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Trusts
A trust would avoid these taxes:
PA Inheritance Tax Rates
Pennsylvania imposes an inheritance tax on a decedent’s taxable estate. The tax applies to every dollar of the estate in excess of expenses and debts. There is no exemption nor is there an exclusion under which no tax will apply. The tax rate is dependent upon the relationship between the decedent and the beneficiary.
According to Pennsylvania Department of Revenue, 2020 Tax rates on individually owned assets passing to beneficiaries at the death of a PA resident are as follows:
A decedent’s spouse: 0.0%
A decedent’s children or grandchildren: 4.5%
A decedent’s siblings: 12%
A decedent’s nieces, nephews & friends: 15%
A decedent’s Parents: 4.5%
Charities: 0.0%
Lifetime Gifts: There is no Pennsylvania gift tax. However, all gifts made during the 12 months preceding the decedent’s date of death are brought back in and are taxable in the estate for PA Inheritance Tax purposes. There is a $3,000 exclusion for gifts made during each calendar year of the 12 months prior to the date of death. For example, if Sally dies on May 1, 2019 and she made a gift of $103,000 to her son on December 30, 2018 and another $3,000 on January 1, 2019, only $100,000 will be brought back into Sally’s estate for PA inheritance tax purposes. The $3,000 exclusion applies to both the 2018 and the 2019 gifts made during the 12 months prior to Sally’s date of death.
Jointly Owned Assets: Pennsylvania imposes inheritance tax on the decedent’s percentage ownership interest of jointly-owned assets. For example, if Sally died owning a $100,000 account jointly with her son, $50,000 of that account would be subject to a 4.5% tax. If Sally died owning a $100,000 account jointly with her son and daughter, $33,333 of that account would be subject to a 4.5% tax.
In Trust For Or Beneficiary Accounts: Pennsylvania imposes inheritance tax on the entire value of accounts a decedent owned in his or her name alone and on which he or she designated beneficiaries.
Assets Owned In a Revocable Trust: Generally, if someone dies owning assets in a revocable trust over which he or she had access and control those assets, those assets will be 100% taxable for Pennsylvania inheritance tax purposes.
Assets Owned In An Irrevocable Trust: Irrevocable Trusts are taxed in a complex way and you should consult counsel when determining if assets in an irrevocable trust are PA Inheritance taxable. Depending on how an irrevocable trust is written, the trust assets could either be inheritance taxable or not, subject to the reservations of powers in it when created.
Life Insurance: Pennsylvania does not apply inheritance tax to the proceeds from life insurance on a decedent’s life.
Spend Thrift Trusts
Key takeaways
A spendthrift trust is a type of trust that prevents a beneficiary from accessing all of the trust’s assets at once.
A spendthrift trust can be a useful way to provide a steady stream of income that’s protected from creditors.
Your financial advisor can help you understand whether a spendthrift trust makes sense for your financial situation and estate plan.
A spendthrift trust is a type of trust that establishes certain conditions, or terms, that must be met for a beneficiary to receive assets held within the trust. These terms prevent a beneficiary from directly accessing the trust’s assets. While the terms of a spendthrift trust can vary, they are typically designed to release assets to the beneficiary slowly over time rather than all at once.
For example, the terms of a spendthrift trust might dictate that the beneficiary receives a certain sum of money on a monthly, quarterly or annual basis. Or they might specify that the beneficiary will receive interest and dividend payments on a quarterly basis while never gaining direct access to the trust’s underlying assets.
The biggest benefit of a spendthrift trust is that the beneficiary cannot access all of an inheritance at once, so you have less worry that they could waste it through poor financial decisions. With the proper design, a spendthrift trust can become a lifelong source of income for your heir. Another appealing aspect of a spendthrift trust is that the assets are protected from creditors.
Preserving the Maximum Amount of Money and Assets For Your Loved Ones and Protecting Against Nursing Home Costs
Lehigh Valley nursing home costs are astronomical and will eat up most of your wealth in a short amount of time. Planning for the future and ensuring that your wishes will be carried out doesn’t have to keep you up at night. Work with us to help ensure that your assets are preserved appropriately, that you have provided for your heirs, and that your wealth will be transferred in a seamless, tax-efficient manner. An Asset Protection Trust protects your loved ones after you are gone.
Asset Protection Trusts (Irrevocable Trust)
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It is an irrevocable trust that protects the assets transferred to it from counting as resources for Medicaid qualification purposes. When the Trust is signed, a new legal entity is created. There are four major roles in the trust: Grantor, Trustee, Beneficiary, and Trust Protector. The Grantor is the creator of the Trust and the person transferring assets into the Trust. The Trustee manages the trust, makes decisions regarding the use of trust assets and makes distributions pursuant to the terms of the trust. A Distribution Trustee is not necessarily in every one of these trusts, but is recommended in order to split off the duty of making distributions from the other Trustee duties. The beneficiary is the person who benefits from the trust. There can be two types of beneficiaries: income beneficiaries, who are recipients of trust income, and the principal beneficiaries, who are the recipients of distributions of trust principal. Lastly, the Trust Protector is responsible for protecting the purpose and intent of the trust in the event of changes in the law.
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It is very important that when the Trust is created, assets are transferred into the name of the Trust. The transfers made into the Trust are subject to a 5 year (60-month) lookback period for Medicaid eligibility purposes. Therefore, depending upon the amount of assets used to fund your Irrevocable Trust and other factors relating to Medicaid eligibility as required by the Deficit Reduction Act of 2005 and Pennsylvania law, you might not qualify for Medicaid benefits for a full 5 years after the month in which your Irrevocable Trust is funded (assets transfered into it).
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Generally, real estate, certificates of deposit, checking accounts, savings accounts, non-qualified annuities, stocks, bonds, mutual funds, money market accounts and life insurance can be transferred. The only asset that really should not be transferred to the trust would be any qualified funds, such as, IRAs, or 401Ks because there would be income tax consequences and those accounts must be held in the name of the individual who created the account.
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In order to transfer real property into an Asset Protection Trust a new deed must be executed and filed at your County Courthouse. Once the deed has been changed, the Trustee has the ability to sign all necessary paperwork to sell your home. Assuming the trust has the appropriate terms and is considered a Grantor Trust for Federal Tax purposes, when your primary residence is sold you can still use your capital gains exclusion if you otherwise qualify for that exclusion.
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The Grantor cannot be a principal beneficiary of the Trust because then the assets would be considered available for Medicaid purposes. The terms of the trust and your goals will determine whether or not the Grantor will have access to the income generated in the Trust.
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Assets owned by the Asset Protection Trust will not be controlled by the Grantor’s Last Will and Testament, but instead will have its own terms that will determine how assets pass. It would be very similar to your Last Will and Testament in that it determines how your property should be distributed when you pass and who would be in charge; however, it would avoid the probate process.
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It depends on the terms of the trust. Typically, the Grantor will pay the bills (utilities, taxes, maintenance, etc.) as they normally would. Usually a tenancy agreement is completed between the Trustee of the Trust and the Grantor so that the Grantor can lease their residence from the trust. In lieu of rent, the Grantor pays for the ordinary household bills.
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No extraordinary record keeping or accounting must occur; however, the Trustee should keep statements for the trust assets so that the Trustee has an understanding of the value of the assets in the Trust and outside of the Trust.
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Any time a separate legal entity is created, a tax preparer should be consulted in order to make sure that everything is filed appropriately. If the trust is a Grantor Trust for Federal Tax purposes, then a separate federal return would not be necessary; however, the tax preparer would be able to assess if a separate form was needed for Pennsylvania income tax purposes.
Living Trust
5 Benefits
A living trust avoids probate
Probate is the court-supervised process of distributing a deceased person's estate. Depending on the estate, as well as the assets and individuals involved in the state where you live, probate can become a lengthy and costly process, which may not only delay distributions to your beneficiaries but also cut down on what they inherit.
By placing your property in a living trust, however, you can avoid probate because the successor trustee distributes assets according to the trust creator's instructions without court intervention.
This can mean a faster distribution to your heirs—shortening the time frame from months or years to just weeks—without any additional expenses to the estate.
The avoidance of probate may be particularly helpful if you own property in another state, as it would pass directly to your beneficiary and not be subject to probate in that state (as long as title ownership to the property is in the trust).
A living trust may save money
As described above, a living trust can save money by avoiding probate expenses at your death.
Regarding the initial cost, though, making a living trust is likely to be more expensive than creating a last will and testament. A living trust is a more complex legal document that requires more actions because you also must “fund the trust" with your assets, that is, transfer ownership of your property to the trust.
Living trusts may provide savings for married couples in the form of joint living trusts.
A living trust protects your privacy
As mentioned above, one of the benefits of a trust is the avoidance of the probate process.
A living trust is a private document between the parties involved and does not become part of the public record. In other words, no one can later go and search public records to find out more about the distribution of your estate.
A will, on the other hand, is public record, so everything in it becomes public as well.
A living trust assists in the event of incapacitation
If you become ill or incapacitated, the person you have chosen as successor trustee can step in and manage your affairs without the intervention of a court. In this way, you can avoid a court-appointed conservatorship for your affairs—the kind that Britney Spears' father famously had over his daughter's affairs.
Moreover, since a living trust is revocable, you can dispute the implication that you are incapacitated and retain control of your own affairs.
A living trust provides certainty and peace of mind
When drawn up correctly, a living trust sets out a clear plan to deal with all of your assets. This can help prevent you from unintentionally disinheriting someone, can help you provide care for a loved one with special needs into the future, and even protect assets from certain people.
All of these things can give you peace of mind now, knowing that your estate will be handled exactly as you wish later. The existence of the trust can also provide certainty and comfort to your loved ones during an already stressful time because you've laid everything out for them.
Deciding which is better: a trust or a will
In choosing what is best for your estate—living trust vs. will—it is important to understand the differences between them.
The biggest difference is that a will has no effect on your property while you're still alive and only takes effect after your death.
A major benefit of the living trust is that it will not have to go through the probate process, as a will must do. But, in some states, the probate process is quick and inexpensive, so it really depends on your state and the types of assets you own. Also, keep in mind that a last will is simpler to set up and less expensive.
Note, though, that in conjunction with a living trust, you should have a “pour-over will" to catch any assets that have inadvertently been left out. This would ensure that your property doesn't fall subject to state intestacy laws, which mandate the distribution of assets not covered by a will or trust. The pour-over will does have to go through probate.
As described above, a will offers no privacy as it becomes public record. Your estate may also see cost savings with a trust as opposed to a will.
Ready to make a living trust?
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