Lancaster PA Probate and Estate Administration Law Blog

Tax season is just over. The filing deadline of April 17 is past. (My son, as a little kid, said he thought there were five seasons - spring, summer, fall, winter and tax season.) As soon as you have calculated the damages for your 2011 Form 1040, the next question for most taxpayers is what can be done to reduce taxes in the future?

Tough question. At the end of this year, the Bush tax cuts expire. The Bush cuts were to expire at the end of 2010. During the Obama presidency they were renewed for 2 years, now sunsetting at the end of 2012. What will happen? Some analysts predict that Congress will pass a temporary extension before the end of 2012, patching things up to continue for one more year. Which begs the question, what will they do during that year? We are faced with enormous tax uncertainty. Tax uncertainty is the economic risk individuals and businesses face when the amount and type of taxes cannot be accurately predicted.

Uncertainty about tax rates as well as the future cost of Obamacare is holding back business growth. How can anyone evaluate the economic effect of a decision if a large portion of the expense - the taxation of business transactions and business income, as well as the cost of employee benefits - is a complete unknown?

At the end of 2012, the top income tax rate will rise to 39.6%. The lowest bracket of 10% will increase to 15%. Taxes on capital gains and dividends will increase. The 15% rate on capital gains will move up to 20%. Qualified dividends now taxed at 15% will be taxed like other income with a top rate of 39.6%. If the cuts expire, there will be no more special rate for capital gains and no more qualified dividends.

The Alternative Minimum Tax (AMT), which is an alternative tax system originally designed to make sure high-income tax payers don't escape paying income tax, will be applicable to many more taxpayers, raising effective rates. Because the AMT was not indexed for inflation, Congress has had to approve periodic fixes to keep it from affecting many more people than intended.

If Obamacare stays, there is a 3.8% tax on investment income for taxpayers with incomes over $200,000. A new .9% Medicare tax on incomes over $200,000 is imposed.

Without the Bush tax cut, the marriage penalty will be back, withholding rates will rise and the earned income tax credit will be reduced. The American Opportunity Tax Credit which provides a credit of up to $2,500 per student expires December 31, 2012.

The current federal estate tax exemption of $5 million is slated to drop to $1 million on December 31, 2012. This is a huge drop and leaves many people in a quandary over their estate plans. Not to mention the top estate tax rate goes from 35% to 55%.

The effects of tax uncertainty are widespread. For example, the National Restaurant Association (NRA) reports that about three in ten restaurant operators have put expansion/improvements projects on hold because they're uncertain whether Congress will extend the 15-year depreciation schedule for spending on construction and improvements. If restaurants proceed with the projects they have put on hold, the result would be $7 billion in direct construction spending by restaurants; a $23 billion overall economic impact as this construction spending ripples across other industries; and 200,000 new jobs across all U.S. industries, the NRA's research department estimates.

Congress let the 15-year write-off period for restaurant construction and renovations expire at the end of 2011, allowing the depreciation schedule for such expenditures to revert to 39.5 years. Nearly 100 members of Congress are backing NRA-supported bills, S. 687 and H.R. 1265, to make the 15-year schedule permanent.

Another example is the quandary faced by individuals trying to plan for retirement. The Social Security and Medicare systems are stressed. Would-be retirees have to be responsible for

savings for their own retirement. Not only must they manage their investments but they also need to plan around taxes - IRAs, Roth IRAs, 401Ks, mutual funds, stocks, bonds, http://myarchive.us/richc/2012/cdf51b58e72f_8536/dividendrates2013.jpginsurance products have made taxes very complicated. An increase in taxation of dividends and capital gains can have a dramatic effect on retirement income.

Dividend income and capital gains is the kind of income used for paying bills, purchasing prescription drugs, keeping the air conditioning going in the summer, and paying property taxes. For senior citizens, higher capital gains taxes and dividend tax rates can be especially hurtful.

Then there's the Obama administration proposal to take away the tax break for tax-free municipal bonds for wealthier tax-payers - talk about uncertainty! Budget projections show that the current budget trajectory is grossly unsustainable. The tax changes required to balance the budget in the future could be enormous. We need a fair, predictable tax policy. Now.

It seems like a simple question. It's the first question in the interview for many estate plans. But the answer may be far from simple. There are many issues involving children with unmarried parents, adopted children, stepchildren and children conceived through assisted reproductive technology. Establishing parentage is important for securing a child's benefits such as support, social security, veteran's benefits and inheritance rights.

The common law term parent refers only to a mother or father who is related to the child by blood. This definition now holds whether the child is born to natural parents who are married to each other or to parents who are not married to each other. Under current law, adoptive parents have the same rights and responsibilities as natural parents. Other persons standing in the place of natural parents, such as stepparents, are not, however, given such extensive rights and responsibilities

The general rule for an adopted child is that the adoption severs the parent-child relationship between the adopted child and his or her natural parents including severance of all inheritance rights. Thus, under Pennsylvania law, for purposes of inheritance by, from and through an adopted person, the adopted person is considered as a natural child of his or her adopting parents; and an adopted child is not considered to be a child of his or her natural parents. Pennsylvania provides a limited exception to this rule. A child who has been adopted may inherit from his or her natural kin (but not natural parents) when the natural kin has maintained a family relationship with the adopted person. The comment to the statute when it was enacted says that "[t]he exception recognizes that family relationships frequently continue for grandparents and others where an adoption may have occurred after the death or divorce of a parent."

The most common form of adoption is by a stepparent who assumes financial and legal responsibility for his/her spouse's child(ren), and the non-custodial parent is released from all parenting responsibilities. Without adoption a step-child has no rights of inheritance or benefits as a child.

Pennsylvania law permits adoptions in same-sex households. For example, the partner of a biological parent can become an adoptive parent. Second parent adoptions enable the child to be covered as a dependent of the non-biological parent for health insurance and life insurance benefits. Adoption provides the child with inheritance rights and rights to federal benefits. Second parent adoptions give the non-biological parent legal rights as a parent in future potential custody, visitation and child support issues.

A posthumous child is one conceived prior to, and born after, the death of his or her father. Such a child, referred to in the law as en ventre sa mere (literally in his or her mother's belly), has the same inheritance rights as a child born while his father is alive. A child is not entitled to full legal rights unless the child is born alive.

What about a child conceived by artificial insemination using the father's sperm after the father is dead? Or a mother's egg after she's dead? According to U.S. New & World Report, more than half a million cryopreserved embryos are now in storage somewhere in the United States. An unknown but far greater number of sperm donors have also made deposits that could be used in assisted reproductive technologies. The law in most states is unclear. A case is presently pending in the U.S. Supreme Court on whether a child conceived after the death of his biological father can receive Social Security benefits as his father's surviving child.

In an attempt to solve these problems, The Uniform Parentage Act (UPA) has been promulgated by the Commissioners on Uniform State Laws and has been adopted by 8 states, not including Pennsylvania. UPA aims to modernize the law for determining the parents of children. It seeks to ensure that the parent - child relationship extends equally to every child and every parent, regardless of the marital status of the parent. UPA addresses the issues of children conceived by in vitro fertilization and artificial insemination as well as a child possibly carried by a woman other than the legal mother. It also addresses the identification of fathers and the termination of parental rights.

An optional section of UPA includes provision for a gestational agreement - a contact between a woman and a married or unmarried couple obligating that woman to carry a child genetically related to either or both of the intended parents. The Uniform Commissioners state that we must recognize the obligations of parents in any possible combination and permutation of marriage of the parents, method for conception of the child, and arrangements that intended parents make to have children. Otherwise, we have children for whom nobody has responsibility.

Some scholars suggest moving beyond the accepted notion of only two parents. Acknowledging more than two parents, these scholars argue, "would better reflect the dynamics of the modern family, and also protect the children in such families. It would ensure that, even in the event of a split or major disagreement between the adults in question, the children would not be deprived of the affection, care and financial resources of any of the people they have grown up regarding as their mothers and fathers." The notion of multiple parents is not all that new and novel - ask anyone who was raised with stepparents.

It is not flesh and blood but the heart
which makes us fathers and sons.
-Schiller

When a person dies, any debts he or she owes can be collected from his or her estate. If there is no estate or if the estate is insufficient to pay all debts, then usually no one is liable; and the creditor is out of luck.

That's the law. But the practice in the real world is something different. It is not uncommon for creditors of the deceased to call, write, and repeatedly badger (even harass) family members to pay all or a portion of the decedent's debts. Let me say it again, family members have absolutely no responsibility for a decedent's debts, unless they were a co-signor on a loan or otherwise assumed liability themselves.

The debt doesn't disappear with the death of the debtor. The estate of the deceased person owes the debt. If there isn't enough money in the estate to cover the debt, it goes unpaid. There are a few exceptions to this rule. A family member or friend may be responsible to pay the debt if 1) you co-signed for the loan; 2) you live in a community property state, such as California, where a surviving spouse may have liability; 3) state law requires a surviving spouse to pay certain kinds of debts like health care expenses; or 4) you were legally responsible as executor or administrator for settling the estate and didn't comply with state law.

It the estate has insufficient assets to pay all debts, it is akin to bankruptcy. It is called an insolvent estate, and the law provides a system of priorities for who gets paid in full first. That fact has not stopped the burgeoning industry of debt collections from families of deceased persons.

Jessica Silver-Greenberg writing for the Wall Street Journal says: "No one knows the size of the death-debt collection business, but it appears to be growing, according to court records, regulatory filings and interviews with dozens of lawyers and industry experts. The Federal Trade Commission investigated the industry and issued new guidelines in July after receiving numerous consumer complaints. William Howard, a consumer-rights lawyer with Morgan & Morgan in Tampa, Fla., says he has represented 50 people pursued for debts owed by dead family members so far this year, up from 10 in all of 2010. 'Collectors are starting to realize just how much money you can get from someone when they are at their most vulnerable,' he says."

Some family members claim that debt collectors mislead them into believing they are required by law to pay the debts of deceased relatives. The debt collectors can threaten all sorts of things that are not in fact true or even possible. The collectors can be persistent - racking up hundred of harassing telephone calls to surviving spouses and other family members.

Family members of the deceased, just like all consumers, are protected by the federal Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair, or deceptive practices to try to collect a debt.

Collectors are allowed to contact third parties (such as a relative) to get the name, address, and telephone number of the deceased person's spouse, executor, administrator, or other person authorized to pay the deceased's debts. Collectors usually are permitted to contact such third parties only once to get this information. The main exception is if a collector reasonably believes that the information provided initially was inaccurate or incomplete, and that the third party now has more accurate or complete information. But, collectors cannot say anything about the debt to the third party.

Even if a third party is authorized to pay a deceased person's debt, the third party can stop the debt collector's contacts. The third party must send a letter to the collector stating that he or she does not want the collector to contact him or her again. The letter should be sent certified mail, return receipt requested so there is proof of mailing and receipt.

David Streitfield, writing for the New York Times, says that collecting money from relatives of decedent's is one of the healthiest parts of the debt-collecting industry. "Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones." Usually these people do not understand that they have no legal liability.

If you get a collection call for a family member who is deceased what should you do? First, do not give any of your own personal information such as your social security number. Find out who is the debtor, who is calling to collect, the account number, the amount, and any relevant information. Forward this to the executor or administrator of the estate if there is one. If you have any doubts about whether or not you might be liable, contact your lawyer.

For parents, deciding who will raise their minor children if the parents die is one of the hardest decisions to make. In fact, the decision is so difficult that many parents avoid the topic and never do it. Not making a decisions is also making a decision and for those parents who avoid the issue, the route they choose is one of uncertainty, unnecessary costs, and perhaps a stint in foster care for their children. You need to name a permanent guardian and it can only be done in a will. More than half of the population if the US does not have a will - are you one of them?

Jacoba Urist, writing for the Huffington Post lists 4 myths that prevent parents from naming guardians in wills:

Myth No.1. There is a perfect choice who will raise your children exactly the way you would - but you haven't figured out who that is yet. Wrong. No one will do it exactly the same way you would. You must choose the best from the available options - imperfect as they may be.

Myth No.2. Someone will step up if needed. Sure family, friends, neighbors all may love your children and be ready to care for them, but who decides? A Judge who is a stranger to you and your family will make a decision. If two family members are vying for the position, a Judge, Solomon-like, may not appoint either one of them. What happens to the children while this litigation continues? They'll be meeting with lawyers, social workers, psychologists and perhaps be placed in foster care.

Myth No. 3. A letter or an e-mail expressing your wishes is good enough. Wrong again. The only way to appoint a guardian is in a will or standby appointment document. Informal writings and requests carry no weight.

Myth No. 4. There is no need to talk with the guardian. This misconception can cause very unfortunate mistakes and hardships. You should ask anyone you are considering if he or she is willing to serve and give him or her the opportunity to ask questions. Very importantly, they may want to know what financial means will be available for the child's support and education. The person you name may not be able to raise your children because of the demands of work, their own medical issues or extended family obligations.

There can be more than one guardian: One can be appointed for the personal custody of the child and another can be appointed for the child's property. Guardianship is a cumbersome and expensive way to manage financial affairs. I always recommend a trust for the minor children instead of guardianship which, by the way, ends when the child attains age 18. From then on any property left to a child is exclusively owned and controlled by the child which is probably not a good idea.

Standby Guardianships

Since July 1, 2002, Pennsylvania has had a law which allows parents to sign a document designating a standby guardian for their child or children in the event the parent(s) become incapacitated. The guardianship is not activated until a trigger specified in the document occurs, such as a health care professional certifying that the parent or parents have actually become incapacitated. At that point, a notice of the Standby Guardianship must be filed in court. The petition can be filed at anytime prior to the triggering event as well.

This is a missing piece in many estate plans. If you have minor children and have executed a will, you probably named guardians for your minor children in case you die. But what if there is a car accident and the parents are incapacitated - perhaps just for a period of time. Parents and children are taken to the hospital by ambulance. Neither parent is conscious.

Who can make medical decisions for the children? If the children are not badly hurt and can go home, who takes care of them? Who is in charge?

The parents have powers of attorney and health care directives. Their named agent steps in for them, but there is a void for who has authority and custody of the children.

Absent a standby guardianship document, the only answer at this point is to have a judge adjudicate Mom and Dad as incapacitated and appoint a guardian for children. This is expensive, time-consuming, difficult and unweildy.

The better plan is to have formally named a Stand-by Guardian which allows parents to appoint temporary guardians for their children. These Guardians can begin acting only after as specified triggering event. For example, the triggering event could be the "incapacity of both parents as designated by their attending physicians". Triggering events are not listed or suggested in the law; it is up to the parent to make the list of potential events. The Standby Guardian would have all the powers to make medical, legal and financial decisions for the children.

If the document is approved by the court before a triggering event occurs, the standby guardianship can commence immediately upon the triggering event and may continue to act until the child reaches 18 years of age. If the document is not approved by the court before a triggering event occurs, the standby guardianship can commence immediately but a petition must be submitted to the court for document approval within sixty days or else the standby guardian shall lose all authority to act as co-guardian or standby guardian. If the petition is filed within 60 days but the court does not act within the 60-day period, the authority to act as guardian is temporarily continued until the court orders otherwise.
Seems obvious, doesn't it? But many estate plans have this piece missing. Does yours?