Popular Misconceptions About Estate Planning

1.  “Only wealthy people need Wills.”

FALSE. Every person should have a Will regardless of the value of assets. A Will serves many purposes. It provides for disposition of assets, which should include personal goods, realty and monetary accounts. Without a Will, this disposition is governed by the Pennsylvania intestacy law, which provides for distribution first to spouse and children and/or grandchildren in set shares; thereafter, if no spouse exists, to children and/or grandchildren; and if none of the above, to the next nearest class of relatives still living. If no relatives survive, then the Commonwealth of Pennsylvania will take the assets. This disposition is usually not in keeping with an individual’s wishes.

A Will can also help to prevent disputes between the heirs. By providing for disposition of personal goods, many family fights can be avoided.

The Will should name a guardian of the persons to take custody of minor children, and this is of critical importance. Without such an appointment, the surviving adult family members must decide on a guardian of the children, and then must proceed to Court to complete the appointment. The resulting guardian may not be the person that the parent would have wished to take this role, and could actually be harmful to the children’s best interests.

The Will should provide for a trustee or guardian of any share which is left to a minor. Without such an appointment money cannot be distributed. Again, a court appointment will be necessary, at added expense, and the person so appointed may not be the one the author of the Will would have trusted.

The Will should appoint an Executor to carry out the instructions as written in the Will. Without a Will, the nearest class of relatives all have the right to serve, and may not be able to agree among themselves as to who should serve.

2.  “In the absence of a Will, the surviving spouse will take all.”

FALSE. While a surviving spouse will receive all assets held in joint names of the couple, (known as “tenants by the entireties”) any asset held solely in the name of the deceased will pass in shares to the spouse and children of the deceased. The share of the spouse varies depending on the number of children, and whether they are children of the surviving spouse or step-children. For example, a husband with two children from a previous marriage dies without a Will; his second wife will receive one-half and his two children will share in the other one-half. If his only asset is a family farm or business, imagine the step-mother and two step-children attempting to carry on. In most such cases, there is resentment which may eventually lead to open warfare and possible loss of the farm or business.

3.  “Probate expenses will eat up the estate.”

FALSE. Probate is the process of filing the Will in the courthouse and then settling the estate. The filing fee for probate is small, usually under $300 except in very large estates. Advertising expenses required by law are approximately $200. The Executor is entitled to a fee of up to 5% of the estate value, but if a family member is named, this money stays in the family and is not lost. An attorney’s fee may be as much as 5%, although it may be less. Therefore, the cost is usually in the vicinity of 10%, but seldom more.

4.  “Everyone should have a living trust.”

FALSE.  Living trust serve some very good purposes including ease of management, providing for a smooth transition of assets through disability and after death, preservation of privacy, and reduction of probate fees. However, there are some costs involved in setting up the trust and the asset must be formally transferred into trust name. Depending upon the beneficiaries and the nature and value of the assets, transfers may be somewhat costly. For example, although a trust may ultimately benefit charities, there will be a Pennsylvania real estate transfer tax of 2% on the transfer of real estate into the trust. If a beneficiary, i.e. son or daughter, is serving as Executor of the Will, his or her 5 % fee will remain in the family, and so there is less incentive to use a living trust to save on this expense. Legal services will still be required to set up the trust and to distribute it after death. There may only be a small savings in this item.

Living trusts do afford great benefit where management assistance is needed. For example, in the case of a husband and wife, suppose that the husband always manages the couple’s stock and mutual fund portfolio. He is then diagnosed in the early stages of Alzheimer’s. His wife has no knowledge of the financial management and is very worried about continuing with it once the husband’s condition prevents him from doing so any longer. In this situation, a living trust is very useful in setting up a successor trustee to handle the management in place of the husband.

5.  “The use of a living trust avoids death taxes.”

FALSE. A living trust which is flexible and can be changed or revoked by its creator will not reduce estate or inheritance taxes at all. The law presumes that a revocable trust remains fully in the control of its creator or “settlor” and imposes taxes on the trust assets at death of the creator,  the same as if the trust had not been used.

There are trusts which can help to reduce or eliminate taxes, but these have serious limitations. One such trust is an irrevocable trust, which can never be changed or revoked, nor can beneficiaries or shares be changed. Since it is impossible to foresee the future, many people are uncomfortable with the idea of locking themselves into an irrevocable trust. One good use of an irrevocable trust is for the holding of term life insurance. In this type of trust, tax on the life insurance proceeds can be eliminated if very detailed requirements are met. If the settlor later decides the trust provisions are not as he wishes them to be, the policy can be allowed to lapse.

Another tax-reducing type of trust is one created by one (or each) member of a married couple, with marital deduction provisions. This marital trust plan can eliminate some or all estate and inheritance taxes if correctly drawn, and can take the form of a living trust or one included in a Will, which is known as a “testamentary trust”.  Marital trust planning is only needed in very large estates which exceed a statutory threshold.  This threshold is changing and may soon be lowered.

6.  “A Will is recorded at the Courthouse right after it is signed.”

FALSE. The Will has no legal effect until the author of it (the “testator”) dies. The Will can be changed many times if the testator so desires. Therefore, the original Will is not filed at the Courthouse until death occurs, and then only if assets held in the Testator’s sole name indicate the need to open a probate estate.

7.  “A husband and wife should have a single joint Will.”

FALSE. This practice was used many years ago, but is no longer appropriate, as it gave rise to many problems. If Sam and Mary, husband and wife, sign a joint Will saying “I leave all to my three children equally,” what happens when Sam dies and Mary is still living? Does Sam’s estate pass directly to the children and not to Mary? After Sam is gone and the Will has been filed for probate, may Mary make a new Will, or is she bound by the filed one? If Mary writes a new Will leaving less or nothing to one of the three children, may that child attack the new Will and claim the joint Will controls? The answers to these questions may vary, and the obvious problems illustrate why a joint Will for two people is a bad idea.

8.  “A home-drawn Will is just as good as one prepared by an attorney.”

Hardly ever true. The law in Pennsylvania allows home-made Wills, and requires only that they be in writing and signed at the end. Pictures, videos or audio tapes will not suffice. The Will should also be dated, as the last Will in time supersedes all prior ones. The Will is not required to be witnessed or notarized. There have been cases of Wills written on a shirt, a page from the Bible, and even a piece of a wall, where the writing was brought to Court and admitted to probate.

However, the dangers in doing a Will without professional help are many. The author undoubtedly knows exactly what he or she wishes to leave to whom. However, the language used may be open to interpretation. As above, a Will has no legal effect and will usually not be seen by others until death occurs. By definition, by the time surviving family members try to interpret the Will, the person who wrote it can no longer be asked to clarify it. There may be contradictions in its terms so that the Executor does not know how to distribute the assets. For example, Ruth writes her own Will and states, “I leave the family farm to my children or survivors. Everything else I have, I give to the church.” Ruth dies owning four parcels of land in two different townships acquired in four different deeds. Two were once farmed, but none have been engaged in active farming for nearly twenty years. Did Ruth intend all four parcels to go to the children? Ruth had three children, but one son has died, leaving six children of his who are still living. Did Ruth mean that the farm would go to her two surviving children, or should those grandchildren who survived the deceased son also have shares? Shall the farm be divided into thirds and one-third then be divided among the deceased son’s children, or shall all eight beneficiaries take one-eighth each? This Will is headed for litigation and will likely pit the two living children against their nieces and nephews. Further, it may be unclear what church Ruth intended and that church, if identified, may also become embroiled in court over the Will.

Or change the facts slightly: Ruth dies owning a working farm. Did her Will intend to leave a working farm to children or only real estate? What will become of the $50,000 worth of farm tractors and equipment she owned, or her 200 head of cattle? Will the children be able to carry on the farm or must these valuable items pass to the church? A judge will have to decide.

The danger of the Will being misconstrued is very likely. Ruth’s true intentions may never be known and would die with her, leaving behind only a family torn apart by hard feelings.

Also, a professionally-drawn Will should be witnessed by at least two independent witnesses and a Notary, none of whom are beneficiaries of it. Although this is not required by law, this procedure provides three persons who may need to testify in support of the Will. Suppose Ruth left “all the assets I own to my son Paul.” At her death her daughter, Martha comes forward and challenges the Will, saying her mother was ill and in a weakened condition, or not in her right mind, or that Paul coerced their mother, or deceived Ruth into believing that Martha had died. If Ruth signed the Will in complete privacy, no one will be able to say what occurred. In a case of a witnessed and notarized Will, three persons with no reason to lie can each testify as to what condition Ruth was in and whether she was coerced or deceived.

For these reasons and many others, a home-drawn Will is very risky and gives rise to problems more often than not. The cost of a professionally-drawn Will begins at around $250 and is certainly money well spent to insure that wishes are carried out and to reduce the likelihood of family battles.

9.  “Jointly-held assets pass automatically and tax-free to the survivor.”

Only partially true. Assets jointly held by husband and wife are presumed to be “tenancy by the entireties” and will pass to the surviving spouse on the first spouse’s death. There is no Pennsylvania Inheritance Tax on spousal assets nor any Federal Estate Tax on the first death.

All other persons who are not husband and wife will have some tax to pay on the first owner’s death. First, in order to be a joint asset with right of survivorship, this must be clearly stated or intended by the parties. An asset such as a bank account held in two names is usually presumed to be joint with survivorship under bank rules and law. However, a piece of land in two names is not presumed joint, and unless clearly titled joint with right of survivorship, the land would not pass automatically to the owner who survives the first to die. Without a clear statement of survivorship intention, the law calls this a “tenancy in common” and the land will pass one-half through the estate of the first owner to die, to his heirs, who may not be the other co-owners.

In any co-ownership other than husband and wife, there will be inheritance and/or estate tax due on the deceased owner’s share. The fraction owned by the deceased will be taxed, so that if two co-owners hold the land, one-half will be taxed; if three owned it, one-third, etc. The title of land held jointly with right of survivorship will pass automatically to the survivor. Although the survivor becomes the sole owner, there is tax on the deceased owner’s share. This tax is due not later than nine months after the first co-owner dies. If not paid at that time, interest and penalties will be added.

 

The above misconceptions are popularly held and many people make vital decisions based on these misunderstandings. As with any legal need, specific facts of each person’s affairs must be discussed before a plan is developed. Professional help is a must and can avoid many problems.

Often clients come in and begin by saying, “My friend told me…” and the statements are outlandishly wrong.  Seek good, local, experienced advice and save by preventing costly mistakes and lawsuits among your heirs.  Let us help.

By Lisa Pepicelli Youngs, Esq.

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