Last Updated: May 28, 2006
If state bureaucrats appeared on your front step and told you they were going to decide who should get your money and property and who should raise your children when you die, would you let them do that? We don't think so. But if you don't have a Will, those are exactly the kinds of issues that will be decided by the state where you reside at the time of your death.
We hope that the questions and answers presented here will assist you in familiarizing yourself with the issues and terms associated with the preparation of your Will and planning your estate. While the material below attempts to answer common questions in this area, State and local laws may significantly modify the facts set forth. Because all legal problems are unique, nothing provided here is a substitute for the advice of competent counsel. We strongly urge you to consult with an attorney licensed to practice in your state about any particular legal problem you may have.
A
Will is a legal document which allows you to specify who will get your property
after your death. In order to be effective, your Will MUST be properly
prepared, signed (also called "executed"), and witnessed in
accordance with the laws of the state in which you reside.
If
you own property titled
in your name alone, YES, YOU DO NEED
A WILL! A Will is the only legally effective way for you to control what
happens to that property after your death. In addition, a Will permits you to
select a personal representative (the person or institution that will manage
the affairs of your estate) and a guardian for any minor children (the person with
whom your children will live) in the event you and your spouse die at the same
time. You may also leave instructions in your Will about your funeral and
burial, relieve your personal representative of the necessity of posting a
bond, and, if you wish, limit the compensation of your personal representative.
When
you die without a Will ("intestate"), the disposition of your property
depends on
· how the property was owned ("titled") during your life, and
· the laws of intestate succession (who inherits) of your state of residence at the time you die.
For example, if you lived in Pennsylvania at the time of
your death and did not have a will, but left a surviving spouse and children of that
marriage, Pennsylvania law will distributes the probate estate (solely owned
property) as follows:
· cost of administration (this includes compensation of the personal representative and attorney;
· family exemption;
· funeral and burial expenses as well as healthcare expenses within six months of death;
· rents;
· taxes, expenses of last illness and other debts and claims;
· $30,000.00 of the net estate plus one-half (1/2) of the balance to the surviving spouse; and
· the balance of the net estate to the surviving children.
It
is important to have a Will even if you have no children. For example, if you
have no surviving children, but
your spouse and one or
both of your parents survive you, your surviving spouse gets the first
$30,000.00 of your net estate plus one-half (1/2) of the remaining balance and
your parents get the remaining one-half (1/2). If there are neither surviving
children nor parents, your spouse gets your entire estate. ARE THESE THE
RESULTS YOU WANT OR EXPECT?
A valid Will is the only way you can determine what happens to your estate.
If
you own property jointly with your spouse,
then upon your death that
property passes entirely to your surviving spouse, without regard to your Will
or the intestacy laws. If you expect the total value of the estate in the hands
of your surviving spouse to be less than $1,500,000.00 ($1.5 million) in 2005
or $2,000,000.00 ($2 million) in 2006 and 2007,this arrangement may be
adequate, subject to your personal wishes and family objectives.
If the total value of your surviving spouse's estate, including the value of joint and other property passing from your estate, exceeds $1.5 million in 2005 or $2 million in 2006, the estate of your surviving spouse may incur federal estate tax at your spouse's death. This circumstance requires analysis and planning to minimize the federal tax impact.
If you
designate a beneficiary on a
life insurance policy,
annuity, deed or other contract, at your death, the proceeds or interest in any
such contract is transferred to the designated beneficiary without regard to
your Will. A BENEFICIARY DESIGNATION SUPERSEDES YOUR WILL. Assets that
designate a beneficiary pass "outside" your Will or probate estate
and may not be subjected to the claims of general creditors. In most cases,
however, these assets are still subject to inheritance (death) taxes. Note:
While Pennsylvania does not tax proceeds from life insurance, other states do
tax these proceeds.
In
some states, if you die without a Will and without children, your spouse will
inherit everything you have, even if the two of you are separated. If you have
children from a previous marriage, in most states your separated spouse will get
half your estate if you don't have a Will. If you are separated or divorced,
you should consider doing some or all of the following:
· Have an attorney prepare your Will to distribute your assets to the people you want to receive them;
· Have an attorney prepare a Power of Attorney, naming someone to handle your finances if you become disabled;
· Change the beneficiary on stocks, bank accounts, IRAs and other assets you may own;
· Change the beneficiary on your life insurance policy; you should consult your divorce lawyer before you do this as some states do not allow you to make changes during divorce proceedings;
· Change the beneficiary on any employee life insurance, pension, stock options or other employee benefits;
· Check the people you designated to be your children's guardian and trustee.
When
you die, any property you own is potentially subject to federal estate tax, and
to state inheritance and estate taxes.
Estate taxation is a very complex area and the advice of competent professionals is required. The two main estate taxes are:
Federal Estate Tax:
All property and interests in property you own or in which you
have a beneficial interest at your death, including insurance, annuities, and
pension plan funds, are subject to the federal estate tax. You automatically
receive the benefit of a credit which has the effect of exempting property with
a value of up to $1,500,000.00 in 2005 or $2,000,000.00 in 2006 from this tax.
The tax is graduated according to the value of the property you leave after
debts, expenses and the value of all property passed to your surviving spouse.
The minimum effective rate of the tax is thirty-seven percent (37%), increasing
to a maximum rate of fifty-five percent (55%).
Inheritance Tax: Generally most states impose an inheritance tax on all personal property and any real estate located in the state at the time you die. If, for example, you die while residing in Pennsylvania, Pennsylvania imposes a tax on all personal and real property which passes from your probate estate to your beneficiaries or heirs. There is an exemption, however, for jointly held property passing to your spouse. Property passing under other types of joint tenancies (except to a spouse) through revocable living trusts or other devices having testamentary effect, and transfers made in contemplation of death, are subject to inheritance tax.
Estate
planning begins with gathering information
about your property (real
and personal) and its value. It includes an analysis of your property situation
and the likely tax impact at the time of your death. It entails the formulation
of a plan to achieve personal objectives at the least possible tax cost. Each
family's situation is different and requires skilled professional attention for
a customized result.
For married people with combined estates over $1.5 million in 2005 or $2 million in 2006, the most common estate planning device is to have Wills which create marital and credit shelter trusts for the benefit of the surviving spouse. These trusts operate to ensure that both spouses are able to take maximum advantage of their individual $$1.5 million in 2005 or $2 million in 2006 credit/exemptions.
A
married couple with minor children may
have important planning
concerns other than potential tax problems. Attention should be given to the
support and education of minor children in the event of premature death. This
may require the use of a Will creating a trust for the children and appointing
appropriate people to be trustees and guardians for the children.
You
should review your estate plan to make sure it meets your particular and
personal needs whenever any of the following occur:
· There are changes in family make-up, such as births, deaths, marriages or divorces;
· Your named beneficiary or fiduciary (i.e., executor or trustee) dies, or your own or a beneficiaries, physical or mental health changes;
· You change the way you want your assets disposed;
· You move to a new state;
· You buy a new home;
· You change your career or significantly increase your earnings;
· You acquire a new business interest, add a partner or another shareholder in an existing business, change existing ownership relationships or dispose of a business or major investment interest;
· You decide to retire;
· Your family's net worth increases significantly;
· The projected value of your (or your and your spouse's) gross estate increases over the federal exclusion from estate taxation;
· You decide to purchase a significant amount of life insurance;
· The law changes;
· When other special circumstances (such as the need to care for an elderly or disabled dependent) arise.
A trust
is an estate planning tool that allows one to reduce estate taxes, retain
control of asset distribution, make gifts to charities, provide for the
possible incapacity of the creator, protect heirs, avoid probate, allow
professional management of assets, and ensure provisions for minors.
Yes,
if you create a Revocable Trust. Trusts are either revocable or irrevocable.
With a Revocable Trust, you may change the provisions or even terminate the
entire trust during your lifetime. Since you maintain control of the assets,
the trust property remains part of your taxable estate. Instead, you could
create an Irrevocable Trust. With this, you give up control of the trust
property. Since it is not part of your taxable estate, it therefore cannot be
changed or terminated during your lifetime.
Credit
Shelter Trust: This type of trust is based on the federal unified credit.
The unified credit is applied to one's estate at death. The amounts of money
considered to be the "unified credit" recently changed, and over the
next few years, will continue to gradually increase. But right now, if your net
estate is $1.5 million in 2005 or $2 million in 2006 or less (or the higher
amount, depending on the unified credit for that year), the federal government
will not impose the federal estate tax on the assets you leave. Its primary use
is to ensure that spouses take advantage of both of their unified credit (or
lifetime gift and estate tax exclusion) without directly transferring assets to
other heirs until both spouses die. The trust can be funded up to the unified
credit amount, $1.5 million in 2005 or $2 million in 2006 for this year. It
becomes effective, if funds have been properly earmarked, at the death of the
first spouse. During the surviving spouse's lifetime, he or she is entitled to
the income from the trust with the principal available for health, support and
maintenance.
Irrevocable Life Insurance Trust: This trust is used to ensure that life insurance policy proceeds are not subject to estate taxes.
Charitable Remainder Trust: This type of trust is used to avoid a large capital gains tax while giving a large charitable contribution.
Children's Trust: This trust is used to control how proceeds are used for minors and when distributions will be made.
Qualified Terminable Interest Property (QTIP) Trust: This is a special type of trust used when a spouse who has remarried wants to protect children from a prior marriage.
Yes.
Estate Planning and Will drafting are highly technical and should only be done
by a competent professional. An improperly drafted Will may not be valid, may
force your beneficiaries to pay substantial additional death taxes and may not
distribute your property in accordance with your wishes.
DESSEN, MOSES & ROSSITTO is happy to assist you in any legal matter that involves either Pennsylvania or New Jersey, the two states in which our attorneys routinely practice. If you have other questions or comments about the areas of Wills and Estate Planning, or any other area in which we practice, please send us an E-mail message with your questions or comments and we will be happy to try to assist you.
LINKS TO OTHER INTERESTING INFO
Federal
Estate and Gift Tax Code
Insurance Information Institute
Living Wills: Common
Questions and Answers
Plan Your Estate
State
Estate and Probate Laws
Tax Code Online
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