An estate plan is beneficial to both you and your loved ones because it allows you to carefully plan for uncertain future events such as death, disability and incapacity. In Pennsylvania, there are a few essential estate planning documents that you should consider in order to achieve your objectives. An estate planning attorney can help you identify your goals and objectives and prepare the necessary estate planning documents to accomplish them.
LAST WILL AND TESTAMENT
A last will and testament generally sets forth your intentions for distribution of your estate after your passing. The will is the most common dispositive estate planning document that addresses two critical questions: who will inherit one’s assets after death and what is the best way to pass assets to one’s intended beneficiaries (outright or in trust)?
The will can also address estate taxes. Estate tax planning deals with an analysis of the amount of estate and similar taxes that will be due at death, and the optimum method of minimizing or postponing their impact without unduly distorting the distribution of assets among the intended beneficiaries. For many, estate planning is unnecessary due to the rather large federal estate tax exemption amount. In 2021, the exemption amount is $11,700,000.00 per individual. This means that the first $11,700,000.00 of an individual’s estate will not be taxed at the federal level. Automatic portability allows a married couple in 2021 to pass double that amount to their loved ones with no federal estate tax consequences.
Estates are also subject to the Pennsylvania inheritance tax. Generally, there is very little, if anything, that can be done to reduce the inheritance tax. In 2021, the tax rate is zero for transfers between spouses. For transfers to children and all lineal descendants, the tax rate is 4.5%. For transfers to siblings, the rate is 12%. For most others, the rate is 15%.
A will can be divided into five basic categories:
- Standard will for a married couple (no tax planning)
- Standard will for unmarried couple (no tax planning)
- Tax planning will for married couple (credit shelter bypass trust)
- Tax planning will with disclaimer trust
- Tax planning will with generation-skipping trust
After the type of will is established, the contents of the will should address the following, at a minimum
- Provisions for distributing specific property to certain individuals
- Provisions for distributing your remainder of your estate (residuary estate)
- Trusts provisions for minor children (trust provisions allow for discretionary distributions by the Trustee for the children’s health, maintenance support and education)
- Appointment of a Personal Representative (commonly referred to as the executor or executrix)
- Appointment of a Guardian for minor children
- Appointment of a Trustee to manage any trusts for the benefit of minor children
- Spendthrift provision
- Provisions for the Personal Representative’s access to online or digital accounts
REVOCABLE LIVING TRUSTS
Sometimes, a revocable living trust is used as a primary estate disposition method instead of a will Revocable (living) trusts are established during your lifetime. You retain the right to income and principal and the right to amend or revoke the trust at any time prior to death. Upon your death, the trust becomes irrevocable and the trust assets are disposed of as provided in the trust document. The trust document upon death acts essentially as a substitute for a traditional will. Often, the question arises as to whether a revocable trust should be used instead of a will as the primary testamentary instrument.
One consideration is probate avoidance. With a revocable trust, title to property is transferred by you to the trust when you are alive. Because title has already been transferred, the property is not part of your probate estate. The avoidance of the probate process and its related costs and delays is the principal reason for using the revocable trust instead of the will. While this may appear to be beneficial, the following factors should be analyzed before making a decision to use a revocable trust:
- Need for pour-over will. Even with a revocable trust, it is necessary to have a “pour-over” will. A pour-over will transfers any property upon your death into the revocable trust if any property has not already been transferred into it. The pour-over will requires property to pass through probate anyway so any advantage that may exist by avoiding probate is lost.
- Pennsylvania probate costs. The costs for probate in Pennsylvania are relatively modest so there is not a big advantage in using a revocable trust if the main concern is costs.
- Legal and accounting fees. The legal and accounting fees to administer an estate subject to a will or revocable trust should be fairly consistent. However, setting up the revocable trust can be more expensive due to the breadth of the document, need for a pour-over will, and costs to transfer assets to the revocable trust.
- Delay in distribution. Claims by supporters of revocable trust that the trust avoids delays in distributing assets are often exaggerated. While it is true that there need not be interruption for trust administration when a person dies, there are generally no significant delays in having a will admitted to probate and having assets available to make partial distribution throughout the estate administration process.
- Privacy. A will must be filed for probate and as such, becomes available for review by anyone. A revocable trust on the other hand has some privacy advantages. However, any privacy advantage can be compromised before death by banks and brokerages that require review of the trust document before they will open an account. After death, trust assets must be reported on the inheritance tax return that is required to be filed in Pennsylvania.
- Estate taxes. A revocable trust is not an estate tax savings device. The assets in the trust at death are included in the person’s estate and subject to tax.
- Incapacity planning. A successor trustee of a revocable trust generally assumes management of the trust if you are no longer able to manage your own affairs. While this is a good reason to create a revocable trust, the Pennsylvania Durable Power of Attorney (see below) often accomplishes the same objectives.
The decision to use a will or a revocable trust for the primary purpose to distribute one’s estate upon death should be carefully discussed and analyzed with an estate planning attorney.
DURABLE POWER OF ATTORNEY
The Durable Power of Attorney (POA) allows a principle (you) to designate an agent to make legal decisions for you and carry out those decisions on your behalf. Pennsylvania law provides for a “durable” power which means that the powers given to your agent will still be effective even if you subsequently become incapacitated. Therefore, the principal can create a POA that gives an agent the power to act now or the principal can give a “springing” power which means the power is effective only when the principal becomes incapacitated or disabled. If the principal creates a springing power, the agent will usually need a certification from one or more physicians in order for the POA to be legally enforceable. Typically, the POA will give the agent powers related to banking, real estate, tax matters, litigation, and other financial/business matters.
ADVANCE HEALTH CARE DIRECTIVE (LIVING WILL).
An Advance Health Care Directive also known as a Living Will is a legal document that allows you to state whether you want to be given life sustaining treatment in the event of two very specific scenarios. The first scenario is if you are suffering from an “end stage medical condition”. This means that you have a terminal illness, death is imminent, and the only thing keeping you alive is artificial treatment such as mechanical ventilation (ventilator), dialysis, cardiopulmonary resuscitation, hydration, etc. The second scenario is when you are suffering from a state of “permanent unconsciousness”. Only these two scenarios trigger the provisions of your Living Will. You can decide now whether you will want to remain on the life support or be removed from the life support. The Living Will should not be confused with a Do Not Resuscitate (DNR) instruction.
MEDICAL POWER OF ATTORNEY
A Medical Power of Attorney allows you as the principal to designate an “attorney in fact” to medical decisions for you if you cannot make the decisions yourself. Even though you might not be suffering from an end-stage medical condition or you may not be in a state of permanent unconsciousness, you may have a condition that can be defined as temporary unconsciousness, incapacity or disability. The person you designate as your attorney in fact is usually a close family member or trusted friend who will make decisions for your medical care and treatment such as surgical decisions, treatments, medications, and the like.
ESTATE PLANNING ATTORNEYS – THE MARTIN LAW FIRM, P.C
If you wish to create an estate plan or would like to know more about the essential estate planning documents in Pennsylvania, contact the Martin Law Firm today to discuss your legal options. Our standard process is to discuss your objectives with you and then suggest solutions for you. We prepare the necessary documents, review them with you to make sure they are in line with your goals, and then we assist you with signatures and notary. We offer telephone or virtual consultations too. Call us today at 215-646-3980.