Trust and Estates attorney Patti Spencer is a national authority on estate planning matters. She is a prolific author of books and articles designed to help individuals, families, attorneys, accountants and business owners protect their financial assets and minimize tax burdens through sophisticated estate planning. Here are answers to some of the trust and estate questions she is frequently asked.
- How your Estate is Distributed
Why do you Need a Will?
A Will is a document that allows you to direct the transfer of assets after your death. It also enables you to designate an executor or personal representative to effectively manage and distribute your estate. Perhaps most importantly, if you have minor children, your Will is the only means for you to nominate a guardian for them.
What Property Does Not Pass by Will?
Jointly Owned Property — Assets held in joint name pass by right of survivorship. Accordingly, such assets do not go through probate and pass directly to the surviving joint owner. This can be particularly troublesome when all assets are held jointly because it may prevent full funding of a Credit Shelter Trust.
Life Insurance — Life insurance proceeds pass to the person named as beneficiary under the policy. (If the estate is the beneficiary, the proceeds will be probate assets and pass through the estate.) It is thus very important that a contingent beneficiary be named; otherwise, most policies will revert to the estate.
Retirement Plans — As with life insurance, IRAs, pension plans, 401 (k) plans, and other retirement plans (including annuities) generally pass outside probate, provided there is a named beneficiary. The beneficiary can be an individual or a trust.
Trusts — Funds held in trust are disposed of in accordance with the terms of the trust and not the Will. Usually, most trusts do not pass back into the estate.
If You Do Not Have a Will…
Absent a Will, your estate will be distributed according to the state’s interstate statutes. For example, under the intestacy laws of Pennsylvania, a surviving spouse is entitled to the first $30,000 and only one-half of the remaining property. The children, regardless of their respective needs, inherit the remaining one-half.
- Disposing of Tangible Personal Property
How Can I Dispose of Tangible Personal Property?
Various items of tangible personal property may be disposed of by your Will. You may use a separate writing or Memorandum to dispose of your tangible personal property. Examples of such property include jewelry, silverware, antiques, stamp collections, china, glassware, furniture and furnishings.
What Are the Requirements for Using a Memorandum?
- The Memorandum may be handwritten or typed, and it must be dated and signed by you. Although not required, it is recommended that your signature be witnessed.
- The Memorandum must clearly describe each item so that a particular item will not be confused with another similar item.
- Your Will must specifically refer to your disposing of tangible personal property by separate Memorandum.
What Other Considerations Are There?
- You should clearly identify the beneficiary who is to receive each item by his or her proper name and relationship to you. You should also list his or her address.
- Consideration should be given to naming an alternate beneficiary should the first beneficiary not survive to receive the property.
- From time to time, you may change the beneficiaries or the items listed in the Memorandum, and you may revise or revoke the entire Memorandum. However, never make changes by marking or altering a signed Memorandum. Changes should be made only by typing or writing a new Memorandum.
- The Memorandum must be completed prior to–or after–the date of signing your Will.
- Health Care Directives
What is an Advance Directive for Health Care?
An Advance Directive for Health Care is a single document authorized by Pennsylvania law that permits you to select a health care representative and state your preferences regarding medical treatment in the event you are unable to make such decisions. An Advance Directive consists of two parts: (1) an Instruction Directive (commonly known as a “Living Will”) that expresses medical treatments you wish to accept or refuse and the circumstances under which your wishes will be implemented; and (2) appointment of a Health Care Proxy (equivalent to power of attorney for health care).
What is the difference between a Living Will and Health Care Proxy?
A Living Will states the extent to which an individual wishes to be provided life sustaining treatment if: (1) the individual is terminally ill or permanently unconscious; (2) the life sustaining treatment is experimental, likely to be futile, or merely prolong the dying process; or (3) the individual has a serious irreversible illness, and the benefits of treatment are outweighed by its risks and burdens. The Living Will can state a preference against (or for) specific life sustaining treatments. A Health Care Proxy appoints a representative to implement the Living Will and make health care decisions in cases where a Living Will does not apply, such as a stroke. Additionally, you may face medical circumstances that were not considered at the time you wrote your Living Will. Although you can have either part without the other, it is usually recommended that you have both.
Whom should I appoint as my Health Care Representative?
Most people name a relative, close friend, or religious advisor. Your health care representative should understand your wishes, and be prepared to carry them out. Sometimes, beneficiaries of your estate may feel torn between the responsibility of carrying out your intentions and knowing that they will inherit part of your estate.
Can I change my Advance Directive?
You can make changes to your Directive or revoke it at any time. This can be done in writing, orally, or by any action that indicates you no longer want the Directive to take effect.
Who should have copies of my Advance Directive?
You should give copies of your Directive to your health care representative, physician, and family members or close friends as you deem appropriate.
- Choosing Your Executor
What Are the Executor’s Duties?
Appointment as Executor involves substantial responsibility. An Executor has a fiduciary duty to manage the estate with the care and skill that a prudent person would use to manage his or her own affairs. A sampling of an Executor’s duties includes:
- Probate of the Will
- Custody, preservation and administration of estate assets
- Collection of income from investments, business interests and real estate
- Prudent investment of estate assets
- Payment of estate expenses
- Filing of appropriate Federal and State inheritance and income tax returns
- Distribution, when appropriate, of estate assets and income for the benefit of heirs
Can an Executor Be Held Personally Liable?
An Executor is personally liable if the Executor violates or fails to perform any duty owed to the beneficiaries (e.g., a duty of diligence and due care) and if the breach is intentional or negligent. If so, the beneficiaries can sue the Executor to recover the value lost because of the breach. Thus you should name as Executor only those individuals or institutions that have the expertise and responsibility to properly administer an estate.
What Are the Advantages of Naming a Corporate Executor?
Many people mistakenly believe that settling an estate is quick and simple. Although this may be the case in some instances, many estates involve numerous complexities involving real estate, closely-held stock, post mortem tax planning, and liquidation of business interests, just to mention a few. A Corporate Executor has extensive experience in matters such as investment management, re-registering of securities, and funding trusts. It can often greatly reduce legal costs and produce income from estate tax savings. Individual Executors are often described by other family members as biased, which can sometimes lead to family strife. Frequently, it makes sense to name a Corporate Executor and a family member as Co-Executors.
How Long Does It Take To Settle an Estate?
Estates above $2,000,000 require the filing of a Federal estate tax return (form 706) within 9 months of death. The IRS usually takes close to a year to give approval of the return, which normally leads to distribution and closing of the estate within 1-2 years.
- Powers of Attorney
What is a Power of Attorney?
A Durable Power of Attorney is a written document that gives one person the authority to transact business on behalf of another. It provides for continuous financial management if a person becomes incapacitated or incompetent, and eliminates the need for a court-appointed guardian or conservator.
What is a “Durable” Power of Attorney?
Under a Durable Power of Attorney, the instrument becomes effective immediately and continues despite the principal’s disability. Under a “Springing” Power of Attorney, the instrument is not activated unless and until a specified condition is satisfied, e.g., certification of incapacity by one or more physicians. Practically speaking, the Durable Power is more likely to be accepted by a third party because it alleviates the need for proof regarding competence.
Legally, the agent is the Principal’s fiduciary and must act in furtherance of the principal’s best interests. Nevertheless, because the agent will usually have broad authority, the principal is advised to consider giving the power only to those whom the principal implicitly trusts.
Why is a Power of Attorney so important?
Without a Power of Attorney, the person would have to be declared incompetent by a court, with the court – and not the person – choosing the guardian. This process is costly and cumbersome, including: preparation and filing of legal papers, physician affidavits, court hearings, and notices to interested parties. Many people take for granted the routine management of their financial affairs. Nevertheless, even married couples cannot execute financial transactions for their spouse without a Power of Attorney. Consider just a few examples:
- Selling jointly-held real property, e.g., the marital residence.
- Applying for government benefits, such as Medicare and Social Security.
- Access to safe deposit boxes.
- Signing tax returns.
- Conducting banking and other investment transactions.
In addition, Powers of Attorney can be invaluable in planning for long term care.