Estate Planning

I recently came upon an old Forbes article about what women need to know about estate planning (read it here).  With women living longer than men, now more than ever do they need to take charge of the estate planning process, or at least they need to be an equal participant in it.  Estate planning affects women more profoundly because they generally outlive their spouses, giving them the last word about where the family's weath goes.  As a result, they need to be up to date with their estate planning and it intricacies.  Although the field is still dominated by men, widows are now able to balance a checkbook and handle the family assets.  If they do not participate in estate planning, women are far more likely to see their living standards compromised in retirement.  And since 42% of women are widowed (compared to 14% of men), they have the last word about which family members and charities the couples assets go to.

Before it is too late, women should talk to their spouses, children and even parents to avoid fights, hostility and hurt feelings.  To get the conversation started, here are some tips, but know that there are many other things you should consider.  Consult an estate planning attorney should you have more questions or want more information.

• Talk to your husband about the conversation.  Know what he wants in case he passes first, but make sure to find a gentle way to bring up the conversation.
• Talk to your children, too.  You may be surprised to hear their views on the subject.  You don't have to agree to their wishes, but it is important to know what they think.
• Learn the key deadlines and how they apply when a spouse dies.  The Forbes article lists the time frames for 2011, but it is possible that they have changed already and might be changing again in the future.  Consult an estate planning attorney to answer this and any other questions you may have.
• Find someone you can trust.  Our lives may be longer, but it also means a greater chance of suffering from a diminished mental state.  Make sure you have a friend or family member on hand to act on your behalf.

In the news, there has been a lot of talk about the impending "fiscal cliff," and if Congress and the administration can't strike a deal, starting tomorrow, January 1, there will be spending cuts and tax increases because of this cliff.  These changes have the potential to greatly impact many families, especially in terms of estate planning.

In the new year, the federal estate tax and gift tax exemptions will drop from their current level of $5.12 million to $1 million.  This means that if your estate values over $1 million, only the first million dollars will be exempt from tax, leaving the rest subject to tax rates that will also be increasing.  In 2012, the maximum tax rate was 35 percent; under current law it will be raised to 55%.  Tax rates have not been that high since 2001, and the exemption level was last at $1 million in 2003.

These two changes will all of a sudden cause quite a few people to worry about estate planning who weren't worried before.  Families with estates under $1 million can still relax, and those with estates valuing over $5.12 have likely already structured their wills to protect from estate taxes.  However, estates totaling between $1 million and $5.12 million are probably not ready for these changes.

There are several different techniques available to get out of the direct line of fire of the new estate tax laws.  Establishing trusts and using different insurance methods are two, but there are many others available.  The best plan of action would be to seek counsel from an estate planning attorney who knows all the available options and can establish the plan most suited for your needs.  While it's not too late to take action, moving quickly will best protect your family and the legacy you leave behind in the new year.

Unfortunately, most action taken now will likely prove to be unnecessary in the future, but how soon in the future is unknown.  Exemptions and tax rates have changed 9 times since the start of the century, and because most congressmen have estates larger than $1 million and will want to protect themselves from the high rates, it is likely that the exemption amount will raise to around $3 million.  However, the specifics of these changes and how soon they will come into effect are unknown at this time, and with so much uncertainty surrounding them, it is best to take action and protect your family as soon as possible.

First, let me apologize for the hiatus in blog posts.  The school year started up again, and with it everyone became a bit busier, myself included.  However, I am hopefully back on track to keeping you updated and informed on Estate Planning and Elder Law.

Estate planning can be easy, and when done right it saves a lot of hassle in the end.  However, this is a confusing topic and the possibility for error is huge.  Being an estate planning firm, we have seen and heard all the horror stories about plans going wrong.  To prevent that from happening, here is a list of the most common mistakes of estate planning.

1.  Failure to plan at all!!  This is pretty simple, if you don't have a plan everything can go down the drain.  We've had stories of families being torn apart because they didn't know the wishes of their loved one.  The claims of "She wanted me to have it" are endless, and unless you have a will to truley know, the claims can cause families to fall to pieces.

2.  Having an improper or antiquated plan.  This is just as bad as not having a plan.  Think about where you were 10 years ago compared to where you are today.  Were you married then?  How about now?  Do you have kids?  Has someone passed away?  Was someone else born?  All of these changes are likely to happen in a person's lifetime and require will revisions.  Old wills may also be following old tax laws, which no longer apply and can still cause problems.  At the bare minimum, estate planning documents should be reviewed every five years, and they should definitely be reviewed after any major life changes.

3.  Improper use of joint property.  Don't be tempted to avoid estate planning by using joint accounts on property.  This planning could cause huge problems.  For example, if your co-owner is sued or files for bankruptcy, your valued asset will be attacked by creditors, causing you to lose it.  Additionally, you could accidently disinherit people completely through joint ownerships if the co-owner doesn't know (or follow) your wishes post death.  Prior planning can avoid these mishaps, but it requires thought and effort before declaring a joint owner.

4.  Not properly using IRS-approved annual gift accounts.  By current law, every American can gift $13,000 annually, completely tax free, to anyone they want.  Of course, doing so might not be the wisest move, but it might be very effective to shrink an estate.  Shrinking the estate will then lower the income tax paid by the estate.  While you may not want to give these funds to family members while they are young, it is still an idea to consider later in life.

5.  Failure to plan for the distribution of your pension retirement accounts.  An alarming 80% of all pension and IRA monies are passed (and therefore taxed) to beneficiares named on the accounts, meaning only 20% of the nation's IRA monies are used as retirement income.  In other words, we set aside pension money just in case we need it, but then don't usually touch it.  And these investments can grow to astronomical numbers, but only a few people know to plan for them.  Accounting for these pensions is a crucial part to your estate plan.

6.  Lacking liquidity to cover estaet settlement expenses.  After your passing, there will be a financial assessment, and no matter what your situation is, your heirs and executor will need cash!  Because many people don't have a sound estate plan, most heirs have to liquidate assets to generate enough cash to cover estate costs.  This can cause stress, which might have been avoided if there had been a strategic plan in place beforehand.

7.  Improperly arranged and owned life insurance.  The proceeds of a life insurance policy might pass income tax free, but they are not free from estate tax.  That is, unless the policy is owned by someone other than yourself (in which case the estate would have no claim on the account).  Another common mistake is the failure to name a contingent beneficiary.  Millions of dollars lay unclaimed due to their beneficiary predeceasing the insured.  And a third error is that many clients have antiquated policies.  These policies served a purpose for when your kids were younger, or when you just started a new business.  Now that times have changed in your life, it's time to change your policy so that it is more useful.

8.  Not planning for the cost of long-term care.  Four out of ten Americans will need long-term care, according to the Health Insurance Association of America.  This costs between $40,000 and $80,000 yearly, which is definitely enough to wipe out many estates.  Also, in order to apply for Medicare (or Medical Assistance), you must spend down your assets, by which point your estate might be gone or almost gone.  Are you prepared to take the chance that your assets will endure any potential costs?  Could you survive a long-term illness or accident financially?

9.  Not leaving behind your story.  When you pass, don't think of your legacy just being in financialy terms.  After working with older clients, we always ask what piece of advice they can give us from their experiences.  Write down this advice and your own unique history.  For the most part, these histories become faded memories before disappearing forever, so make sure yours is there to be remembered.

If you enjoyed reading this post, check out this one, What Might be Missing from Your Will.

While perusing the internet recently, I came across an article on Forbes by Deborah L. Jacobs.  At a recent online conference for estate planning advisors, she noted the questions these advisors had.  Most of these questions had to do with inherited IRAs and 529 college savings accounts.  Since some of the advisors didn't know the answers and because some are tricky, we thought it'd be in the best interest of our clients if we shared some information on them.

Inherited IRAs

The person who inherits your IRA, like other assets, isn't necessarily the person you named in your will.  Your beneficiary designations on all accounts take precedence over wishes stated in a will.  So what happens if there's no beneficiary on file?  The heir is determined by the IRA custodian's policy.  Usually the IRA is first awarded to a living spouse, then to the estate, so if you want to pass on your IRA directly to your kids, you need a beneficiary form.  To give your heirs maximum flexibility, name both primary and alternate beneficiaries.

If you've inherited an IRA, do nothing until you know what rules apply.  For example, if you are not the spouse and have inherited an IRA, you must begin taking distributions by December 31 of the year after inheriting.  Also, unless you are the spouse, you must retitle the IRA to include the original owner's name.  And once you've inherited an IRA, make sure to designate beneficiaries.

An advisor asked if you can write on the beneficiary form "according to the terms of my will."  While this will most likely be accepted by the custodian, there's no guarantee that there won't be complications.  By writing this, you have to verify that the custodian has the will on file and that they have the latest version of the will.  Still, they may not accept the designation this way, so your best bet is still to name a beneficiary.

529 Plans

A 529 Plan is an education savings plan designed to help families set aside funds for future college costs.  As long as the plan satisfies a few basic requirements, federal tax law provides special benefits to the plan participant.  This can include gift and estate tax benefits.  You can give anyone $13,000 annually without eating into your exemption from gift or estate tax.  When it comes to 529s, however, you can deposit as much as $65,000 (or $130,000 for a couple) and treat it as five years' worth of gifts.  Once in the 520, the money can grow tax free.

One advisor said he heard that if the grandparent is the owner of a 529 plan, distributions are considered income to the child and jeopardize their financial aid eligibility.  He is correct with this.  If a grandparent makes a distribution from a 529 to pay tuition, that amount counts as income and must be reported on the following year's FAFSA (Free Application for Federal Student Aid).  A student is expected to apply 50% of all income above a certain limit to education, so if a grandparent with good intentions pays the first year's tuition, he might exhaust the 529 and endanger the student's aid eligibility.  In such a case, the 529 would be best spent paying senior year tuition.

Unfortunately, it gets more complicated.  About 250 of the most expensive private colleges use a different form to award aid.  This form requires the student to report all 529 savings accounts that name him as a beneficiary and that are not owned by his parents.  These accounts can have a huge impact on aid eligibility.  You might be able to mitigate the impact on aid by transferring the account ownership to the student's parent a year before the student applies for college.  However, this raises another question: could the transfer of ownership be a taxable gift to the parent?  While the IRS hasn't ruled on this specific issue, the answer is probably not, but still be cautious.

To read the original article, click here.

Your will, your marriage license, insurance policies, medical records.  While you may have all of these documents now, what would happen if your house were to burn down, taking these with you?  Protecting your documents is just as important as having them, and keeping them safe and accessible can be easy.  Protecting them can also make your documents easier to find should you need them in a crunch.  Consider these steps to secure your family's vital documents:

1.  Take Inventory.  Find out what documents you have, documents which might be scattered in boxes in the attic, in filing cabinets, on old computers and new laptops, and other places.  Group these items, making a group of critical items (wills, power of attorneys, car titles, insurance policies, deeds, licenses, etc.) and a group of items you want to archive (old tax returns, brokerage statements, records of when you established retirement accounts, etc.).  This is also a good time to purge old documents you no longer need.

2.  Scan them.  The most practical way to duplicate files is to scan them.  Although it takes a bit more time than photocopying, scans can save you from ever having to make and mail a copy again.  If you can't scan your documents yourself, ask your accountant, lawyer or financial advisor to send you scanned copies of you documents, or hire a scanning service.  Also, check your local library to see if they have a scanner you could use.  You don't need to scan bank statements, as those are generally available online for five years, but you should make a list of accounts, as well as email and other online accounts, and include account numbers, user names and passwords.

3.  Store electronically.  Having backups on your computer won't be much help if your home burns down, destroying your hard drive.  And documents in a safe-deposit box might be inaccessible after a natural disaster or if you need them while traveling.  Instead of having to worry about those alternatives, store your documents "in the cloud" or on a remote server.  Dropbox, Microsoft's SkyDrive, Google's Googel Drive, and Apple's iCloud are all cloud-storage platforms that allow you to access your files anywhere in the world.  You can also share account information with trusted advisors and family members so that they may access the information should you be unable to. 

4.  Store securely.  If you're wary of storing sensitive documents on a cloud storage site, you should know that you are alread doing the same thing when you send emails with attachments.  However, if that doesn't calm your worries, you can enhance security by encrypting your files before downloading or adding a password to individual documents.  There are also cloud-based storage platforms available that will encrypt your documents for you (like VaultWorthy).  These are normally costlier than other cloud-storage platforms.

Want more help deciding what documents to keep and what to trash?  Read our previous blog entry, Keeping a Clean Desk.

This article was sent out in our newsletter last week, but we liked it so much we decided to share it here as well!  Did you read it in our newsletter?  Look for a few more additions in this version.

Most wills generally have the same provisions.  However every now and then there comes a will with a strange bequest.  Here are some of the weirdest will bequests known.

• Gene Roddenberry, the creator of the Star Trek television series, requested that his ashes be blasted into space on a satellite and be distributed as it orbited the earth.  In 1997, six years after his death, Roddenberry’s ashes were able “to boldly go where no man has gone before.”
• German Countess Carlotta Liebenstein left 139 million German marks (about $66.2 million) to her pet dog, Gunther III.  The dog and his offspring, Gunther IV, lived out the rest of their lives in luxury, with a personal maid, chauffeur and customized pool.
• New York hotel magnate Leona Helmsley left $12 million for the upkeep of her Maltese terrier, Trouble.  However, after the will was contested, the dog was left with only $2 million.  Still, that’s more than two of her four grandkids, who were left with nothing.
• Charles Vance Miller, an eccentric Canadian lawyer and practical jokester, bequeathed a large sum of money for the lady in Toronto who could produce the most children in the 10 years following his death.  The Great Stork Derby, as the resulting contest was called, had 4 winners who all received 125,000 Canadian dollars, or about $121,975 in the United States.  Additionally, Miller gave joint lifetime tenancy to three men known to despise each other in his Jamaican holiday home.
• Samuel Bratt grasped an opportunity to get even with his wife after his death in 1960.  She never allowed him to smoke, but in his will, he left her 330,000 pounds ($509,025) provided that she smoke 5 cigars a day.
• Juan Potomachi left more than $50,000 to the Teatro Dramatico Theatre in Buenos Aires on the condition that his skull be preserved and used in Hamlet.
• Harold West was worried about becoming a vampire after his death, so much so that he left instructions in his will for his doctor to “drive a steel stake through my heart to make sure that I am properly dead.”
• James Bowman, from Vermont, died in 1891, after his wife and two daughters passed away.  As a firm believer in reincarnation, Bowman instructed that his 21-room mansion be maintained through a specific amount of money designated for that purpose.  In addition, he specified that each night dinner must be prepared in case the family came back.  The money ran out in 1950, before the return of the family.
• A Danish widow left the equivalent of $61,700 to six chimpanzees - Jimmy, Trunte, Fifi, Trine, Grinni and Gigi - at the Copenhagen Zoo.
• Tom Goodson asked his relatives to give everyone who attended his funeral an envelope containing a one pound note with the words, “Have a smoke, crack a joke.  Thanks for coming,” written on it.
• Harry Houdini left 10 random words to his wife in his will.  He stated that she should hold a seance every Halloween after his death, and that he would communicate with her using those ten words.  She held the seances every year for 10 years, but eventually stopped because Houdini never made his presence known.
• Janis Joplin, who updated her will just two days before her death, set aside several thousand dollars for a posthumous party for 200 of her closest friends.  This party was held at her favorite bar in San Anselmo, California, and Janis noted that she wanted her friends to "get blasted after I'm gone."
• The philosophical father of utilitarianism, Jeremy Bentham, wanted his remains to be clothed in a black suit and sitting in his favorite chair inside a wooden and glass cabinet.  And that is exactly what happened; his body is preserved in the cabinet, called the Auto-icon, at University College London, with a wax head as the real one was left looking macabre after mummification.  His body sits on display at the end of the South Cloisters in the college's main building.  It has also attended meetings of the College Council, where it was listed as "present but not voting."

A Will is the legal document that declares how a person (the testator) wants to distribute his or her assets after they pass.  You may think that once their wishes are stated, there is no changing them, but an unhappy family member has the right to contest the Will.  Will contests can drag out for years and may keep all heirs from getting their entitled shares.  Although it may be impossible to prevent future relatives from fighting over your Will, there are steps you can take to minimize quarrels and ensure that your intentions are carried out.

The first step to preventing a Will contest is to understand how it can happen.  A family member may contest your Will if they believe that you did not have the requisite mental capacity to execute the Will, someone exerted undue influence over you, someone committed fraud, or the Will was not executed properly.

To make a Will contest less likely to succeed, try following these steps:

• Make sure your Will is properly executed.  Although this seems like a no brainer, it is a common way for a Will to be contested.  Each state has laws dictating what makes a Will valid.  In Pennsylvania, anyone of sound mind over the age of 18 years old may make a Will.  The Will must be in writing and signed by the testator and this signature must be witnessed by two competent witnesses.  They must also be self-proven before a notary.  The best way to ensure that your Will is properly executed is to have an estate planning attorney assist you in the drafting and executing of the Will.
• Explain your decision.  If family members understand the reasoning behind your decisions, they may be less likely to contest them.  It is a good idea to talk to family members at the time of your draft and explain to them why someone may be left out or receiving an unequal share.  If you don't talk to them about it, state the reason in the Will.  You may also want to include a letter with the Will with an explanation
• Use a no-contest clause.  A no-contest clause is one of the most effective way of preventing a challenge, but it will only work if you are willing to leave something of value to the potentially disgrumbled family member.  The way a no-contest clause works is that it allows an heir to challenge the Will, but if her or she loses the  challenge, they also lose their inheritance.  For this to work, you must leave the heir enough so that a challenge is not worth the risk of losing the inheritance.
• Prove competency.  Another common way of challenging the will is to argue that the decedent was not of "sound mind" at the time of the signing.  Avoid this argument by making sure that the attorney drafting the will tests for competency.  This may involve seeing a doctor or answering a series of questions.
• Videotape the signing.  This may be more on the extreme side, but videotaping your signing will allow family members and the court see that you are signing under your free will and makes the argument of incompetence more difficult.
• Remove the appearance of undue influence.  To avoid the appearance of undue influence, do not involve any of your possible heirs in the drafting of your will.  Family members should not be present when you discuss the will with your attorney, nor when you sign it.  To be totally safe, they shouldn't even drive you to the attorney's office.

On July 2, Governor Tom Corbett signed a piece of legislation that exempts farmers from inheritance tax.  This law, effective for all deaths after June 30, 2012, allows farmers to pass down their farms to their heirs without having to worry about the farm paying taxes after death.  These taxes (4.5% for children of the decedent, and 12% for siblings) left a large burden for those inheriting them, because although farmers are rich in land, they are often time poor in cash.  In order to pay the taxes, they would have to sell their farmland, causing farms to shrink in size and productivity as the family line grew longer.

When signing the bill, Corbett said that this tax has forced many families "to sell their legacy, their land and their way of life."  Now, as long as the farm is a working farm, it can be passed to immediate family members without having to pay inheritance tax.  In the past, farmers all knew of friends that had to dissolve the farm to pay inheritance tax.  Now, the nearly 63,000 farming families in Pennsylvania will be able to pass along the land and the business.

Cutting this tax is obviously cutting a source of revenue for state operation, making the budget a bit tighter.  However, agriculture is the top industry in the state, so this law could be healthier for the future of Pennsylvania.  The 8 million acres of farmland in Pennsylvania generates almost $6 billion in sales each year, and by protecting the land through eliminating inheritance tax, Pennsylvania can protect this industry.

Have you ever thought what will happen to your pet when you pass away?  Oprah has, and she set aside $30 million for her five dogs.  Not considering the dollar amounts, leaving money to ensure that Fido is taken care of in case of a tragedy is smart estate planning, and it could save him from being abandoned or sent to a shelter.  Although pets cannot be beneficiaries in a will, you can name a caretaker and set aside money for their care.

Pets aren’t the only ones being left out of estate planning.  Most people did not include their aging parents in their wills, even if that person is already providing care for them.  The probability of your parents, an older relative or an elderly friend outliving you might be small, but the consequences for not planning for their care should they outlive you can be huge.  Discuss the issue of parent care with siblings and parents before including it in your estate plan, but don’t forget about your parents completely.  Should they outlive you, they will need someone to take care of them and look out for their well-being.

Finally, most young people have multi-media libraries that are sizeable assets in their estate.  But have you thought to include them in your estate plan?  If you’re not around, who is going to get what and how will your loved ones know that?  These assets include social media accounts, photos, videos, music, even loyalty points.  Distributing and safeguarding these assets will help keep you loved ones from scrambling to close out accounts and accessing photos and music.  Password sharing is discouraged, so how to manage these accounts posthumously can be tricky, but recording your preference in your estate plan can’t hurt.

Most people don't realize that beneficiary designations indicated on any type of financial account, bank or brokerage accounts for example, supersede the instructions given in a will.  Yes, that's right.  Your beneficiary designations, if contradictory to your last will and testament override your will.  This is a mistake we see time and time again, and its one of our focuses as a law firm, to make sure all designations match your will so that all your intentions are met.

This means that your ex-wife could get your inheritance if she remains the designated beneficiary, even after you update your will.  Or it could mean you end up leaving your kids large sums of money at a very young age.  A lot of time and effort goes into planning your will so that your wealth is passed along as you please and beneficiary designations can easily destroy all of that.

Double check that your beneficiaries on all accounts match what you truly desire.  And whenever there is a significant change in your life, for example a birth or a marriage, review your beneficiary designations and your estate plan to ensure that the people you have named are the ones you would like to inherit your assets.

Among this week's news was the announcement that Joe Paterno's Last Will and Testament was sealed.  Although a rare occurrence (Paterno's is the only will sealed in the past 18 months according to county records) it is not an unusual request for high-profile individuals.  And in a death as public as Paterno's, especially surrounding the Sandusky scandal, it's no wonder that the family wants some aspect of privacy.  Which judge declared the sealing of the case file could not be determined, but the judge sealed the entire case file.

Paterno passed away from lung cancer on January 22.  Penn State paid an estimated $5.5 million to his estate in salary, bonuses, television and radio revenue and death benefits as well as forgiving the $350,000 oustanding loans and debt incurred by the Paternos.  Other details on Paterno's estate can be found on the loan court docket sheet that remains a public record and from the Penn State and state employees retirement system.

Like most wills in Pennsylvania, Paterno's will entered the probate process on April 5.  Probate is a court process in which the personal representative (or Executor) notifies beneficiaries, gathers assets, pays all debts and taxes, and properly distributes the estate.  Reasons for probate include fraud prevention and protection of beneficiaries.  In Pennsylvania, it is an efficient way to deal with estate assets and their distribution while protecting beneficiaries and creditors.  By sealing the will, the Paterno family was able to add another level of protection and privacy to the estate and to the beneficiaries who have already been through so much.

If you have any other questions about probate, visit our FAQs or check out this pamphlet on probate.  Or contact our office at (717) 560-4966 or questions@piersonelderlaw.com.