Estate Planning

There are many legal strategies involved in estate planning, including wills, revocable living trusts, irrevocable trusts, durable powers of attorney, and health care documents.  New clients often say that they do not have an estate plan. Most people are surprised to learn that they actually do have a plan. In the absence of legal planning otherwise, their estate will be distributed after death according to a Pennsylvania law known as the intestacy law.  This plan is rarely the plan they would have chosen for themselves.  A properly drafted estate plan replaces the Pennsylvania intestacy law with your unique plan.

Following is some general information about estate planning.

Last Will and Testament

It’s common for people to think that an estate plan involves nothing more than writing a will, but in fact a will is just one part of a comprehensive estate plan.   This is because a will typically does not govern assets which have a beneficiary designation (such as life insurance and retirement accounts) or assets in certain types of joint ownership.  Therefore, a will alone is never enough; ownership and beneficiary designations must also be considered and updated if appropriate.   Some other things you should know about wills:

  • A will has no legal authority until after death. So, a will does not help manage a person’s affairs when they are incapacitated during life, whether by illness or injury.
  • A will does not help an estate avoid probate. In fact, a will is the legal document submitted to the probate court (known in Pennsylvania as the Orphans’ Court), so it is basically an “admission ticket” to probate.
  •  A will is the only place where you may nominate the guardians of your minor children if they are orphaned.  All parents of minor children should document their choice of guardians.  If this is not done, the court will appoint a guardian for your children with no input from you, and may not appoint the person you would have chosen.

Trusts: Revocable Living Trusts, Irrevocable Trusts, Testamentary Trusts, Special Needs Trusts, etc.

There are many different types of trusts.  They can be simple or complex, and they may serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal entity with at least three parties involved: the grantor (who sets up the trust), the trustee (who manages the trust), and the trust beneficiary (the person who benefits from the assets in the trust).  In some cases, all three parties are represented by one person or a married couple. In the case of a revocable living trust, for example, a person may create a trust and name herself as the current trustee who manages the trust assets for her own benefit.

Depending on the situation, there may be many advantages to establishing a trust, including probate avoidance. In most cases, assets owned in a properly funded revocable living trust will pass to the trust beneficiaries immediately upon the death of the grantor with no probate required. Certain trusts also may result in tax advantages both for the grantor and the beneficiaries.  They may also be used to protect property from creditors, or simply to provide for someone else to manage and invest property for the grantor and the named beneficiaries. If well drafted, another advantage of trusts is their continuing effectiveness even if the grantor dies or becomes incapacitated.

Power of Attorney

A power of attorney is a legal document giving another person (known as an agent or attorney-in-fact) the legal authority to do certain things for you.  The extent of the agent’s power depends upon the terms of the document. A power of attorney may be very broad or very limited and specific. All powers of attorney terminate upon the death of the maker.

Health Care Power of Attorney and Living Will

If you are unable to make decisions about your health care because you are injured or ill, others will have to make these decisions for you. You have the right to choose the persons who will make those decisions.  This is done using a Health Care Power of Attorney.  You also have the right to let your health care providers know your wishes about the treatment you want, and the treatment you don’t want.  This is done using a Living Will.  In Pennsylvania, it is common to use a document combining both the Health Care Power of Attorney and Living Will.

Tax Considerations

Pennsylvania Inheritance Tax

When you die in the Commonwealth of Pennsylvania, any property or assets that you leave to other people is subject to the Pennsylvania Inheritance Tax. This is in addition to possible federal estate taxes. Currently, in 2013, the federal estate tax exemption is over $5 million per person, so most people are not affected by the federal estate tax.

Typically, but not always, the Executor or Administrator of the estate pays the inheritance tax on behalf of all beneficiaries of the estate before any of the property is distributed to beneficiaries.


Pennsylvania mandates that inheritance tax be paid nine months after the decedent dies.

The estate can receive a discount if the Executor pays within 3 months.

Extensions can be granted, but interest starts to run after 9 months.

The PA Inheritance Tax rates for 2013 and beyond (at least as of now) are:

  • 0%:    Legally married spouses (No common law marriage), Charities
  • 4.5%: Children, Grandchildren (Direct Descendants)
  • 12%:  Siblings
  • 15%:  All others (Includes domestic partners, friends, etc.)


Most property is subject to inheritance tax.

Jointly owned property is taxed at the share the person owned (i.e., if a person owned 50% of a property, that 50% share would be taxable).

One way to avoid inheritance tax in PA is to establish an irrevocable trust, or simply gift assets (unconditional giving, no strings attached) to someone. You must outlive them at least one year in order for the gift or trust to be complete so that no inheritance tax is due on that property. Be careful what you gift to someone and do not make gifts without the advice of an attorney and financial professional. If you gift someone a house, and you still want to live in it while he or she owns it, you could be making a risky move, especially if that person gets in trouble.

Also, life insurance is typically inheritance tax free. Life insurance is a great wealth transfer tool, and our firm regularly helps individuals and families with their life insurance needs.

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Pennsylvania is one of seven states that assess a state inheritance tax.  This tax applies to transfers at death of certain property owned by a Pennsylvania resident, and real estate and tangible personal property located in Pennsylvania that is owned by a nonresident.

The Pennsylvania inheritance tax rates are generally as follows:

  • Spouses:  0%
  • Lineal heirs (such as children and grandchildren): 4.5%
  • Siblings: 12%
  • Collateral heirs (anyone else, including uncles, aunts, cousins, nieces, nephews and unrelated individuals (including domestic partners and friends): 15%

Life insurance proceeds and distributions to charity are exempt from Pennsylvania inheritance tax.  Other exemptions (such as for family farms) may be available depending on the circumstances.

The Pennsylvania inheritance tax return is due nine months after the date of death; following this deadline interest will accrue on the late payment and penalties may also apply.  A 5% discount is applied to payments of inheritance tax made within three months of the date of death.

 Federal Estate Tax

There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes.  The most recent version of the federal estate tax was signed into law on January 2, 2013, as part of the American Taxpayer Relief Act of 2012 (ATRA).

Federal Estate Tax Exemption

ATRA made the $5 million exemption signed into law in 2010 permanent, and indexed for inflation. Accordingly, the federal estate tax exemption for 2015 is $5.43 million (and a nearly “automatic” $10.86 million for married couples who follow very specific requirements at the death of the first spouse).

Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

The new law continues the concept of a unified exemption that ties together the gift tax and the estate tax. This means that, to the extent you use your lifetime gift tax exemption while living, your federal estate tax exemption at death will be reduced accordingly. Your unified lifetime gift and estate tax exemption in 2015 is $5.43 million, as indexed for inflation. Note: Gifts made within your annual gift exclusion amount do not count against your lifetime limit.

The annual gift exclusion for 2015 is $14,000. Married couples can combine their annual gift exclusion amounts to make tax-exempt gifts totaling $28,000 to as many individuals as they choose each year, whether both spouses contribute equally, or if the entire gift comes from one spouse. In the latter instance, the couple must file an IRS Form 709 Gift Tax return and elect “gift-splitting” for the tax year in which the gift was made.

Generation-Skipping Transfer Tax Exemption

The amount that can escape federal estate taxation between generations, otherwise known as the Generation-Skipping Transfer Tax Exemption (GSTT) is unified with the federal estate tax exemption and the lifetime gift tax exemption at $5.43 million, as indexed for inflation. Likewise, the top tax rate is 40%.

So, what is this GSTT? Basically, it is a transfer tax on property passing from one generation to another generation that is two or more generational levels below the transferring generation. For instance, a transfer from a grandparent to a grandchild, or from an individual to another unrelated individual who is more than 37.5 years younger than the transferor.


 ATRA 2012 makes “permanent” a new concept in estate planning for married couples. This concept, called “portability,” means that a surviving spouse can essentially inherit the unused estate tax exemption of the deceased spouse. However, unless the surviving spouse files a timely (within nine months of death) Estate Tax Return and complies with other requirements, the portability may be unavailable.

In addition, married couples will not be able to use the GSTT exemptions of both spouses if they elect to use “portability” as the means to secure their respective estate tax exemptions. Furthermore, reliance on “portability” in the context of blended families may result in unintentional disinheritances and other unpleasant consequences.