Last Updated August 22, 2009

INFORMATION ABOUT WILLS AND ESTATE PLANNING

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.

WHAT IS A WILL?

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.

DO I NEED A WILL?

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.

WHAT HAPPENS IF I DIE WITHOUT A WILL?

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 domicile at the time you die.

For example, if you were domiciled 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;
• 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.

I AM CHILDLESS. WHY DO I NEED A WILL?

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.

SUPPOSE I OWN EVERYTHING JOINTLY (AS TENANTS BY THE ENTIRETY) WITH MY SPOUSE, AND ALL MY INSURANCE AND RETIREMENT BENEFITS ARE PAYABLE TO MY SPOUSE - DO I STILL NEED A WILL?

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 $3,500,000.00 ($3.5 million) in 2009, 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 $3.5 million in 2009, 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.

WHAT IF MY LIFE INSURANCE POLICIES AND OTHER CONTRACTS LIKE DEEDS HAVE DIFFERENT BENEFICIARIES THAN MY WILL?

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.

I AM SEPARATED/DIVORCED. WHAT EFFECT DOES THIS HAVE ON MY ESTATE IF I DIE WITHOUT A WILL?

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; and name who should be your children's trustee;
• 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; after consulting with your divorce attorney for the same reasons;

WHAT IS THE DIFFERENCE BETWEEN STATE AND FEDERAL ESTATE TAXES?

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 $3,500,000.00 in 2009. 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. However the state of New Jersey has an entirely different inheritance tax system.

WHAT IS ESTATE PLANNING?

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 $3.5 million in 2009, 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 $3.5 million credit/exemptions.

DO I NEED ESTATE PLANNING?

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.

WHEN AND WHY SHOULD I REVIEW MY ESTATE PLAN?

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 beneficiary's, 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; or
• When other special circumstances (such as the need to care for an elderly or disabled dependent) arise.

WHAT IS A TRUST?

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, allow professional management of assets, ensure provisions for minors and in some states under certain circumstances, avoid probate.

IF I CREATE A TRUST, MAY I TERMINATE IT WHENEVER I CHOOSE?

Yes, if you create a Revocable Trust. Trusts are either revocable or irrevocable. With a Revocable Trust, the provisions may be changed or even terminated entirely during your lifetime. Since you maintain control of the assets, the trust property remains part of your taxable estate. With an Irrevocable Trust, though, 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.

WHAT TYPES OF TRUSTS CAN I CREATE?

Credit Shelter Trust: This type of trust is based on the federal unified credit. 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, which depends on the 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.

DO I NEED AN ATTORNEY?

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

Information found at this Web site is for general informational purposes only and is not intended to be legal advice or the rendering of a legal opinion. DO NOT assume that anything contained in these Web pages answers your specific legal problem. Each legal situation is unique. You should seek independent legal advice and counsel regarding any specific legal problem you may have.