taxes by certain types of Trusts, such an Irrevocable Life Insurance Trust, Trust With a Charitable Remainderman, Marital Deduction Trust, etc.
B. Management of assets in case of disability. This is one of the primary advantages of a Living Trust. A person can say now who will manage their assets in the event they become mentally incapacitated and are unable to care for themselves.
3. What are the costs involved with a Trust?
There are costs to set up a Trust including legal fees, administrative expenses to change title of assets over to the Trust, administrative fees or Trustee fees in some cases, especially where a financial institution is named as Trustee, additional accountant fees since additional tax returns are due for the Trust and upon death, there will be Trustee’s fees, attorney’s fees and in most cases, inheritance taxes. In Pennsylvania, with respect to Revocable Living Trusts, the costs are almost identical to probate.
NOTE: It is critical that if a person establishes a Trust to take effect during their lifetime, then they need to transfer the assets to the Trust. This requires an actual transfer of title to the asset from the Grantor’s name to the Trustee in trust for the Grantor.
DEATH AND GIFT TAXES
1. PA Inheritance Tax
The Pennsylvania death taxes are inheritance tax and state estate tax. State estate taxes only apply to large estates and in limited circumstances. Most estates normally incur only an inheritance tax. For persons who die after June 30, 2000, the rate of tax for lineal descendants, i.e. children, grandchildren and stepchildren etc., is 4-1/2% (formerly 6%), 12% for siblings (formerly 15%) and 15% for other heirs. As of January 1, 1995, there is no Pennsylvania inheritance tax for assets passing to the surviving spouse under most circumstances.
There are now very strict rules to exempt inheritance tax for family owned business and family farms for the Pennsylvania Inheritance tax.
2. Federal Estate/Gift Taxes 2014
The estate, gift and generation skipping transfer tax exemption amount is $5 million, indexed annually for inflation from 2011 forward. The exemption amount for 2017 is $5,340,000. Assets in excess of $5,340,000 ($10,680,000 per married couple) will be subject to a 40% estate tax.
Portability of the estate tax exemption between spouses is now permanent, allowing a surviving spouse to aggregate the unused estate tax exemption of a deceased spouse with the surviving spouse’s exemption. The annual exclusion for gifts remains at $14,000 per person per donee in 2014.
WARNING: This is only general information and is in no way meant to specifically advise you. For specific legal advice, you should consult your attorney.
Dana M. Breslin, Esquire
Robert J. Breslin, Jr., Esquire
PAPPANO & BRESLIN
3305 Edgmont Ave.
Brookhaven, PA 19015