Do I Really Need an Estate Plan? – Part 2: Power of Attorney

This is part 2 in a 4-part series intended to help you answer the question of whether you really need an estate plan. In this post, we will focus on the power of attorney.

Power of Attorney – What is it?

Your power of attorney document names a person (your agent) to manage your affairs if you become incapacitated.

Power of Attorney vs. Guardianship

Having a power of attorney drafted is as important as having a will, in my opinion, because without a power of attorney no one has the authority to manage your finances and affairs. In that case, your friend or loved one would need to petition the Orphans’ Court for guardianship, which is a time consuming and expensive process (orders of magnitude more difficult and expensive than having a power of attorney drafted).

When Does the Power of Attorney Take Effect?

You have two options with regard to when the agent or agents you name are given the legal authority to manage your personal financial and general affairs.

Option 1: Springing

A “springing” power of attorney “springs” into effect upon determination (or adjudication) of your incapacity. This prevents the agents you name from taking any action prior to your becoming incapacitated which, on the surface, sounds good. Why would you want anyone to act on your behalf before then? However, securing such an adjudication takes time and money because a court is usually involved. It is my recommendation in most cases that the principal (you) opt for authority which is immediately effective upon signed (as described below).

Option 2: Immediately Effective

A power of attorney which is immediately effective upon signing does just that; it bestows the legal authority for your agent to act on your behalf immediately upon your signing the document. If you are injured and incapacitated, steps likely need to be taken in a timely manner to manage your finances and property, and your agent needs access to your accounts to enable them to do so. By drafting your power of attorney to become effective immediately upon signing, you allow your agent to step in right away without the requirement of an adjudication of your incapacity.

The reason for the smooth transition is that your agent had the power to act for you all along. This makes it critical that your agent be someone in which you have complete trust. If there is any question on this point, consider a springing power of attorney instead (as described above).

Note about interacting with banks and other institutions: In my experience, bank representatives are often unaware of the difference between a springing power of attorney and one that is immediately effective upon signing. This is understandable, as they look the same except for a bit of language usually toward the end of the document, and because bank representatives themselves are not lawyers or trained to recognize the difference. Therefore, a bank representative may require proof of incapacity of the principal even when presented with a power of attorney which is immediately effective upon signing. At this point, your agent should reiterate that the power of attorney does not require such proof, and that they should forward the document to their legal department for confirmation of this.

Durable vs. Special

You will sometimes hear the term “durable” power of attorney. A durable power of attorney survives the incapacity of the principal (you). Thus, durable power of attorney is the type which we are discussing today and is the type which is appropriate for estate planning.

Durable powers of attorney are contrasted with “special” powers of attorney, which are rendered ineffective upon the incapacity of the principal. Since our goal is to plan for incapacity, special powers of attorney are usually not appropriate for estate planning. They are very helpful in other circumstances, however, like when a person is overseas and wishes to give authority to someone stateside to, for example, transact business on their behalf while away.

Special Powers

A power of attorney is not an entirely standardized document, despite the fact that it is treated that way by manufacturers of standard forms available to the public and from online legal document drafting services. In fact, there are a host of powers which may or may not be appropriate in your case which an attorney can help you decide on whether to include. These special powers are only given to your agent if you include them in your power of attorney document. Discussion of each of these powers is beyond the scope of this article, but each is worthy of discussion with your attorney.

Such powers include giving your agent the power to:

1.     Delegate authority

2.     Appoint a substitute agent

3.     Nominate a guardian

4.     Create or change rights of survivorship

5.     Create or change beneficiary designations

6.     Waive rights as a beneficiary of a joint or survivor annuity

7.     Exercise fiduciary powers

8.     Create, amend, revoke or terminate a living trust

9.     Disclaim property

10.  Make limited or unlimited gifts

11.  Exercise authority regardless of relation

12.  Manage digital assets

Stay tuned for the next post in this series on your healthcare power of attorney and living will. If you would like to draft an estate plan or power of attorney, or just have questions, please don’t hesitate to reach out.

 

Do I Really Need an Estate Plan? - Part 1: The Will

This is part one in a four-part series intended to help you answer the question of whether you really need an estate plan. This post focuses on the the first document in an estate plan, the will. In it we describe the functions of a will and what happens if you don't have one. Future posts in this series will focus on the other documents in an estate plan: the power of attorney, medical power of attorney, and living will. 

Your Will - What is it?

Gifting

Your will is the central organizing document of your estate plan. In it, you tell your executor (the person you select to administer your estate after you pass) who to distribute your property to, and you authorize that person to do so. Take the following language, for example:

“I give to Jane Doe all of my interest in my engagement ring; provided, however, if Jane Doe fails to survive me, this gift shall lapse.”

This states that the person you name as executor is authorized and required to transfer ownership of your engagement ring to Jane Doe, if the engagement ring is still in your possession at the time of your passing. If Jane predeceases you, the gift “lapses,” which means that it falls into your residue (everything that you don’t specifically give away).

Residue

As stated, your residue is everything you don’t specifically give away, and you choose a recipient for your residue just like you would do for a specific gift (like the engagement ring example, above). It looks something like this:

“I give all of the residue of my estate to my spouse if my spouse survives me. If my spouse fails to survive me, I give all of the residue of my estate to those of my descendants who survive me per stirpes. If neither my spouse nor any of my descendants survives me, one-half (1/2) of the residue of my estate shall be distributed to my heirs and the other half (1/2) of the residue of my estate shall be distributed to my spouse’s heirs.”

This language directs your executor to transfer ownership of everything you haven’t specifically given away to your spouse, if you have a surviving spouse. If not, to you descendants evenly, and if no descendants survive you, to your heirs (your closest living family members, as defined by PA law).

Probate vs. Non-Probate Property

A common misconception is that your will determines who should get “everything.” However, this is usually not the case. Your will only controls what happens to property in your “probate estate,” which consists only of property that you own personally at the time of your passing. It does not include property that is jointly owned because, strangely enough, you no longer own such property. Instead, at the moment of your passing, jointly-owned property passes immediately and automatically to the other joint owner(s). Your probate estate also does not include property owned by a trust, even if you are the trustee, because a trust is a separate legal entity and not considered “you” for the purposes of probate. Finally, your probate estate does not include assets for which there is a beneficiary designation, such as life insurance policies or retirement accounts. When you die, those assets pass immediately and automatically to the designated beneficiaries.

Executor Nomination

Your will also nominates someone to serve as executor, an important role. As discussed above, this is the person that administers your estate and carries out the wishes set forth in your will. Usually this person hires a probate attorney (like me) to help them through this process because, if done improperly, the executor can be held personally liable. If done properly, the executor cannot be held personally liable for any debt or obligation of the deceased, and claims against the estate are limited to the assets in the estate itself.

Guardian of Minor Children

Most importantly for people with young children, or those who may have minors in their care in the future, is the nomination of a guardian. The named guardian would assume responsibility for the minor upon the death of the person making their will (and usually the death of that person’s spouse, if applicable).

What happens if I don't have a will?

Unintended Beneficiaries

Without a will, PA law steps in and determines who gets what based loosely on your closest living family members. Those people whom PA law says should inherit from the estate of someone who dies without a will are called that person’s heirs. It’s a kind-of “fallback” for when a deceased person’s wishes are not memorialized in a will. The problem is that, at least in PA, the fallback scheme of who gets what out a deceased person’s estate rarely lines up with what the deceased person would have wanted.

For example, if you are married and you die without a will, a large portion of your estate goes to surviving children and, if none, surviving parents, and it does not all go to your surviving spouse. In contact, my experience is that most spouses want all their property to their surviving spouse upon their death, if there is one. It rarely makes sense to give a large chunk of money or property directly to a child or a parent of a deceased person when that person is survived by their spouse.

Tax Consequences

There are also beneficial tax consequences to leaving everything to your spouse because in a will, rather than to your heirs under the default PA law for people who die without a will. The PA Inheritance Tax imposes a 0% tax on transfers to a surviving spouse, whereas transfers to a surviving child or parent are taxed at 4.5% - no wonder PA wants more transfers to parents and children!

Guardianship Proceedings

The process for obtaining guardianship over a minor is vastly more complex and difficult when there is no will in which the deceased person stated their preferences for the nomination of a guardian. And of course, this translates into a costlier procedure as well. With a will, the process is smoother because your wishes are known.

There are more reasons to have a will, but these three are arguably the most important. If you have any questions or would like to discuss this blog post, or set up a consultation to have your will drafted, please don’t hesitate to reach out.

Where Should You Keep Your Will?

In Pennsylvania, if the testator’s original will cannot be found, there is a presumption that the original will was destroyed by the testator with the intention to revoke it. Overcoming this presumption is not impossible, but by design it is an uphill battle, so the original will is, for this reason, an important document.

With that in mind, where does one put their will? This is a question clients often ask, and reasonably so. There are a few options and none are perfect for everyone.

Option One: Keep the will at home, with you

This is the most convenient option, but only recommended for the settled, well-organized individual, preferably with a fireproof safe.

Pros:

·       Easily found when edits are necessary

·       Not subject to the changing location or career decisions of your attorney

·       Not locked in a bank vault your named executor doesn’t have access to

Cons:

·       Easily lost

·       Easily misplaced

·       Can be destroyed by fire, flood, etc.

Remember, if you executor can’t find your will, it will be presumed revoked and a difficult and expensive process will likely ensue in order for a copy to be admitted to probate. Make sure your executor knows where you’re keeping it.

Option Two: Keep it with your attorney

This is a safe option, if your attorney has a fireproof safe in which to keep it, and you trust your attorney and had a good experience during the drafting process.

Pros:

·       Relatively safe

·       Won’t be lost (at least not by you)

Cons:

·       May be difficult to locate if your attorney changes office locations, contact information, or retires

·       Inconvenient when changes are necessary (this could be argued, but if you want to use a new attorney to modify your will, you’d have to request your old one back from your former attorney…awkward!)

Option Three: Safe deposit box

This is the most commonly thought-of place to keep your will, but remember that it can be a challenge for your executor to get access to the safe deposit box. There are laws in PA which allow an executor to do so, but it can be difficult nonetheless and banks often resist if the person seeking access does not have explicit access rights.

Pros:

·       Safest option

·       Relatively convenient when changes are necessary

Cons:

·       Can be difficult for your executor to gain access, if they do not have access privileges or are not a surviving spouse

Many lawyers flatly tell their clients not to put their will in safe deposit box. I don’t go this far, but I do make clients aware of these pros and cons.

The Wildcard Option: Duplicate Originals

You could sign and execute duplicate original wills, and put them multiple places. Although many attorneys do this regularly, I personally don’t recommend it to clients. If you decide to destroy your will because you want it revoked, then your intention would be entirely contravened by the existence of a second (or third!) duplicate original which could be validly probated. Execute one will and keep it in a safe place, keeping in mind the above advantages and limitations.

If you have any questions about wills, estate plans or where to keep them, please don’t hesitate to reach out!

Estate Tax, Portability and the New Tax Law

Estate Tax, Portability and the New Tax Law

The new tax law is on the books, and among its many changes is a doubling of the estate tax exemption amount from $5.49 million for an individual ($10.98 million for married couples) to around $11 million for an individual (around $22 million for married couples). This means little to ordinary Americans whose estates are valued well under a few million dollars (the vast majority of my clients – oh, and me too). However, for those flirting with the five-or-so million dollar mark and considering whether to plan to reduce the size of their estate (or married couples flirting with the eleven-or-so million dollar mark), the new tax law and doubled exclusion amounts mean you may be safe from having to engage in advanced planning techniques.

Estate Tax—Still a Valid Concern

However, for individuals and couples whose estates may be flirting with (or are certainly in excess of) the new exclusion amounts in the tax bill now headed to the white house, the estate tax remains a real and valid concern. After all, Uncle Sam still takes 40% (!) of the excess value of the estate-- that is, 40% of the value of the estate which is in excess of the exclusion amount. If an individual’s taxable estate is valued at $20 million, and the exclusion amount is $11 million, your executor would be writing Uncle Sam a $3.6 million check.

Taking Advantage of the Exemption Amount for Married Couples

It’s a relief for married couples with significant assets to know that they can effectively use both of their individual exemptions. However, the popular understanding that this happens automatically is incorrect because something called the  “unlimited marital deduction” often gets in the way. Basically, it works like this: when the first spouse dies, assets passing to the surviving spouse (often all of the decedent’s assets), pass estate-tax-free by way of the unlimited marital deduction. This sounds great, but the problem is that the unlimited marital deduction cannot be waived, and assets passing by way of the unlimited marital deduction do not utilize the first spouse’s estate tax exemption amount. As such, the first spouse’s exclusion amount is lost, and all the surviving spouse has to work with is his or her individual exclusion amount.

Enter “portability.” Portability allows the first spouse to die to transfer his or her unused exclusion amount to the surviving spouse. However, portability is fragile and lost under certain circumstances (such as divorce), so many attorneys prefer to utilize planning techniques that ensure that the first spouse to die transfers an amount equal to their estate tax exemption amount to a trust for the benefit of the surviving spouse, rather than to the surviving spouse directly.

Opportunity Lost

If you’re following this, you’re doing better than most, and the reality is that for most people the estate tax discussion is moot because their estate is nowhere near the now $11 million threshold.

But, politics aside, there was a real opportunity here for congress to simplify the bizarre and complex estate tax laws currently on the books. And the explanation above only scratches the surface of the estate tax, and covers nothing at all of the even-more-baffling Generation Skipping Transfer Tax.

Traditionally, to ensure that the surviving spouse has access the first spouse’s unused exemption amount, attorneys draft bypass trusts or disclaimer trusts which are expensive and which the clients themselves have little shot at understanding. And the cost doesn’t end at the drafting of these trusts, because when the first spouse dies, the second spouse likely has no recollection of what these documents are or why they exist (if their attorney even offered a comprehensible explanation at the time of drafting, which is no easy feat). So, the surviving spouse, at what is already a difficult time, must hire an attorney to help them sort it out.

So, while this tax bill was originally touted as a simplification of the tax code and is anything but, at least the doubling of the estate tax exemption amount reduces complexity in the sense that fewer individuals will need to engage in complex and costly estate planning.

If you have questions about the estate tax, your estate plan (or lack thereof), or the process of probating the estate of a deceased loved one in Pennsylvania, please don’t hesitate to get in touch. Consultations are always free.