Estate Planning FAQs

Every one needs estate planning in one form or another. If one has assets, estate planning, through either a Will or a Living Trust, is necessary to ensure that those assets pass to one’s intended beneficiaries after one’s death. Furthermore, estate planning–through either a Power of Attorney or Living Trust–is necessary to protect oneself in the event of one’s disability. Through a Power of Attorney or a Living Trust, a representative is appointed to handle one’s financial matters during one’s disability. Through a Power of Attorney, an individual can be appointed to make health care decisions in the event of one’s disability.

For married couples with minor children, Wills are necessary in order to appoint Guardians for those children in the event that both parents die. In addition, it is critical for such a couple to provide for a Trust if they both die in order to hold their assets (including insurance proceeds and retirement accounts) on behalf of their children. Otherwise, the children would inherit those assets without restriction upon reaching the age of 18 or 21 (depending on state law) which is not the situation which parents typically desire for their children.

Finally, everyone needs a Living Will to set forth their wishes in end-of-life situations. Without a Living Will, health care professionals are left without direction as to the appropriate steps to take when a patient is comatose and unable to communicate his or her wishes. A Living Will sets forth a patient’s wishes, and, most importantly, appoints an agent to speak on behalf of the patient.

Living Trusts are revocable trusts created and typically funded during a person’s lifetime.

They serve two principal purposes:

      1. To reduce the costs of probate; and

      2. To provide for an individual (or individuals) or an institution to handle a person’s financial affairs if the person becomes disabled.

The costs of probate vary greatly from state to state, and, therefore, the benefits of reducing probate costs vary from state to state as well. For example, in Delaware County, Pennsylvania, the probate costs charged by the Register of Wills on an estate worth $500,000 in assets is only $350.

Conversely, in other states like California, the cost of probate can be 1% or more. While reducing probate costs is a worthwhile objective, there are several other ways of achieving the same results. Titling assets in joint names with rights of survivorship avoids the costs of probate without the cost and bother of a Living Trust, and for many married couples, this is an ideal solution. For widows and widowers, titling assets in joint names with adult children is often a viable alternative, although there can be potential problems with children as joint owners.

Many bonds and securities accounts, as well as mutual funds, also offer the option of naming post-death beneficiaries, which gives the named beneficiaries the right to receive the account’s proceeds

after the account holder’s death. Using these “Payable on Death” or “Transfer on Death” designations avoids probate. Retirement accounts, annuities and insurance policies will normally avoid the costs of probate as well.

In our experience, for our Pennsylvania clients, we recommend Living Trusts primarily for our unmarried elderly clients. For our married clients, generally we will recommend Living Trusts only when out-of-Pennsylvania real estate is owned (particularly by just one of the spouses). We find that, for married clients, Wills work just as well as Living Trusts and are cheaper and less bothersome.

As mentioned above, Living Trusts can provide protection in the event that an individual becomes disabled. Under a Living Trust, a person (or persons), or an institution, is appointed to take over the financial affairs of the creator of the Trust if he or she becomes disabled. However, a properly drafted Power of Attorney will serve the same purpose and will work as well, particularly for married couples.

You may see advertisements for Living Trusts claiming that they will save you hundreds of thousands of dollars in taxes. That is deceptive advertising. A Living Trust will save compared to a properly drafted Will. Organizations trying to sell you Living Trusts with that sales pitch ought to be avoided.

While Living Trusts can certainly be valuable tools as part of one’s estate planning, they are not always the best or most cost-effective option for all clients.

The Tax Cuts & Jobs Act of 2017 (the “Act”) made significant changes to the federal tax laws regarding estate, gift, and generation-skipping transfer taxes. The Act contains a “sunset” provision which will cause the estate, gift, and generation-skipping transfer tax changes described below to expire after December 31, 2025.  Absent Congressional action, the estate, gift, and generation-skipping transfer tax exemption will revert to $5.25 million, adjusted for inflation. Although the future of federal transfer tax is uncertain, most practitioners do not believe that this drastic decline in the exemption amount and increase in the marginal rate will occur.  The general consensus throughout the field is that the estate, gift, and generation-skipping exemption will be somewhere around $5.85 million with a maximum tax rate around 40%.   

Estate Tax

For the estates of individuals dying in 2021, the Act grants an estate tax exemption of $11.7 million, imposes federal estate tax at a rate of 40%, and provides for a step-up in basis for income tax purposes for assets acquired from the decedent.  Transfers made to a U.S. citizen spouse are not subject to estate tax.

The Act also contains a “portability” provision that allows a surviving spouse to use the unused portion of the estate tax exemption of his or her previously deceased spouse, so long as that spouse died after 2018.  For example, if a husband dies in 2021 and he has only used $7 million of his $11.7 million estate tax exemption, his surviving wife will have an aggregate exemption of $16.4 million (her own $11.7 million exemption and the unused $4.7 million of her deceased husband’s exemption).  In order to take advantage of the portability provision, the Executor of the estate of the first spouse to die must make the requisite election on a timely filed estate tax return. 

Gift Tax

For gifts made after 2018, the Act grants a gift tax exemption of $11.7 million and imposes federal gift tax at a rate of up to 40%. The portability provision described above also applies to gift tax.

Furthermore, certain transfers are not subject to gift tax.  Such transfers include: transfers to spouse, payment of the medical or educational expenses of another individual so long as paid directly to the institution providing the medical or educational services, and present interests gifts of $15,000 to an unlimited number of donees.  

Generation-Skipping Transfer Tax

For gifts to grandchildren and more remote descendants, the Act grants a generation-skipping transfer tax exemption of $11.7 million and imposes a rate of  up to 40%. The portability provisions described above do not apply to generation-skipping transfer tax.  

The Importance of Flexibility

Because no one is certain about the potential changes to the federal transfer tax, it is important to provide flexibility in estate plans.  The primary way to provide flexibility for a married couple (particularly in a first marriage) is to draft documents so that, with after the death of the first spouse, the surviving spouse has the ability to revise the details of the decedent’s estate plan. This is referred to as “post-mortem” estate planning.

There are several methods by which “post-mortem” estate planning can be accomplished. The most common of those methods is by use of disclaimers and “Disclaimer Trusts.” Under this plan, all assets of the deceased spouse are left to the surviving spouse, who then has nine months to file a document called a “disclaimer.” In a disclaimer, the surviving spouse gives up his or her rights to some or all of the decedent’s assets. The surviving spouse generally has complete control over the breadth of the disclaimer.

As a result of the surviving spouse’s disclaimer, the disclaimed assets typically go into an Exemption Trust, which can provide the surviving spouse with some benefits (such as the right to the trust’s income, the right to receive principal distributions from the trust at the Trustee’s discretion, and etc.). Notwithstanding the disclaimer and the retained benefits, the assets in the Exemption Trust should not be included in the surviving spouse’s estate at his or her death. The advantage of this “disclaimer plan” is that it gives the couple the flexibility to modify their estate plan (and reduce their potential taxes) until nine months after the death of the first spouse to die.
Obviously, in some circumstances (such as a second marriage), giving that much discretion to the surviving spouse is not advisable. In those situations, discretion can be given to other persons, such as an “independent” Trustee.

For some clients, the best advice is to currently fully use the gift tax exemption of $11.7 million ($23.4 million for a married couple) by transferring assets into a trust for their children. The choice of assets to be transferred into trust, and the form of the transfer, must be evaluated on a client-by-client basis. Of course, the first consideration for the clients is whether they can afford to transfer that amount of funds out of their financial control.

There is no “magic” plan which will fit the needs of every high-wealth individual or couple in these uncertain times. Only through communication with a knowledgeable and experienced estate planner can clients be assured that an appropriate estate plan has been developed to serve their particular needs.