Why do you need a Will?
In the absence of a Will, the law and court system will dictate who will handle your estate after your death and how your estate will be distributed. Therefore, some of the important reasons why you must have a Will:
- Direct to whom your property will be distributed upon your death.
- Appoint the executor of your estate
- Appoint the guardians of any minor children
- Provide for specific bequests of items of your tangible personal property, real estate and business interests.
- Allow for the creation of trusts for, instead of outright distributions to, beneficiaries.
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Do I need a Revocable Living Trust?
By implementing a revocable living trust, probate can be completely avoided. The trust works much like a Will, including containing the plan of distribution of assets upon your death. In addition, if you are unable to manage assets because of disability or death, your successor trustees steps in to manage assets for your benefit.
Many variations are available, and each living trust must be specifically drafted to meet the needs of the individual, taking into consideration personal wishes, family needs, tax ramifications and the types of assets involved.
Funding the trust is very important. A trust agreement will NOT avoid probate if assets are not titled in the name of the trust. Probate is only avoided if the trust owns all of your assets, excluding joint assets or assets which pass by beneficiary designation.
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What is an irrevocable life insurance trust and when should one be used?
If your estate may be subject to federal estate tax and includes life insurance, you should consider implementing an irrevocable life insurance trust. Ideally, the Trustee of the irrevocable life insurance trust purchases the insurance policy. Therefore, you should explore this option prior to applying for the policy. After the trust is created and the policy purchased by the Trustee, you make annual contributions to the trust to pay the premiums. While the provisions of the trust cannot be changed, the proceeds are excluded from your estate.
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What is a Financial Power of Attorney?
A Power of Attorney names an agent to make all financial decisions on your behalf if you are unable to do so. The use of a Financial Power of Attorney avoids the need for a costly guardianship proceeding in the event that you become incapacitated.
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What is a Health Care Power of Attorney?
A Health Care Power of Attorney names an agent to make all medical decisions on your behalf if you are unable to do so. A Health Care Power of Attorney also sets forth your feelings about life-sustaining treatments and measures. The use of a Health Care Power of Attorney avoids the need for a costly guardianship proceeding in the event that you become incapacitated.
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What do you need to know about the federal estate tax?
In 2011 and 2012, each person can give up to $5,000,000 either during lifetime or at death free of the federal estate and gift tax. Therefore, assuming during your life that you make no taxable gifts (see below for further information), if your estate is less than $5,000,000 after deducting debts and estate administration expenses, your estate will owe no federal estate tax.
However, even if the federal estate tax will not imposed on your estate, the Pennsylvania inheritance will still exist and your estate must still be administered. Therefore, you still need a Will and/or other estate planning documents and state death taxes will reduce what your beneficiaries ultimately receive from your estate.
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What do you need to know about the Pennsylvania inheritance tax?
Like the federal estate tax, basically anything you own or control at the time of your death, with the exception of property passing to a spouse and life insurance proceeds.
There are several rates at which property is taxed and the rate depends upon the classification of the beneficiary receiving the property.
- 0% Spouses and Charity
- 4.5% Grandparents, parents, children and grandchildren
- 12% Siblings
- 15% All other beneficiaries
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Should you own property in joint names with children to avoid probate?
Naming children as joint tenants should not be done without considering all of the ramifications. The potential issues include:
- Relinquishment of the power to control the property without the consent of the joint owner.
- The joint property is subject to the claims of the creditors of the joint tenant.
- If your intent is an equal division of your estate between all children, the joint tenancy will not carry out this objective—only the surviving joint tenant inherits the property.
If ownership in joint tenancy is contemplated solely to avoid probate, probate avoidance can be accomplished with the living trust without creating potential tax, creditor, distribution, management or other issues.
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How does making gifts during your lifetime reduce estate and inheritance taxes?
Currently, each person can give up to $13,000 per year to each donee without incurring gift tax or reducing the amount of that you can give tax-free at death. The benefit is that the amount of your estate which will be taxed at death is reduced. The tax benefit is amplified if you give property that appreciates in value.
You may also decide to make gifts for than for the following non-tax reasons:
- The lifetime enjoyment of sharing your wealth.
- The opportunity to see how beneficiaries handle amounts smaller than their potential inheritance.
- Shifting income tax burdens to persons in lower tax brackets.
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Does a Will control the distribution of all of your property?
For estate planning purposes, assets are divided into two groups—probate and nonprobate.
Nonprobate assets are assets which pass to a beneficiary directly at your death by operation of law, such as property held as joint tenants or by beneficiary designation. Your Will does not control how these assets are distributed; therefore, they are not subject to probate.
Probate assets are assets which you own in your individual name which do not pass to a beneficiary directly at your death. These assets are distributed according to your Will or, if no will exists, according to state law. If desired and advisable, your estate can be planned in order to totally eliminate probate.
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