Tag Archives: estate planning

The Need for an Estate Plan

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Everyone needs an estate plan. Due to the range of decisions and situations that such a plan can cover, you shouldn’t let a lack of property or wealth keep you from addressing this. An estate plan generally includes a number of documents, and only some of these focus on transferring wealth when you die.

 

Of course, one of the essential pieces is a Last Will and Testament. This is important for certain transfers of property but also can deal with other topics, such as burial arrangements. The second essential part of your estate plan is a Durable Power of Attorney, although it basically is effective only while you are living. You could choose someone to make financial decisions or, at least, handle your financial affairs, such as paying bills, when you are unable to do these things. A Medical Power of Attorney can provide authority over some medical decisions when your medical condition prevents you from speaking for yourself.

 

A final essential element in every estate plan is commonly known as a Living Will (or Advance Directive). It permits you to make decisions regarding the medical treatment and care that you would want when you can no longer communicate your wishes and are not likely to recover in the opinion of doctors who have examined you while you have been in this condition. You could name a surrogate decision maker, but – if a decision is covered in the Living Will – you can require that your surrogate follows your wishes.

 

The need for a Power of Attorney and a Living Will may be more understandable than the need for a Will if a person has does not own much. However, your Last Will and Testament can provide valuable information, regardless of the size of your estate. You may have items that have sentimental value to family members or even a small amount of cash that you want a particular person to have after your death. A Will can be used to make your intent clear. It also can provide other information; for example, you can name the person you want to handle the necessary activities that follow a person’s death, including handling taxes and your final expenses. You also must remember that, while your Will can make your wishes clear, the necessary person has to have access to it in order for it to be effective.

 

While a Will is important in transferring ownership of property to others, an estate plan can use other methods to do this. Each possibility has positive and negative points that are best reviewed with a professional. One method is to set up a joint account with the right of survivorship, which avoids the probate process but not necessarily the so-called death taxes (such as Pennsylvania’s inheritance tax). Other assets, including a life-insurance policy, can name beneficiaries so probate again can be avoided. Another possibility with life insurance is to use it to fund a trust as part of your estate plan.

 

Trusts of various types can be used for a variety of purposes. There are trusts that are intended to reduce the tax bill for your estate and for others – this is a complicated area that’s beyond the scope of this post, but it may be a realistic consideration depending on your circumstances. An example is a “credit-shelter” trust that a wealthy spouse might want to shield a surviving spouse’s estate from a large federal estate tax bill later on.

However, trusts are not just a tool of the rich and can be created for purposes that don’t focus on protecting wealth. For example, you may have a child who receives Medicaid (or, as it is known in Pennsylvania, Medical Assistance), which limits income and resources that your child can have while retaining eligibility. You could decide to disinherit your child to avoid the loss of these benefits, but you might consider a “supplemental needs” trust in your estate plan. Basically, this does not permit payments that would replace government benefits but can pay for other things to supplement what your child receives from public sources. A carefully drafted trust would make this possible.

 

Estate planning can even take place through gifts while you are alive and through post-mortem planning, such as a disclaimer by a beneficiary or an heir of something that she would receive so that it goes to someone else. Disclaimers often are used based on tax implications. With the numerous potential aspects of an estate plan, a person often benefits from consulting with a professional about the available options. Even the seemingly simplest estate can benefit from a review of an individual’s objectives and the consideration of ways that you might be met.

 

For the moment, there is one final thought to keep in mind. You never should view an estate plan as a final product. With time, changes occur in a life. The purpose of the plan may change if you get married or divorced, for example. Laws also change, and your plan may no longer meet your tax-planning goals when new tax laws are passed. An estate plan should be reviewed every few years, at least, so that it remains relevant to your current circumstances. No matter how simple or complex an estate plan may be, you need to make sure that it is one that you can live with as time goes by.

Responsibility for Inheritance Tax

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In Pennsylvania, inheritance tax basically is a tax on your right to receive property of someone who has died. The tax rate is based on which class of beneficiary that you are in. For example, the spousal rate currently is zero percent while transfers to brothers and sisters face a tax rate of 12 percent. Because inheritance tax is assessed on a “transferee” having the right to receive property and the amount of the tax is calculated based on this person’s relationship to the decedent, an argument could be made that transferees, who are the individuals receiving the property, should be taxed. This also is reality, although they usually do not file returns or pay the tax directly to Pennsylvania.

According to Pennsylvania law, the estate’s personal representative (who also is called the administrator or the executor) must file the inheritance tax return that would include property of the decedent over which he or she had control, as well as any other property of which the personal representative has knowledge and that will be subject to inheritance tax when it is transferred. Simply put, the personal representative has the primary responsibility to file the return.

However, complications do arise. If the personal representative does not file an inheritance tax return or does not include property that you received as a transferee, then you are responsible for filing a return regarding that property and also for paying the inheritance tax. Remember that, ultimately, inheritance tax is based on a person’s right to receive estate property, and rights come with obligations. You have the responsibility to pay the inheritance tax on this property when the personal representative fails to do so. For example, a personal representative could exclude a beneficiary in the inheritance tax return when the property was owned jointly with the right of survivorship by the decedent and someone other than a spouse. The personal representative can fill in a circle on the return which states that the survivor, who automatically becomes owner of the entire amount, is to be billed separately by Pennsylvania’s Department of Revenue. The survivor needs to file a return and pay the inheritance tax on the portion that had been owned by the decedent.

The usual situation will involve the personal representative writing the check for the amount of inheritance tax owed, though. While the inheritance tax statute places the “ultimate liability” for payment on the transferee who receives the property, Section 9144 (entitled “Source of payment”) of Pennsylvania’s Fiscal Code, also specifies that the inheritance tax generally is to be paid by the personal representative from the residuary estate (which is what remains after all debts, expenses, claims, and testamentary gifts have been paid out).

If the personal representative does not pay the inheritance tax, then anyone receiving the residuary estate is supposed to pay it. Ultimately, if none of these individuals makes the payment, anyone who received property from the estate will be liable for paying the inheritance tax on the value of what she or he received. This is why you are said to have “ultimate liability” regarding anything that was transferred from the estate to you.

Because the possibility of receiving property from an estate often seems to bring out the worst in people, you might want to consider eliminating as many potential controversies involving the estate that you eventually will leave. An estate plan can be used to make clear how any inheritance tax on your estate is to be paid. This is why a Last Will and Testament commonly includes a clause directing how the inheritance tax, as well as other costs that can typically arise when a person is dying and other common costs after death, are to be handled by the individual who will be in charge of the estate. Setting forth your clear intent regarding payment of inheritance tax ensures that one possible estate controversy is eliminated. At the very least, this shows how good estate planning can prevent a hard time from becoming even harder for your family and friends.

The Third-Party Supplemental Needs Trust & Its Role in an Estate Plan

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A third-party Supplemental Needs Trust differs from the various Special Needs Trusts that have been created through legislation. While both types are designed to provide disabled individuals receiving means-tested benefits such as Supplemental Security Income (SSI) and Medicaid (known Medical Assistance to Pennsylvanians) with additional benefits while not affecting these other benefits, the third-party supplemental needs trust comes with another benefit: it is not subject to any Medicaid “pay-back” provision so that whatever remains in the trust when the disabled beneficiary dies can be distributed to “residual” beneficiaries named in the trust document. However, these must be drafted carefully because these and other benefits will be lost if the requirements for a valid Supplemental Needs Trust, which have been developed primarily through the courts in Pennsylvania, are not followed closely.

Since we are looking at estate planning, we need to focus on the essential elements when a trust is created in a Will. The most important issue in Pennsylvania is determining the intent of the settlor or grantor (both terms refer to the person who created the trust) regarding the use of the property placed in the trust (this property is referred to as the principal or corpus) as well as the income generated by that property. The starting point always is the language in the trust that defines the settlor’s intent. However, we also have to look at how the trust actually will function to really grasp the reason(s) that it was created.

Two major factors in proving that a supplement needs trust was established are the number of beneficiaries for which the trust provides and whether the beneficiary who is disabled was receiving some type of means-tested assistance, such as SSI or Medical Assistance, during the settlor’s lifetime. Multiple beneficiaries, even if they are only residual beneficiaries, are important because the trustee in charge of handling decisions involving the trust has an obligation to all beneficiaries and cannot use the funds for only one beneficiary’s interests. The presumption is that the settler did not intend the entire supplemental needs trust to be used to help only one person to the exclusion of all other beneficiaries.

Also, if the settlor knew that the one beneficiary, perhaps his or her child, was getting means-tested government benefits such as SSI and Medical Assistance when the estate plan was developed, courts have presumed that the settlor would not want to jeopardize the eligibility of the child, for example. Passing these “tests” does not ensure that a trust will pass muster with the government. There are other factors that need to be handled properly to establish a successful third-party Supplemental Needs Trust.

Briefly, these include the beneficiary who receives government assistance being prevented from having any authority to terminate the trust or from directing that any part of the trust be used for her or his support and maintenance. Instead, the trustee must have complete discretion regarding what distributions will be made and for what purposes. Because a supplemental needs trust exists to supplement, not supplant, the benefits already being received, language is needed to keep the trustee from making distributions that would have a negative impact on the current sources of income (which, as noted above, generally is means tested). In fact, the trustee has to avoid giving money directly to the beneficiary since this would be considered income. However, as long as payments directly to third parties do not involve shelter or food (which SSI regulations look upon as income for the beneficiary), the trustee can purchase goods or services for the disabled beneficiary of the supplemental needs trust.

A couple of final points are to be remembered, as well. Any assets that go into the third-party supplemental needs trust must belong to someone other than the beneficiary – otherwise, this could not be a third-party trust, severely hindering the usefulness of the trust as a result. In addition, the settlor would be wise to include a “spendthrift” clause in the trust document so that creditors of disabled (and other) beneficiaries generally will be prevented from making any claims against the principal or income of the trust as long as money is not given directly to the beneficiary, which is an effective way to protect the wealth within the trust from creditors of a beneficiary other than the federal and state governments.

The third-party Supplemental Needs Trust has strengths and potential weaknesses that must be considered carefully to determine if it can work as part of your estate plan. If it can fit within your estate plan and if you believe that is needed due to your family’s circumstances, then you should seek out a professional to draft the trust due to its complexities. The crucial elements of a supplemental needs trust are set forth here, but you want to be sure that everything is in its proper place and worded properly so that your intent to assist a disabled beneficiary of the trust will be carried out successfully.

Creating an Estate Plan Involving a Disabled Child

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You may have heard of “special needs” trusts, particularly if you have a disabled child. A third-party Supplemental Needs Trust (SNT) often is considered a variation of this type of trust. However, in Pennsylvania, the third-party SNT grew out of a number of court cases as a way of helping someone on government means-tested benefits without making them ineligible for those benefits, which often include Supplemental Security Income (SSI) and Medicaid (or Medical Assistance in Pennsylvania), by providing additional fund犀利士
s and resources that won’t count against the individual’s eligibility. The benefits have strict financial requirements that can make estate planning when a disabled child is involved difficult, to say the least.

Due to these difficulties, various types of trusts and other possibilities, some more drastic in nature, are considerations when a disabled child (regardless of age) generally would be included in an estate plan. Parents could decide to disinherit the disabled child but often do not feel comfortable with this simple but seemingly harsh solution to protecting the person’s means-tested benefits. One common consideration is to leave share that the disabled child would inherit to another sibling, for example, with instructions that the sibling is to use this for the benefit of the disabled child. The inherent danger with this idea is that the parent’s wish is not legally binding, which is why it won’t count against the person who is disabled but also provides no guarantee that this plan will succeed as you had hoped. Also, if the other child has debts, the inheritance intended for the disabled child could end up benefitting the second sibling’s creditors, instead.

This may leave you looking upon the idea of disinheriting your disabled child while relying on someone else’s judgment and circumstances to allow your hope that this share of your estate will be used as you had wished to be too risky. If you really do not want to disinherit your disabled child entirely, then you need to explore other options. You could decide on an estate plan that simply leaves the share to your child who receiving SSI, Medical Assistance, or similar benefits, despite the possible consequences regarding such means-tested benefits. The most obvious of these consequences include a likely disqualification of the disabled child for those benefits for some period of time. In the end, there is no gain, only loss, with this plan because the inheritance, at best, merely replaces the government assistance. When you put together your estate plan, you are likely to want to find a better alternative than this option provides.

Particularly when you work with someone who has experience in estate planning, you probably will find out that better options do exist. One of these may be the third-party Supplemental Needs Trust in Pennsylvania. Although this can be hard to make effective when your estate is quite small, it is a powerful tool for helping your disabled child when your estate has enough resources for it to be cost effective and feasible to run in order to carry out your intent.

Importantly, this SNT can be set up in a way that will not jeopardize the government entitlements that the child receives while, at the same time, being available to supplement these benefits for an improved quality of life. Great care must be taken when you plan to use this type of trust because your intent has to be implemented through the document that creates the trust to accomplish your goal of providing additional benefits for your disabled child without putting the any of the other benefits from the government at risk. In the next post, we will look at some key points to remember your estate plan will include a third-party Supplemental Needs Trust.

The Self-Proving Affidavit: A Valuable Addition to Your Will

Alberts Law, Estate Planning, Probate & Estate Administration, , , ,

Most people are aware of the benefits of having a Last Will and Testament. It can make the flow of your property to your chosen beneficiaries proceed much more smoothly as well as allowing you to decide who you want in charge of the process. There are other potential benefits from having this estate planning tool in place when the time comes for the administration of your estate, but the process involved in the preparation of your Last Will holds a key to getting the probate of a Will started smoothly. This involves the inclusion of a self-proving affidavit. 

Once your attorney has finished drafting your Will, you need to sign it at the end of the last page. After doing so, you have a valid legal document that will set forth your estate plan. The absence of witnesses does not affect this because Pennsylvania law does not require anyone to be present when you sign to show that you are the testator and that the document is your Last Will and Testament. However, there have to be two people who can verify that your signature appears at the bottom of the Will when the probate process is being started. The person named as executor in your Will would have to find two people to do this if you did not have witnesses at the time that you signed the Will. If there were witnesses, the executor needs to attempt to find them and, if not possible, would have file an affidavit of diligent search and look for a substitute for each missing witness to take the oath verifying your signature when your Will is to be submitted for probate. If no one who can make the identification can be found, then proof of the signatures of the original witnesses will be satisfactory. A self-proving affidavit makes these possible problems disappear.

This reduces the stress and difficulties at some future time and is easily accomplished if your witnesses are ready to sign after they watch you add your signature at the end of your Will. A self-proving affidavit simply involves the witnesses acknowledging that they saw you do this. In general, the witnesses then sign the self-proving affidavit in front of an officer authorized to administer oaths in Pennsylvania – usually, this person will be a notary public. However, if the testator’s signature and this self-proving affidavit signed by two witnesses are undertaken with only an attorney present, then the attorney must prepare a certification of attorney to be included as part of your Will. In either situation, no one will need to hunt for witnesses in the future.

This is main benefit of having a self-proving affidavit attached to a Will. Your executor can take the Will for probate at the appropriate time without any need to try to find witnesses at a time that may be many years after you first was executed this document, when it can be difficult to find these people for any number of reasons. This makes the executor’s job – w犀利士
hich may be quite involved and could require years to complete – a little easier at the beginning, at least.