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What You Don’t Know That You Don’t Know: Estate Planning

It isn’t uncommon that I’m told that “a neighbor suggested…” or “my brother-in-law said…” when asking a client why a document was drafted a certain way or why an account lists a specific beneficiary instead of all the children equally. Although well meaning, this “advice” may lead to disastrous results.

Everyone’s estate plan is not the same because everyone’s circumstances are different – we each experience our own truth. Regardless of the amount of wealth you’ve accumulated, certain important distinctions apply when devising a plan: blended family, a child with disabilities, a beneficiary who is addicted to drugs or alcohol, an in-law you’d prefer not to inherit. The list is endless.

The first step of a proper plan is to create powers of attorney. Everyone over the age of 18 should have a Durable Financial Power of Attorney and a Durable Health Care Directive and Living Will, naming an Agent and a successor Agent. These documents will allow whomever you choose – spouse, child, parent – to act on your behalf if you should become incapacitated. The HIPAA laws are very strict and being married to the incapacitated person does not bypass the requirements of being appointed for action.

Next, everyone needs a Last Will and Testament. Why? Doesn’t everything just pass to my spouse when I die? I’m asked this question on a daily basis and the answer is “it depends”. If you pass away with an asset in your individual name, and that asset does not name a beneficiary, then that asset MUST go through the probate process. Which leads to the next question: what is probate? Probate is a court process, in the county the deceased resided, in which the Court will grant permission to the Executor as named in the will or the Administrator as named by action. Probate can take many, many months and cost several thousand dollars. The same holds true if you are not married at your death but have children. Without the probate process, an asset cannot be transferred out of the deceased person’s name until the Court agrees.

Another unknown fact is that if you pass away without a will in Pennsylvania, and you have an asset in your individual name, if you are married with children, your spouse does not receive 100% of that asset. Pennsylvania Intestacy Law will then dictate who receives what portion of your probate estate.

If a party wants to contest the validity of a will, the best advice is to act quickly. We must file a caveat prior to the will being taken to Court and probated by the will’s Executor. This caveat will give notice to the Court that there is a contest and therefore an estate will not be created prior to a Judge ruling on the will’s validity. What happens if you missed your opportunity to contest a will and the estate has already been opened? A party of interest has one year to file an appeal with the Court, stating very specific reasoning as to why the will is not valid.

The age-old adage: “nothing can be said to be certain, except death and taxes…” Benjamin Franklin uttered such truth in 1789 and it still holds true today. So, what about taxes – who pays? Inheritance tax is imposed as a percentage of the value of a decedent’s estate transferred to beneficiaries by will, heirs by intestacy and transferees by operation of law. And, it depends on the beneficiary’s relationship to the decedent and the amount of money that they receive. Surviving spouses, parents inheriting from a child under the age of 21 and charities are the only beneficiaries who do not have to pay Pennsylvania Inheritance Tax. Children and grandchildren pay 4.5%, siblings pay 12% and everyone else pays 15%.

This is just one of the tax consequences beneficiaries face. When someone leaves you an individual retirement account you may end up at the tricky three-way intersection of estate planning, financial planning and tax planning. One wrong decision could lead to expensive consequences, and it’s doubtful that the IRS will give you a redo. Before a beneficiary makes any decisions with retirement accounts, I strongly advise that they meet with a reliable financial advisor or tax planner. The worst decision that beneficiaries make is to cash out an inherited account and then make an appointment to see an advisor. Beneficiaries must be proactive and rather than seeing dollar signs $$$ they must yield and seek a professional’s advice. Why? Because the tax consequences when cashing out an account can be crippling – up to 40%.

And while only 2 out of every 1,000 American households will face federal estate tax, I’d be remiss without mentioning it. Only the wealthiest estates pay this tax because it’s levied only on estates worth more than $5.49 million ($10.98 million per married couple) in 2017. If you fall into that very limited category, don’t fret – there are many tax loop holes which allow this tax to be avoided. But without planning, we can’t avoid after the fact.

Therefore, the best advice that I can give you is if you’ve put off planning or have never spoken with an estate planning attorney about your particular situation, which includes tax consequences, make the call for your complimentary appointment.

This industry insight was written by Attorney Michele P. Conti, an estate planning and elder law attorney, with a focus on tax preservation. Michele attended Allegheny College in Meadville, Oxford University, Duquesne University School of Law and received her LL.M. in Taxation from Villanova University. Michele has worked in the estate planning and elder law arena throughout her entire career. Michele’s primary goal is to educate everyone, no matter their age, regarding the proper way to plan and be successful in your planning strategies.