Estate Administration & Planning Questions

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Estate Administration Questions

What is probate?

Probate is the fancy name that lawyers give to the process of transferring the legal title of property from someone who has died to the person or persons who are entitled to receive the property. Despite what you may read in articles or hear on television, it is not a process to be feared.

How do you know who is entitled to receive the property when someone dies?

If the person who died had a Will, the Will serves as the roadmap and tells you how to distribute the property. The estate administration process includes the process of proving the existence of a valid Will, and having someone appointed to handle the distribution of the assets. That person, when named in a Will, is called the Executor or Executrix. If there is no Will, the laws of intestacy take over. The laws of intestacy provide that the property will pass to the person's closest living relatives. It is a common myth that assets will pass to the government if a person dies without a Will. That only is true is there are no relatives within the meaning of the intestate laws. The only real way to make sure that your assets will pass in accordance with your wishes is to have a Will.

Does all of my property pass under the Will or in accordance with the intestate laws?

No. In fact, in many cases, a significant amount of property does not pass under the Will or in accordance with intestate laws. That is because the probate process only applies to so-called probate assets. Probate property is loosely defined as property owned individually by the person who has died. Other property is called non-probate property. Examples of non-probate property are assets subject to beneficiary designations, like life insurance and retirements plans where papers have been signed designating who will receive the property, most jointly held property, and assets held "in trust for" someone else or with a "pay on death" clause. Those assets pass to the designated beneficiary or the joint holder, as the case may be. In those cases, the designation of the beneficiary or the naming of a joint holder "trumps" the Will or the intestacy laws. In other words, it does not matter what a Will says if the person has no probate property because the non-probate assets will pass to the designated beneficiary or the joint account holder even if the Will says something else.

I have heard that it is impossible to leave property to someone other than your spouse. Is that true?

Not really, but the laws of Pennsylvania provide that a surviving spouse has certain rights to the deceased's property, even if the surviving spouse is not named in a Will. The law provides that the surviving spouse is entitled to a certain percentage of the estate, and the percentage depends upon other facts, such as whether the deceased spouse had children and whether those children were from the marriage or a prior relationship. In other words, it is not possible to cut a spouse entirely out of an estate, unless the couple enters into some kind of agreement. This is why couples often use Premarital Agreements. For example, if two people are about to get married and both have children from a prior marriage, they may want to have a Premarital Agreement. This agreement would make it clear that each spouse is free to give his or her property to his or her children from the first marriage. Without such an agreement, the surviving spouse will have the right to make a claim against the property for a portion of the deceased spouse's estate, even if the deceased spouse's Will says that all of the property should go to his or her children.

Why do I hear so much about the importance of avoiding probate with a Living Trust?

In some states, the probate process can be expensive and time-consuming. However, here in Pennsylvania, it is not quite as confusing as it is in other states. With that said, it is not that difficult to avoid the probate process. If you want to avoid probate, one common way is by forming a Living Trust. The Living Trust gets its name because it is created while a person is living as opposed to a Trust created in someone's Will. When you create a Living Trust, you transfer all of your property to the Trust and you name yourself as the Trustee, giving yourself the right to manage the assets. You also name yourself as the beneficiary of the Trust, which means that the assets will be used by you (as Trustee) for you (as beneficiary) for as long as you are alive. The written Trust document then will say what happens to your assets when you die. Its more technical term is a Revocable Trust because most Living Trusts can be revoked or amended by the person who creates the Trust. A Living Trust avoids the probate process because the assets now are owned by the Trust and not by you individually. To make this effective, you need to make sure that all of your assets are transferred to the Trust. Ultimately what this means is you are taking care of the transfer of title while you are alive, instead of letting someone else do it after your death. By taking care of this matter while you are alive and well you can be rest assured for the future what will happen to your assets.


Life Planning Documents

What is a Will?

A Will is a document that governs the distribution of certain assets upon your death. It is critical to keep in mind that the Will does not govern all of your assets. It only governs so-called probate assets. For a more detailed discussion of what this means, please see the Estate Administration Section of this website. This easily is the most misunderstood concept when it comes to Wills.

What is a Power of Attorney?

A Power of Attorney is a document used to appoint someone (called an agent) to handle your finances for you. There are many different kinds of Powers of Attorney so you need to make sure that you have the one that is right for you. For example, there are General Powers of Attorney where you appoint someone to transact any kind of business. There are Limited Powers of Attorney where your agent only has the powers granted to him or her under the document, such as the power to conduct a specific real estate transaction. There are Springing Powers of Attorney where the agent's powers are not effective unless certain conditions are met such as your disability. However, these are just a few examples of many different types. All of these documents make it possible for you to have a trusted adviser make decisions in your absence.

What is a Living Will and a Medical Care Power of Attorney?

A Living Will, or Advance Directive as it is sometimes called, gives you the right to decide what kinds of medical treatment you will receive. It is used in case you are not able to communicate the decision for yourself because of your medical condition. With a Living Will, you can appoint someone to make medical decisions for you under certain circumstances. That is called a Medical Care Power of Attorney. The idea is to set out your wishes regarding the kinds of medical treatment you will receive and to appoint someone to make medical decisions for you if you are not able.

Why do people use Trusts?

That is a difficult question to answer because there are so many different kinds of trusts so let's separate it into the two main uses.
People use a Living Trust primarily to avoid probate. This is discussed in more detail above. People also establish Trusts in a Will. This is called a Testamentary Trust. This can be used to save some taxes, it can be used to make sure that money is not given to a young child or disabled person who is unable to manage the funds, or it can simply be used to allow someone who is deceased to exercise control over how his or her money is spent. By proceeding with this kind of trust, you can control how the money will be spent.

Why do people put life insurance in a Trust?

For many people, life insurance is an important asset because it represents a large portion of what will be left to family members. There are a few reasons people use Trusts to hold life insurance.
The primary reason is to save Federal Estate Tax. If life insurance is owned by an individual, the life insurance proceeds can be subject to Federal Estate Tax. If, on the other hand, the life insurance is owned by a properly drafted Irrevocable Trust and a very complicated set of rules is followed with respect to the Trust, the life insurance proceeds are not included in a person's taxable estate when the person dies. Simply put, the life insurance will pass dollar for dollar to family members instead of being reduced by Federal Estate Tax.
Another reason to put life insurance into a Trust is to exercise some control over how the life insurance policy proceeds will be paid. If an individual beneficiary of the life insurance policy is named, the money will go to the beneficiary. This control is especially important where the beneficiary is a minor or disabled person.
Finally, by holding this significant asset in a Trust, it is possible to keep the proceeds away from creditors of the deceased. This is because creditors generally cannot get paid from money passing to the Trust.

What are the best ways to give property to minor children?

There are several ways to give property to minor children, either while you are alive or upon death. The obvious problem is that a minor cannot manage his or her own money. If a minor receives money, either by gift or inheritance, a Trustee or custodian must manage the money. The most common way to give property to minors is with a Trust. This means that a Trust will be named to named to manage the money on behalf of the minor. The Trust document will spell out how and when the minor can receive the money.
Another way to give property to minors is a custodial account under the Uniform Transfers to Minors Act. This is where a custodian is selected to hold the property until the child reaches an age specified by law (usually 18 or 21). There also are tax-advantaged ways to put money away for a minor's education or medical expenses.

What is a guardianship?

A guardianship is a court-supervised arrangement where someone is appointed by the court to manage the funds or the daily living arrangements of a minor, or a person who is incapacitated. Guardianships often result from a failure to plan ahead since most can be avoided. They can be avoided if there are alternatives such as a Will, Power of Attorney, or Living Will in place. In those cases where there is no advance planning, the courts must step in to appoint a guardian.


Nursing Home Planning

Is it true that Medicare does not pay for nursing home care?

Generally, yes. Medicare will cover nursing home care for a limited number of days and only under certain circumstances. Medicare generally does not cover long-term custodial care to assist with daily living tasks and needs if no skilled services are necessary. This is different from Medicaid, which may cover nursing home custodial care if income and asset requirements are met. As Medicaid essentially is a welfare program, the eligibility rules for Medicaid assistance are extremely complicated and are constantly changing.

What is Medicaid planning?

Medicaid Planning is the name commonly given to the process of planning to make someone eligible for Medicaid assistance for nursing home care. Medicaid is like a welfare program and there are complicated income and asset requirements to be met. There are steps you can take to qualify for Medicaid assistance but care must be taken because of the changing rules.

Can someone engage in Medicaid planning after being admitted into a nursing home?

Yes, it is possible to start planning even after someone enters a nursing home. It is a common myth that, once someone enters a nursing home, the facility is guaranteed a certain amount of money and nothing can be done. It is never too late to begin Medicaid planning. There are legitimate avenues available to preserve part or most of the assets of a nursing home resident, even if a loved one is already in a nursing home, or nursing home care is imminent.

Can a person who is in a nursing home or about to enter a nursing home transfer all of his or her assets to family members and then qualify for Medicaid assistance?

Generally, no. This is where Medicaid planning comes in. There are complex rules that examine any transfers made by someone seeking Medicaid assistance. All transfers made during the five year period prior to the Medicaid application are scrutinized. With proper planning, it is possible to make transfers and still qualify for Medicaid assistance; but, it generally is not possible to receive Medicaid assistance immediately after the transfers are made.


Death and Taxes

How does the Federal Estate tax work?

You may have read about the evils of the Federal Estate tax as it been the subject to a great deal of criticism. The truth of the matter is that the Federal Estate tax affects very few people because the tax is not a concern until a person has an amount equal to the "Federal applicable exemption amount." In English, this is the amount a person is allowed to give away, free from Federal Estate tax. That amount currently is $5,000,000 but it constantly changes. If an estate is subject to this tax, the rates are steep. The current rate is 35% of the value of the estate.

What assets are subject to the Federal Estate Tax?

The Federal Estate Tax applies to all assets owned by someone who dies as well as certain assets over which the person had "incidents of ownership." For example, even if you have transferred all of your assets into a Trust, the Trust assets are part of your estate if you are the Trustee or if you can revoke the Trust. Deductions are available for funeral expenses, unpaid debts of the person who has died, and the expenses of administering the estate.

How does the Pennsylvania Inheritance tax work?

The Pennsylvania Inheritance tax applies to all assets owned by someone who dies. It is important to note that the Pennsylvania Inheritance tax does not apply to life insurance proceeds. Also, there is no tax for amounts passing to a surviving spouse or a charity. For amounts passing to children and grandchildren, the tax rate is 4.5%. For amounts passing to siblings, the tax rate is 12% and for all other beneficiaries, the tax rate is 15%.

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Disclaimer: This website is intended for general information. I am not rendering legal advice for specific cases so please do not sue me for any information you received in this website. If you want legal advice for your situation, please meet with an attorney, preferably me of course.