There are primarily three (3) ways to hold joint title to real estate in Pennsylvania and
most other states. The manner of ownership will affect how the property will be distributed at the owner’s death. The method of titling can also leave the property at risk to certain claims while both owners are alive, a factor which might be considered when choosing how to own title to property during life.
In Pennsylvania, property owners may hold joint title to real property as Joint Tenants With Right of Survivorship (JTWROS), Tenants in Common (TIC), or Tenants by the Entirety (TBE). A deceased owner’s interest in property held as JTWROS will pass outside of probate directly to the surviving owner(s) upon an owner’s death. A deceased owner’s interest in property held as TIC is subject to probate and passes according to the terms of the decedent’s Will or the laws of intestacy. The surviving owner(s) of property held as TIC might be forced to sell the property in order to provide the deceased owner’s heirs their share of the property interest. TIC also allows an owner to sell their interest in the property without the consent of the other tenants, which can create complications for the other joint owner(s) during the lives of all property owners.
Tenancy by the Entirety is only an option for married couples and provides for similar distribution upon the death of an owner as JTWROS, with the deceased owner’s interest passing automatically to the surviving owner upon death. However, in Pennsylvania, and many other states, TBE offers additional creditor protection benefits for the real estate, since creditors of only one spouse cannot reach the property. This protection extends to TBE property that is transferred to a spouses’ joint revocable trusts as long as both spouses remain beneficial owners of the Trust.
The benefits and disadvantages of titling choices should be reviewed carefully with an estate planning attorney to determine if the manner of titling aligns with an individual’s testamentary goals. Following are a few important questions to ask your attorney:
- Who Will Own the Property if One Owner Dies? If a brother and sister jointly own a property and the brother wants his adult child to inherit his interest in the property, this will not be accomplished if the property is held as JTWROS. In order for the adult child to receive his interest, the brother would need to hold title with his sister as Tenants in Common and leave explicit provisions in his Will distributing the property interest to his adult child. (Without these provisions, if the brother marries or divorces, intestate succession laws could apply and transfer the property interest to a spouse.) Another way to ensure the child receives the property interest is to hold the property in Trust. The Trust agreement can be structured to benefit the brother and sister, designate and provide specific instructions for future beneficiaries, protect the property from beneficiaries’ creditor claims, and allow the property to pass outside of probate.
- What if One Owner is Involved in a Lawsuit or Divorce? Judgments imposed on an owner might attach as liens to the property depending on how title is held. One of the benefits married couples enjoy, through Tenancy by the Entirety ownership, is that a judgment against one spouse will not attach to the property. However, the property might be at risk to claims jointly pursued against both spouses. Properties held as JTWROS and TIC could be vulnerable to a judgment against an individual owner in the event of a lawsuit, bankruptcy, or divorce.
- Are there Gift Tax Consequences if the Sole Owner of a Property Chooses to Add a Joint Owner to the Deed? If the individual added as joint owner is not married to the other owner, the transaction might be deemed a transfer for gift tax purposes. Prior to changing how title is held, a property owner should always consult with an experienced tax and estate planning attorney to discuss potential transfer tax implications that might result upon a change in the legal title to real estate.
Individuals who are concerned about real estate included in their estate plan should itemize properties for review during an estate plan review meeting. Understanding the practical considerations and tax implications of different methods for owning real estate titled in Pennsylvania, and other states, will help clients to properly plan for the current ownership and ultimate distribution of real estate, as well as for the potential acquisition of future investment properties.
A consultation with an experienced tax and estate planning attorney can help ensure an optimal title choice is made for real estate currently owned and to be acquired by clients. To arrange a complimentary consultation with attorney Philip Levin, Esq., for the purpose of establishing an estate plan to achieve your wealth transfer planning goals, please call The Levin Law Firm at (610) 977-2443.
Powers of Attorney are powerful legal documents that grant another individual broad rights over medical and financial decisions. Giving legal authority to another person, vested with the ability to make financial and health-care decisions, should involve careful planning.
Ready-made legal forms found online and other DIY solutions are attractive to many individuals due to the ease of access and low cost. However, template forms are not the equivalent of properly designed Powers of Attorney drafted by a competent estate planning lawyer, in accordance with specific state law.
Most states have strict requirements regarding the specific terms and provisions contained in this legal document, along with what constitutes a validly executed Power of Attorney.
DIY Powers of Attorney have several downsides:
- Fail to be Up-to-Date – Laws change and legal documents might need to be updated to reflect those changes. Many times laws change faster than online legal templates can respond, which are often not state specific. Was the document completed more than or 10 years prior? Some banks and other financial institutions might try to avoid a potential lawsuit by refusing to recognize an outdated Power of Attorney.
- Missing Provisions and Definitions – A DIY Power of Attorney might fail to address certain powers or limitations, such as a gift rider—which would limit the attorney-in-fact’s ability to make gifts to third parties. Likewise, a DIY advance health-care directive might lack “safe harbor” language. These terms minimize the health-care provider’s liability. Some health-care providers might not recognize a DIY Power of Attorney for this reason. “Springing” Powers of Attorney, which go into effect when the individual becomes disabled, should include clear definitions of how incapacity is determined in order to avoid judicial intervention through a Guardianship proceeding.
- Not Filed or Managed Properly – Depending on the state law which controls and the powers included in the Power of Attorney, the document might need to be filed in order to be enforceable. For example, for transactions involving real property in a number of states, a Power of Attorney might not be recognized if this legal document was not recorded in the Register of Deeds office where real estate owned by the client was located. Very often, local laws provide that, once the Principal becomes incapacitated, a financial Power of Attorney must be recorded at the Register of Deeds office in their county of residence in order for the Agent named in the document to have authority to act on behalf of the Principal.
Agents appointed in Financial and Health-Care Powers of Attorney are vested with the power to take control over the management, investment, and distribution of another individual’s assets, as well as consent to medical procedures on their behalf. These responsibilities are essential if the individual becomes ill, injured, or incapacitated. For the reasons detailed in this edition of Estate Planning Matters, DIY forms generally are not a wise choice for delegating important estate planning decisions.
If you have specific questions about Powers of Attorney, or other vital estate planning legal documents, please contact The Levin Law Firm to arrange a Complimentary Consultation with Phil Levin, Esq., at (610) 977-2443.
Why Appoint a Trust Protector?
Clients often create long-term Trusts in their Will (commonly known as multi-generation Dynasty Trusts) in order to protect their beneficiaries from creditors, ex-spouses, estate taxes, and even themselves.
Depending on state law, a Trust can have a perpetual term or an extended term, which can provide a family legacy for many generations. However, the problem with a long-term Trust is that it is not possible for the Grantor to anticipate future changes in the law and/or the family’s circumstances, which might require specific modifications to the Trust in order to better serve the needs of the beneficiaries. One way to allow the Trust to be more flexible (and to adapt to factual and legal changes) is to appoint a Trust Protector.
A Trust Protector is a third party (not the Grantor, Trustee or Beneficiary) who is given the power in the Trust agreement to make changes to the Trust in order to carry out the Grantor’s intent. A lawyer or an accountant may often be a good choice to serve as a Trust Protector, with no compensation unless their services are required.
The powers granted to a Trust Protector can be very limited or very broad, and include the following powers:
- Remove and replace Trustees
- Amend the Trust to comply with tax or other law changes
- Resolve disputes between Co-Trustees
- Modify Trust distribution provisions based on changes in the beneficiaries’ circumstances
- Make technical corrections or correct scrivener’s errors
- Change the situs or governing law of the Trust to another state
- Modify the powers of the Trustee
- Terminate the Trust
Trust agreements can name the Trust Protector (and his/her successors). Alternatively, the Trust agreement may include provisions for the appointment of a Trust Protector, but defer the appointment until needed. For example, the Trust agreement can provide for the Trustee (or the beneficiaries) to appoint, remove and replace a Trust Protector.
Under most state laws a Trust Protector is a fiduciary who, as such, is required to act in good faith with regard to the purpose of the Trust and the interest of all beneficiaries. While the inclusion of a Trust Protector is not mandatory, it may be advisable to provide for a Trust Protector to assure the intentions of clients who establish legacy Trusts are accomplished.
For more information regarding this topic and other estate planning matters, please email your requests to Philip Levin, Esq., or call Phil at (610) 977-2443.
To learn more about how The Levin Law Firm can create an estate plan designed to help you and your clients achieve their wealth transfer goals, please contact our office to schedule a Complimentary Consultation at (610) 977-2443.
Estate planning for couples in a second or later marriage can be challenging, particularly when one spouse has significantly more assets than the other spouse. One solution for allowing the well-to-do spouse to maintain control of his or her assets, and provide peace of mind for the other spouse, is to establish a “Lifetime QTIP Trust.” In this edition of Estate Planning Matters, we will detail how a “Lifetime QTIP Trust” can provide multiple benefits to married clients with lopsided estates, and how you might alter a client’s investment strategy when using it.
The Basics of Creating a Lifetime QTIP Trust
In the estate planning world a “QTIP Trust” has nothing to do with those handy cotton swabs used for cleaning ears, applying cosmetics, or making children’s crafts. Instead, QTIP is a “Qualified Terminable Interest Property Trust,” which is the legal name for a type of Trust that allows a wealthier spouse to transfer assets into Trust, rather than outright, for the benefit of a less wealthy spouse, completely free from both estate and gift taxes.
Many married couples have estate plans that make use of a QTIP Trust, which takes effect after the death of the first spouse using the so-called “A – B Trust” strategy. After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption amount, (currently $5.43 million in 2015) and the “A Trust” holds the excess assets which distribute upon the passing of the first spouse. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction, meaning that property passing into the Trust will not be subject to federal estate taxes until the surviving spouse dies.
Here is an example: Fred and Susan have both been previously married. Fred has two children from his prior marriage and Susan has three, and their estates are disproportionate – Fred is worth $2 million and Sue is worth $10 million. With the A – B Trust strategy, if Susan dies first the B Trust is funded with $5.43 million and the A Trust is funded with $4.57 million. No estate tax will be due at Susan’s death since the B Trust utilizes her federal estate tax exemption and the A Trust qualifies for the unlimited marital deduction. In addition, when Fred later dies, the A and B Trusts can be drafted so that what is left passes exclusively to Susan’s three children (or whomever else she chooses).
What if instead of creating and funding the QTIP Trust after Susan dies, she creates and funds the QTIP Trust for Fred’s benefit with tax free gifts while she is still alive? This is the “Lifetime QTIP Trust”, which can be designed by competent estate counsel to be very flexible and works extremely well in a variety of situations.
Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits
Outright gifts to a spouse during life or after death lead to total loss of control. For married couples with lopsided estates and clients with children from prior marriages, the problem is exacerbated by the difference in wealth – while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not true.
A Lifetime QTIP Trust offers the following benefits to this type of couple:
The wealthier spouse can create and fund a Lifetime QTIP Trust, without using any gift tax exemption.
Provide an excellent opportunity to make use of the less well-to-do spouse’s generation-skipping tax exemption, which is not portable under current law.
During the beneficiary spouse’s lifetime, he or she will receive all of the Trust income and may be entitled to receive Trust principal for specific purposes.
When the beneficiary spouse dies, assets remaining in the Lifetime QTIP Trust will be included in the surviving spouse’s estate, thereby making use of the less wealthy spouse’s otherwise unused federal estate tax exemption.
If the beneficiary spouse dies first, the remaining Trust property can continue in an Asset Protection Trust, for the grantor spouse’s benefit and the remaining assets at the grantor’s passing will be excluded from the grantor spouse’s estate when he or she dies.
After both spouses die, the balance of the Trust will pass to the grantor spouse’s children and grandchildren or other beneficiaries chosen by the grantor spouse.
Planning Tip: As with other types of estate planning strategies, a Lifetime QTIP Trust is not a “one size fits all” and must be specifically designed to each client’s unique family dynamics and financial situation. In addition, only an attorney experienced in implementing advanced estate planning techniques should be drafting Lifetime QTIP Trusts for your clients.
How You Might Adjust a Client’s Investment Strategy When Using a Lifetime QTIP Trust
The estate planning strategy utilizing a Lifetime QTIP Trust differs from the conventional “A Trust” because the surviving spouse has access to the Lifetime QTIP Trust’s investment income but not necessarily the principal (for example, the lifetime QTIP might permit distributions of principal to the surviving spouse for health, education, maintenance, and support purposes). So while a particular client’s own goals, risk tolerance, time horizon, and income tax bracket must be taken into account, all else being equal, the investment strategy for a Lifetime QTIP Trust would usually focus more on generating income to offset the limited access to principal, assuming income is needed at the time.
This might mean that recommendations to your client among publicly traded securities would skew more toward high-dividend stocks, high yield corporate and muni bonds, mortgage real estate investment trusts (REITs), business development corporations (BDCs), and certain master limited partnerships (MLPs), as well as high-income exchange-traded funds (ETFs), closed-end funds (CEFs), and mutual funds. In the non-traded arena, you might consider REITs, BDCs, or certain life settlement debt instruments. Or, if your client is an accredited investor, you might consider high quality private debt or equity, provided the income warranted the risk.
For advisors who tend toward annuities for their planning strategy, because assets in annuities would forfeit the Lifetime QTIP Trust’s step-up in basis at the second death, a better place to utilize them might be the “B Trust” (bypass trust), where there is no such second-death step-up upon the passing of the surviving spouse. That being said, if your client thought the lost opportunity to use the Lifetime QTIP Trust’s step-up in basis was less important, you might consider an annuity with a reasonably high guaranteed income, coupled with an enhanced death benefit to replace the typical depletion of capital stemming from a combination of annuity fees and distributions.
Finally, life insurance is often used in conjunction with establishing a Lifetime QTIP Trust. More specifically, due to the Lifetime QTIP Trust’s focus on income, all else being equal, this strategy possibly will impair the capital that would eventually be distributed to the remainder beneficiaries, at least when compared to what they might have received had the holdings been structured less for income and more for capital gains and capital preservation. Thus, financial and insurance advisors might wish to evaluate utilizing a survivorship life insurance policy to provide an infusion of cash to the remainder beneficiaries upon the passing of both spouses, which policy can be owned from inception by an irrevocable life insurance trust (ILIT).
Which of Your Clients Need a Lifetime QTIP Trust?
If you have clients in a second or later marriage with uneven assets, please call The Levin Law Firm to discuss the use of a Lifetime QTIP Trust, along with other vitally important estate planning techniques. We can help your clients determine which strategies will work best for their families. And, if you have any questions about trust and estate planning matters, we would be happy to answer your questions. Feel free to email us your questions at: info@levinlawyer.com.
We look forward to helping you better serve and support your relationship with clients and their adult children. To discuss a particular client situation or arrange a consultation with attorney Philip Levin, Esquire, please call The Levin Law Firm at (610) 977-2443.
Americans love their pets and often feel connected to their animals as part of a family unit. The American Pet Products Association reported that our country spent about $58 billion on pets in 2014. Pet care costs—whether for a cat, dog, bird, horse, or other animals—can be considerable and are often unpredictable. How can the well-being of a pet be ensured if a pet owner dies?
Pet trusts are formal legal arrangements that provide specific instructions and funding for the care of pets. Fortunately, Pennsylvania is one of the states that has specific legislation regulating the creation of pet trusts. In addition to providing for the continued care of one’s pets, creating a pet trust allows the assets held in the trust to pass outside the probate process, eliminating judicial intervention. This can prevent court delays and unnecessary expenses, as well as expedite ability of the caretaker you select, as designated in your Pet Trust, to provide the appropriate care for your pet.
- Medical Needs – As part of the dollar amount reported above, $15 billion was spent on veterinary care. Aside from routine expenses and the cost of emergencies, potential chronic health conditions should be considered when forecasting future pet care costs. Over the past few years, the pet hospice care industry has grown. This service typically costs approximately 25% more on average than comparable in-home programs and this potential extra care expense should be considered when funding a Pet Trust.
- Pet Residence – An estate plan which includes a Pet Trust not only helps to detail where a pet will reside after the pet’s owner passes away, but can also provide direction for the pet’s care in the event the owner becomes ill or incapacitated. Many seniors require long-term care and the costs for LTC are rising. Although there are pet-friendly assisted living communities in Pennsylvania, many nursing homes are not pet-friendly. Therefore, it is important to decide in advance where the owner wishes their pet to live, in the event the owner’s living situation does not allow pets.
- Temporary and Permanent Care – It is now very common and also prudent for a pet owner to leave specific instructions for a friend or family member to provide pet care for the remainder of the pet’s life, as well as to earmark funds for this purpose. The successor care provider might need time to prepare their home and to make arrangements for the transport of the pet.
- Plan Now To Protect Your Pet – Who will care for your pet if you are unable to do so? Deciding and designating a caregivers in Pet Trust, established under the terms of your Last Will and Testament, can help ensure that a loved pet is taken care of in accordance with your wishes, alleviate confusion among surviving family members, and minimize stress for your pet.
Please contact The Levin Law Firm at (610) 977-2443 to arrange a consultation to discuss your estate planning needs, along with the establishment and funding of a Pet Trust to provide for the future care of your loved pets.
If you wish to establish or update your estate plan, or have questions regarding estate planning matters, please call The Levin Law Firm at (610) 977-2443 to arrange a complimentary consultation with estate planning attorney Phil Levin, Esq.
