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Showing posts with label PA Inheritance Tax. Show all posts
Showing posts with label PA Inheritance Tax. Show all posts

Wednesday, May 1, 2019

Joint Trusts - A Great Planning Opportunity for Non-Traditional Couples and Blended Families

Creating an estate plan for clients who are in non-traditional relationships or are part of a blended family can be very tricky.
  

Why is Estate Planning for Non-Traditional Couples So Tricky?

Let's assume a hypothetical fact situation where you have a women (Jane) with $4M in assets.  She is a widow and has 2 children.  Now let's also assume that she is in a committed relationship with a person (Alex) who has $2M in assets, and Alex has three children.  Finally, let's assume that they agreed to set up a joint bank account and that they want to buy a house together worth about $1M, with Jane putting up three-quarters of the money for the house.  

Typically, the clients in this scenario will want to take care of each other, but they also want to ensure that a certain amount of their assets go to their respective children.  Let's assume the specific goal for Jane and Alex is that the surviving partner can have the joint bank account and use the house for the rest of their life, but everything else goes to their respective children.  To accomplish this, they buy the house as joint tenants with rights of survivorship and create Wills leaving everything else to their respective children.

In this hypothetical, if Jane dies first, the house and the joint bank account go to Alex because they are joint assets and supersede the Will.  When Alex dies, his $2M plus the house goes to his children.  This is not necessarily a far result for Jane's children.  Alternatively, if Alex dies first, the house and the bank account goes to Jane, and then upon her death, it all goes to her children, cutting out Alex's descendants with respect to the joint assets.  As you can see, the problem with this traditional plan is that one partner dies and the survivor takes the house and bank account and it cuts out the descendants of the first client to die with respect to the joint assets.

Why a Joint Trust Can Be an Important Estate Planning Tool for Non-Traditional Couples

One of the best ways to handle a situation like this is for Jane and Alex to set up a joint trust.  The trust could be funded with the house and cash (in whatever amount they like).  While Jane and Alex are alive, the trust could be revocable and they could have complete control over it to do whatever they like.  The trust becomes really powerful when the first partner dies (or becomes incapacitated), because we can then make the trust Irrevocable.  While we can customize these types of trusts in many ways, most people want to guarantee that the survivor can: live in the house for the rest of their lifetime, sell it and buy other real estate, or sell it and have an income stream to live off of.  

The main benefit to this type of trust planning is that we can provide a much safer way of ensuring that ALL of Jane and Alex's descendants receive whatever is left over when the survivor dies.  Moreover, we can make sure that their descendants receive money in a way that is more fair based upon need or based upon how Jane and Alex contributed funds towards the trust.  In this example, since Jane is putting up $750,000 towards the house, the trust can say that, following the deaths of both Jane and Alex, the remainder of the trust assets go 3/4 to Jane's children and 1/4 to Alex's children.  

Initially, Jane and Alex could be in control of the Trust (making them the Trustees).  We can also have a system in place so that one of Jane's children steps up as co-trustee if something happens to Jane and one of Alex's children steps up as co-trustee if something happens to Alex.  If Jane's children and Alex's children can't work together, we can also have a neutral trustee appointed. 

Can Anyone Create a Joint Trust?

Anyone can create a joint trust.  The type of trust I am describing in this post works for unmarried or married couples. 

Are There Any Downsides to Creating a Joint Trust?

When creating any estate plan, one of the downsides is the cost to create the plan.  Creating a custom plan like this will certainly cost more than simply titling assets in joint name.  However, the more money over which you are trying to control the disposition, the more it is worth setting up this type of trust.

Another potential downside to creating a joint trust is that, depending upon its structure, the trust may need a tax identification number and a tax return will need to be filed for the trust for any income earned.  

It should also be pointed out though that if the couple is unmarried and they live in a jurisdiction with an inheritance tax (like New Jersey or Pennsylvania), this structure would trigger the inheritance tax on both the first to die and likely the second to die.  However, for unmarried couples, this tax would be incurred on the first to die regardless of whether or not a joint trust was utilized.  In New Jersey, the inheritance tax could be avoided if the couple agrees to enter into a NJ Domestic Partnership agreement.

How Do I Create a Joint Trust?

If you would like to know more about estate planning for non-traditional couples or setting up a joint trust, we would happy to speak with you to so that it could be properly customized to meet your needs.  Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin Pollock meets with clients in Lawrenceville, NJ and in Boca Raton, FL by appointment only.  Kevin may be reached at (609) 818-1555.  

Friday, February 22, 2019

You Can Create a Pet Trust - Just Like the One For Choupette

According to multiple news sources, when the creative director and fashion designer Karl Lagerfeld died on February 19, 2019, he left his famous cat, Choupette, a significant amount of money in trust.

Pet trusts are now quite common, and specifically authorized by statute in most jurisdictions.  Many people consider pets as a part of the family, and want them to be cared for as such.  A pet trust can provide money to pay for a caregiver, food, pet supplies, and a veterinarian.  It can also provide a place for your pet to live (or board), and in the case of Choupette, a personal chef.

Most estate planning attorneys who create pet trusts will provide a check and balance on the trustee, the caregiver, and the remainder beneficiary.  In other words, we do not recommend that the person in charge of caring for the pet be the one managing the money and the ultimate remainder beneficiary when the pet dies, as this would create a perverse incentive for the caregiver to do a bad job in caring for your beloved pet.

For people who do not want to create trust, they can always leave money to a caregiver (or charitable organization) with the hope that the caregiver will maintain the pet properly.  The benefit of a trust is that it makes the arrangement more legally enforceable and provides greater oversight.

New Jersey, Pennsylvania, and Florida have statutes based upon the Uniform Trust Code.  The NJ Pet Trust Statute can be found at:  3B:31-24 Trust for care of animal.  The Pennsylvania Pet Trust Statute can be found at: 20 Pa.C.S.A. § 7738.  Trust for Care of an animal.  The Florida Pet Trust Statute can be found at: Florida Statute 736.0408  Trust for care of an animal.  The State of New York also has a statute specifically authorizing the creation of a pet trust, which can be found at NY Est Pow & Trusts L § 7-8.1 Trusts for pets

It should be noted that the NJ statute, enacted in 2015, amended a previous version of the law that limited Pet trusts to 21 years.  It also clarified that a Pet trust could be created under a revocable trust document, not just as part of a trust created under a Will.

It should also be noted that living money to a pet (in trust or to a caregiver) will likely give rise to an inheritance tax in both Pennsylvania and New Jersey. 

Friday, August 24, 2018

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax

It's been a little while since I have written an article on the Pennsylvania inheritance tax.  However, before I discuss ways to minimize the PA inheritance tax, it is important to understand that the tax rate is affected by who receives money upon your death.

As a refresher, Pennsylvania has an inheritance tax on most assets that are transferred at the time of your death if they are going to anyone besides a spouse or a charity.  There is also no inheritance tax if a child under age 21 dies and leaves their estate to their parent or step-parent.


Pennsylvania Inheritance Tax on Assets Passing to your Children, Grandchildren, Parents and Grandparents


  • There is a flat 4.5% inheritance tax on most assets that pass down to your children, grandchildren, great-grand children or your other descendants.
  • There is a flat 4.5% inheritance tax on most assets that pass up to your parents, grandparents or your other lineal ascendants. (Exception if the decedent is under age 21.)
  • Pennsylvania treats a son-in-law or daughter-in-law as if they are a child for purposes of the inheritance tax.  As a result, there is a flat 4.5% PA inheritance tax on assets that pass to the wife or widow and husband or widower of the decedent's child. 

Pennsylvania Inheritance Tax on Assets Passing to your Brothers, Sisters, Nieces, Nephews, Friends and Others


  • There is a flat 12% inheritance tax on most assets that pass to a sibling (brother or sister).  
  • There is a flat 15% inheritance tax on most assets that pass up to nieces, nephews, friends and other beneficiaries. (This means there will be 15% tax on money you leave to your dog, cat or horse.)

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax


  1. Set up joint accounts with the people you wish to benefit.  Pennsylvania will only tax the percentage of assets owned by the decedent, not the full amount.  
    • This is a particularly useful strategy if you have one child that you trust completely as only one-half of the jointly owned assets will be taxed.  However, if you have more than one child, it is possible that you and all the children are joint owners of the account, so if you have three children, only 1/4 of the account will be subject to the PA inheritance tax.
    • If you have more than one child, be careful of setting up a joint account with just one person (because you may accidentally cut your other children out)
    • Be sure that you don't have any concerns that your child will take your money and it won't be available for you to use.
    • Transfers must occur more than one year before death to achieve the maximum tax benefit.
  2. Gift your assets to your children.  This can be a very dangerous strategy, so I strongly recommend consulting with a tax attorney or accountant before making the gift.
    • Dangers include giving away an asset that has a low basis resulting in a capital gains tax which could be far more expensive than simply paying the PA inheritance tax.
    • If you give away too much, you could be subject to federal gift taxes or generation skipping transfer taxes.
    • This could potentially cause problems if you wish to qualify for Medicaid.
  3. Buy extra life insurance.  Life insurance is not subject to the Pennsylvania inheritance tax, so converting non-life insurance assets to life insurance will reduce the tax.
    • An interesting planning opportunity is to by a long term care insurance policy that has a life insurance rider.  This way if you don't use up the LTC policy, it can pass tax free to your heirs.  
  4. Utilize life insurance to give money to beneficiaries who are taxed at the highest tax rates.  So let's say you have total assets of $1.1 million dollars including a life insurance policy worth $100,000, and you want to leave $100,000 to your nieces and nephews and you want to leave the rest of your estate to your children.  
    • If you have name your nieces and nephews the beneficiary of the life insurance and give the rest of your assets to your children, there will be a total PA inheritance tax of $45,000 (4.5% x $1M).  
    • If you give the children the life insurance money, and have a will leaving your nieces and nephews $100,000 from your Will with the rest to the children, the total PA inheritance tax will be $55,500 (15% x $100,000 + 4.5% x $900,000). 
  5. Buy real estate outside of Pennsylvania.  OK, maybe this isn't very simple, but Pennsylvania only taxes assets located in Pennsylvania, so a shore property in New Jersey will pass free of the PA inheritance tax.
    • Beware of taxes in other states
    • Don't put the real estate in an entity such as an LLC - Pennsylvania reserves the right to tax an interest in business.  (The legal theory is that you no longer own real estate, but the LLC, which is subject to a PA inheritance tax.)
  6. Pay the PA inheritance tax early.  If you pay the Pennsylvania inheritance tax within 3 months from date of death, you are entitled to a 5% discount.
  7. Convert your IRA to a Roth IRA.  The conversion will come at a cost to your current non-retirement assets, thereby reducing your PA taxable estate for inheritance tax purposes.
    • This strategy works best when you have enough funds outside your retirement account to pay for the income taxes on the conversion.
    • This strategy is especially valuable if your children are high income earners, this way they can receive distributions from the ROTH, after your death, free of income tax.
    • I strongly recommend consulting with a tax attorney or accountant though before doing the conversion.  

Other Not-So-Simple Ways to Minimize the PA Inheritance Tax


  1. Move to another state.  Again, this may not be simple for many people, but if you already have a property in another jurisdiction, consider whether you should change your domicile for tax purposes.  (Obviously you must actually meet the requirements of changing your domicile.)
  2. Invest in farmland or a family business.  Pennsylvania exempts certain farmland and small businesses from the inheritance tax.  The problem with this may be getting your money back out of the business.
  3. Setting up a GRAT or GRUT (setting up a special type of trust that creates an annuity back to you and gives excess investments to your heirs).
  4. Setting up a CLAT or CLUT (setting up a special type of trust that creates an annuity to charity and leaves the rest to your heirs).
  5. Setting up a CRAT or CRUT (setting up a special type of trust that creates an annuity to your heirs and leaves the rest to charity).
  6. Setting up a spousal access trust.  These are typically over-funded life insurance trusts.  Money can be used for your spouse and children while your alive and then it goes completely tax free to your children.  This is a fantastic way to minimize the federal estate tax as well as minimizing the PA inheritance tax.

Simple is Never Simple

As always, be very careful that any changes you make to beneficiary designations or joint ownership of accounts could dramatically alter your overall plan.  So it never hurts to run what might seem like a simple change by an estate planning attorney.