Making the Best Use of Estate Planning Professionals

By the time an estate plan takes full effect, its creator will have died making most changes impossible.  Careful, thorough planning is crucial to avoid creation of problems for the family of the deceased.

An estate plan should be developed with advice of the family attorney, accountant, and often a financial planner or insurance representative.  Each professional should be advised of the work being done by the others to produce a comprehensive plan.

The attorney will most often draft the Will and may recommend a number of other gift-giving, trust, and/or tax-saving devices.  It may seem tempting to avoid the expense of an attorney by using pre-printed forms or the advertised Will “kits”; however, the dangers far exceed the possible benefits of such mass-produced forms.

Every word of a Will is critical and a slight variation in phrasing can change the result drastically.  The author of the Will cannot be present to explain his or her intentions because the Will can only take effect after death.  The document must therefore be completely clear on its face.  While a form may raise relevant issues, an untrained use can run afoul of numerous rules of law which change the result to one never intended.

The attorney will ask many questions about the assets of the family, the values of them, and in whose name they are titled; simple changes in title can save substantial tax and probate fees.  For example, a husband may own the couple’s home in his name only; if he dies before his wife, she will find it necessary to file estate administration papers and incur additional costs on what she has regarded as her own home, all at a time when emotions are high and finances are in disorder.  Also, if husband dies intestate, any children may be entitled to a share of said home.

Considerable advance planning can be accomplished by organization of assets into investments through Trusts, annuities, and life insurance.  Great care is needed as the tax consequences of any of these devices can vary widely.  A financial planner or insurance adviser can present alternatives, which should be reviewed with the family accountant and attorney to be sure that all aspects are appropriate to the family needs.

Trusts, gifts, and other devices recommended by the attorney should also be reviewed with an accountant, as these actions cause various income tax consequences, some desirable and others very harmful.

Any written attempt by the parent to ensure partial control of the gift or to retain a “life estate” to use the asset while living will result in full taxation at death, and saves only the probate expense.  Therefore, only property which the donor is absolutely certain he or she will never need is safe to give, and this degree of certainty is usually unattainable except by very wealthy persons.  Of course, after full advice and discussion, the donor may decide to proceed and accept the risks.

Another device for avoidance of probate is the creation of an irrevocable Trust during life.  Here the creator, called the “settlor,” places complete control of certain assets into the hands of a trustee, with instructions to apply the assets to the benefit of named beneficiaries.  To avoid probate and taxation, the Trust must be irrevocable such that the settlor can never again reclaim the assets or change the Trust terms.  The risk, as above, is that settlor may someday need the asset, and would be unable to obtain it.  Or the settlor’s intentions as to either management of the Trust or the desire to benefit the named beneficiaries may change, but settlor will be powerless to change the Trust.

A frequently-used technique for avoiding probate and reducing, although not eliminating inheritance tax, is to place assets in joint title.  To use this device, a bank account, investment, real estate, or other asset is placed in the names of “John Parent and Susan Daughter, as joint tenants with right of survivorship”.  This form of title is open to all and is not limited to children or relatives.  When used by husband and wife, joint title, also in this instance called tenancy by the entireties, will result in no inheritance tax.  As to all others, the joint tenancy will reduce the tax, as the death of any one joint tenant will result in tax only on the fractional share of the deceased person.  In the example above, when John Parent dies, survived by Susan Daughter, Susan immediately becomes sole owner of the asset and will owe a tax of 4.5% on one-half of the value of the asset.  As with gifts the joint title must be created more than one year prior to the death in order to benefit from the tax reduction.

Again, as with gifts, risks are inherent in the creation of joint title.  First, the parent may not realize that the entire asset will pass to that other joint tenant, to the possible exclusion of other children or intended beneficiaries.  Second, if the asset is a joint checking or savings account, either joint tenant can withdraw the entire balance at any time, which places the parent at risk of the child’s potential greed.  Third, where the asset is an investment such as an annuity or mutual fund, the signature of both joint tenants will be required to access the account, and the child may refuse to cooperate.  Fourth, if the asset is real estate, the parent(s) and the child and the child’s spouse will all need to sign a Deed in order to sell or transfer the real property; the parent’s property is thus subject to the control of not only the child, but a potentially less loyal in-law.  In the fourth instance, divorce and civil suits again threaten to subject the parent to risk of loss.  Fifth, if the child should die unexpectedly prior the parent, the parent will have to pay inheritance tax on the child’s share, which could be a very heavy burden.

After full discussion of these and other risks, the client will then be in a position to make an educated choice.  The risks each involve possible hardship, sometimes severe, to the client.  If none of the avoidance techniques are employed, the family or other beneficiaries will bear the expense of probate and taxation.  Since these expenses come due only after death of the principal client, the client may purchase sufficient life insurance or hold cash to cover the costs and taxes.  For estates valued at the Federal Estate Tax limit ($5.34 million in 2014), the costs and taxes will be far less than those of the Tax Limit due to the federal estate tax on the latter.

The issues and risks described here are a result of Pennsylvania law and will vary in other states.  All potential consequences should be carefully reviewed with an attorney and accountant in each state where assets are held so that the chosen alternatives will hold no unpleasant surprises for the client.  The client’s individual financial situation is the key to selection among these devices.

By Lisa Pepicelli Youngs, Esq.

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