Pennsylvania Trusts and Estates Blog

In Pennsylvania, you can disinherit your children, but you can't disinherit your spouse. In fact, in all but one of the fifty states, you cannot disinherit a spouse. In Georgia it is permitted.

If you leave a will that makes little or no provision for your surviving spouse, or if you have arranged title of assets so that there is no probate estate, your surviving spouse is entitled to elect a statutory forced share. The spouse is entitled to one-third of various property interests of the decedent.

It is the policy of the law to make sure that a surviving spouse does not become impoverished because of the loss of the support of the deceased spouse as well as to reward the spouse's contribution to the financial success of the marriage. The survivor is entitled to what our legislature has determined to be a "reasonable" share, that is, one-third (1/3).

Whether the marriage lasts for one hour or fifty (50) years, the elective share is and remains one-third (1/3). The share is not limited to property acquired after the marriage, but applies to all of the decedent's property interests including gifts and inheritances.

The share is not paid automatically. There are specific procedural requirements. To claim the share the surviving spouse must "elect" to take the share. The surviving spouse is entitled to this one-third (1/3) even if divorce proceedings are pending, or even if the spouses have been estranged and living apart for years. The spouse has six months from the later of the date of death or the date of probate to make this election. The election is made by filing a claim with the Clerk of the Orphan's Court in the county of the decedent's domicile.

If there is a pre-nuptial agreement or post-nuptial agreement, often the spouses waive the right to make this election. That solves the problem. But many times such an agreement is not a practical solution, or is personally unacceptable to the parties to the marriage.

What are the property interests that a surviving spouse can reach? In general, these are property interests that were either owned by the decedent at death, or were transferred by the decedent during life but from which the decedent had the right to withdraw income or principal.

Let's look specifically at what types of property are subject to the spouse's election:

The following property interests are not subject to the election:

If the surviving spouses makes the election to take the one-third (1/3) share, then he or she gives up any other provisions that were made for him or her. Making the election is considered to be a disclaimer of all benefits passing to the surviving spouse under the will.

In other words, you can't keep what the first spouse gave you and get a one-third (1/3) share. You have a choice: You can keep what you got, or you can give up what you got and elect a one-third (1/3) share.

What do you have to give up if you elect to take one-third? (1) all items passing to the surviving spouse by will or intestacy, (2) any interest as a beneficiary in a trust created by the decedent, (3) proceeds of insurance to the extent premiums were paid by the decedent or his or her employer, (4) annuities, (5) retirement plans, and (6) joint property owned by the decedent and surviving spouse to the extent it is attributable to contributions from the decedent. Any gifts made by the decedent to the surviving spouse during life are an offset against the elective share.

Obviously, this is a complicated analysis. If you are a surviving spouse, determining whether or not you should elect your one-third (1/3) share is a many-faceted decision. You will need competent advice from an attorney if you are faced with this decision. Similarly, for a spouse who is intent on reducing the value of the effective share, there are steps that can be taken such as maximizing the investment of assets in property not subject to election (retirement plans are a good example; insurance is another example).

It is not uncommon for a spouse to be afraid that her surviving spouse will wreak havoc with the intended distribution of assets. For example, what if the deceased spouse was a business owner who intended to pass the business to her children from a prior marriage. This plan could be destroyed if the surviving spouse "elects" to take one-third of the assets, thus defeating the plan. For this reason, it is very important that the estate planner take steps to ensure that the business owner's intentions are carried out.

The elective share is another example of restrictions on the disposition of property imposed by the legislatures. It may give options, or hope, to someone who otherwise is cut off. On the other hand, it may make it impossible to carry out the intentions of a person as expressed in his or her will. If you are involved in a situation where this may be an issue, you need to seek competent professional advice.

 Where do you keep your original will? Some folks keep their wills in a "fireproof" box in their desk, or under their bed. At your peril, I say. The metal box may not burn but it makes a fine little oven.

Some folks let the lawyer who wrote the will hold it in "safekeeping" for them. This is usually a service provided by law firms at no charge. The practice of lawyers varies. Some hold it in a safe deposit box in the name of the firm. Some keep wills in "fireproof" cabinets or in safes at their offices. Generally speaking, lawyers like to hold wills because that means the heirs have to come to that lawyer to retrieve the original will; that lawyer gets first crack at being retained to settle the estate.

Why not put your original will in safe deposit box at the bank? I often recommend that wills be put in the client's safe deposit box. "But," you cry, "the safe deposit box is sealed when I die." That is simply not true. Your family will always be able to get your will out of the box.

There are some restrictions on entry into a safe deposit box in the decedent's name. The purpose of the restrictions is to prevent inheritance tax evasion. If unreported cash or other valuables are stored in the box, the State wants to make sure that these items are reported and that inheritance tax is paid on them. Nevertheless, banks recognize the right of the family, next of kin or executor (if known), to search the contents of a decedent's safe deposit box for wills, codicils, trusts, life insurance policies, and cemetery deeds. If the key cannot be found, the box can be drilled. The law permits removal of such documents provided a bank employee certifies that no other assets have been removed. It is worth noting that the bank is entitled to demand that wills or other documents remain in their custody until lodged with the Register of Wills, though they seldom insist on this.

The restrictions on entry apply to a safe deposit box "in the decedent's name." A safe deposit box is considered to be "in the decedent's name" if it is registered in the decedent's name alone, if it is registered jointly in name of decedent and one or more others (except husband and wife), or registered in a partnership or trade name where decedent had access to the box, a principal agent or deputy. "In the decedent's name" is a term defined in the Pennsylvania state statute. It seems odd but a box in the joint names of the decedent and a spouse is not "in the decedent's name," while a joint box in the names of the decedent and any other person is "in the decedent's name."

None of the restrictions on access are applicable to boxes registered in the name of decedent and spouse. In that case, decedent's surviving spouse may enter the box and remove anything with no restriction whatsoever.

After the swearing in of an executor, it is the executor's responsibility to enter the box to collect assets. The executor must arrange either for the presence of a bank employee or a Commonwealth representative at the time of entry. It is the duty of the bank employee or Commonwealth representative to list the contents of the box or to certify that only the will or cemetery deed has been removed.

If the safe deposit box was rented jointly by decedent and another surviving party, the right of entry is probably limited to surviving joint owner although the restrictions about inventory still apply, even to this joint owner.

Subsequent entries by the executor or surviving joint owner are free of restriction.

Inventorying the safe deposit box is always part of the estate settlement process. Complying with the requirement about attendance of a bank employee or Commonwealth representative is not difficult. Since the safe deposit box is probably the "safest" place, please consider keeping your will and other valuable papers there. Although this discussion may suggest a complicated procedure to lay persons, in actuality, bank personnel are accustomed to handling this in the ordinary course of their business.

"Probate" is much maligned. To hear some folks talk, having your estate subject to probate is worse than dying. What is all the fuss about?

 Probate is a title proceeding. If a person dies owning property, the question arises "Who is the next rightful owner?". Probate is the procedure by which the ownership is determined.

If the decedent left a will, the will is filed with the Register of Wills, the executor (who is the person in charge of the estate) is sworn in, and notice is given to all persons who have an interest in the estate, including creditors. Anyone who wishes to contest the will, which means to object to the will, may do so within a prescribed time period. Grounds for contesting a will might be that the decedent did not know what he was doing when he signed the will. The law calls this lack of "testamentary capacity." A will can be contested on the grounds that the decedent was under "undue influence" at the time she signed the will. For example, someone was pressuring and pushing her, and the decedent was susceptible to the influence. An improperly executed will can be contested also. For example, a will may not have enough witnesses, or the witnesses may be disqualified persons. In Pennsylvania, the forum for all these sorts of "contests" or objections is the county Orphan's Court.

If the decedent left no will, or if the decedent's will is found to be invalid, then the next rightful owner(s) of the decedent's property are determined by state statute. This statute determines the decedent's heirs. The heirs of a decedent are first, children or more remote issue, then parents, and then siblings and their issue. Also, a surviving spouse is entitled to a share, usually about one-third (1/3) of the estate.

There is a common misconception that a surviving spouse inherits all of the deceased spouse's

property. If there are children in the marriage, the spouse's share of the estate is one-third. If there are no children, the spouse takes the first $30,000 plus one-third; the decedent's parents or other relatives take the remaining two-thirds. This is the distribution for property that was in the decedent's name alone. If property was held jointly with the surviving spouse, it passes immediately on death to the surviving joint owner. A will or the intestacy statute only operates on property that was solely owned by the decedent.

Contrary to popular belief, if you die without a will, your property does not go to the state. The probate proceeding is still necessary to determine who are the heirs, and in what proportion they take the decedent's property. Creditors are also given the opportunity to come forward with their claims.

The court appoints an executor or an administrator. An executor is a person or bank or trust company named in the will to be responsible for the settlement of the estate. An administrator is someone appointed by the court to administer the will if the named executor is unavailable or unwilling, or to administer the estate if there is an intestacy. When the decedent dies without a will, that is called dying intestate.

So what's so terrible about probate? Nothing. It is a fairly simple and logical process. Probate gets its bad reputation from the professional fees that are charged. The executor or administrator and any professionals such as attorneys and accountants who are engaged to assist with the estate settlement process are to be compensated. The duties of the executor and her advisors go far beyond the probate process, including the filing and payment of federal estate taxes, Pennsylvania inheritance tax, and so on. The executor or administrator and attorney are, of course, entitled to be compensated for their work on behalf of the estate. It is common in this area for executors and administrators and for attorneys to compute their fee for services as a percentage of the assets included in the estate, say five percent, or perhaps less. The problem with this approach to fees is that it does not always bear a reasonable relationship to the work and responsibility involved.

High fees are the source of most of the horror stories one hears about probate. The procedure itself is not expensive; it is the professional fees charged that are sometimes excessive. The answer to this is to be an educated consumer. When planning your estate and if you are the executor or administrator or an estate, you need to make sure that the compensation arrangements that you enter into with professionals are fair and reasonable. There is no question that the services are valuable and deserve to be compensated. The question is, how much? The leading case on attorneys' fees in Pennsylvania says that reasonable compensation takes into account the amount of work, the time involved, the results obtained, the amount of money or value of property in question, and the professional skill and standing of the attorney.

Be an educated consumer of legal services. Check it out.

 Before you can select an executor, you need to know what an executor does. The executor is the person responsible for carrying out the terms of your will. The duties are many and varied.

When you die, your executor must first probate your will and be appointed as executor by the local Register of Wills. Then the work begins. The executor collects all your assets and values them, which may require hiring qualified appraisers. The executor opens a bank account in the name of the estate and transfers all financial assets into the name of the estate. The executor pays any bills you left behind and the costs of your last illness and funeral expenses.

It is the executors responsibility to file and pay all taxes. The tax responsibilities include your final federal and state income tax returns, federal estate taxes, state inheritance or estate taxes, and federal and state income tax returns for the estate. If there is property that is included in the taxable estate but does not pass under the will (such as life insurance, pension benefits, or joint property), the executor must also value these assets, report them to the tax authorities and pay the tax attributable to them. In some cases the executor must collect taxes dues from the recipients of this property.

There are various tax elections and planning techniques which may benefit the estate. Some of these are disclaimers, choice of a fiscal year for the estate, elections for the deductibility of administration expenses, elections regarding the taxation of Series E Bond interest, election of marital deduction treatment, valuing real estate as "special use" property, and installment payment of estate taxes. Obviously, a lay person acting as an executor cannot be expected to know about all these choices and will need competent advice to make the appropriate decisions.

It is the executor's duty to preserve the value of the estate and administer it for the benefit of the beneficiaries. The executor collects income from investments, business interests, and real estate. The collected assets must be invested prudently and, in many cases, estate assets must be sold and these sales are handled by the executor. The executor accounts for all transactions and when all creditors have been satisfied and all taxes paid, distributes the estate in accordance with the terms of the will.

An executor is entitled to be compensated for the very substantial work and responsibility involved. The amount of the fee will depend on the amount of work performed. Sometimes an individual executor will do a tremendous amount of work and sometimes he will hire professionals who will do almost all of the work. And of course, in some cases, the work is shared.

Usually the executor engages the services of a lawyer and possibly an accountant to advise them of their duties, the due dates for various actions, assists with the preparation of tax returns, resolution of disputes, making tax elections, and so forth. The taxation of trusts and estates is a very complex matter and a trained professional can often save the estate substantial dollars in taxes with good post-mortem tax planning.

You may have an estate which, for one reason or another, is complex. The estate may hold real estate, closely-held stock, or a variety of business interests, and post-mortem tax planning and liquidation of business interests may be part of your executor's "job description." In such cases, you might consider naming a professional executor such as a bank or trust company, or a private professional executor. A professional as well as family member, of course, may serve as co-executors.

There are some practical considerations. Does the person you prefer live so far away that carrying out the duties of an executor will be inconvenient and excessively costly? Is the individual who seems most competent also abrasive and impatient? Is he or she likely to alienate the beneficiaries or be seen as biased because of ancient family feuds? Since an executor has a number of responsibilities, some of which are time consuming and demanding, it makes good sense to discuss with a person whether he or she is willing to be your executor. Both you and the potential executor need to realize that an executor can be held personally liable by the estate beneficiaires if errors are made or the estate is negligently handled. Beneficiaries may sue an executor to recover these losses. In most cases, individuals name capable and honest executors who fulfill their responsibilities with integrity and conscientiousness; nevertheless, we have all heard horror stories of situations where an executor and beneficiaries are at odds with each other. The executor should be in a position to expend time and energy in this role to handle considerable detail, to keep good records and to expect the bureaucratic wheels to turn slowly at times. He or she may often need to exercise patience and to explain to beneficiaries what steps are required to administer the estate. If the executor has a realistic outlook and realizes that sometimes settling an estate is neither quick nor simple, the process will be considerably more tolerable!

This is the main point: View the executor's position as a job, one for which certain skills and characteristics are essential. Think carefully about who the right person is for that job, let that person know that he or she is your choice, and hope that the answer is "Yes"!

More to the point - do you have more than one IRA at Vanguard? About a year ago, in July 2007, Vanguard Group sent 170,000 customers a form letter titled "Change in beneficiary policy will help you simplify your planning." What it really meant, as reported by Ashlea Ebeling writing for Forbes, is: "Warning! Unless you act, we're about to change who gets your Individual Retirement Accounts when you die."

Vanguard decided that customers must use identical beneficiaries for all IRAs of the same type. All your IRAs holding money rolled from employer pension plans count as the same type and must have the same beneficiaries. Traditional IRAs, both pretax and aftertax, are a second type. Roth IRAs are a third.

There are all sorts of reasons one might want to have multiple IRAs. One could be for your wife, another for the children of your first marriage. You might want one for each child. One might be payable to a trust, another to your children outright. None of this is allowed anymore at Vanguard. If you have named beneficiaries that are not the same for each account of the same type - it has now been changed. What you designated will not apply. Vanguard has changed your beneficiaries. Isn't that shocking?

If you had multiple IRAs which beneficiary designation did they pick? Vanguard will apply the newest beneficiary form to all your IRAs of one type. If two forms were submitted at the same time, Vanguard will treat the one it processed later as newer.

If you have Vanguard IRAs you must be in contact with them to see who your named beneficiaries are. You can change the beneficiary, as long as all IRAs of the same type have the same beneficiary.

For many folks, their IRA is the largest asset in their estate. The provisions of a will do not govern who gets the IRA - it goes by its beneficiary designation.

Vanguard's unilateral action is wreaking havoc with many estate plans. Many financial planners and estate planning attorneys recommend that their clients divide IRAs. For example, since an IRA is an excellent asset to leave to charity (because the charity can receive it free of income and estate tax); it is common to put a part of an IRA in a separate account with a charitable beneficiary. This is important because there are some complex rules and traps to be avoided if a charity is one of a group of beneficiaries.

I thought the policy change to be so misguided and shocking - and it received such bad press - that surely Vanguard would reverse its policy and go back to sanity. But no, here it is a year later, and they are holding fast.

Ebeling's Forbes article states: "Say you've named your older child primary beneficiary of one rollover IRA and your younger child primary beneficiary of another. If you don't read your mail carefully, or were on vacation or in the hospital when the letter came, and you die without contacting Vanguard, one of your kids could be done out of his IRA inheritance." When Forbes showed Vanguard's letter to IRA experts, they were outraged. "This borders on the unconscionable," fumed Green Bay CPA Robert Keebler. "It's crazy. I don't see how they can change the beneficiaries on your accounts without your consent,'' said Boston lawyer Natalie Choate.

Dan Caplinger writing for The Motley Fool advises, "Don't let your broker or fund company have the final word on how you plan your estate. If your provider won't follow your instructions, make a change and find one that will. You deserve to keep control of who'll inherit your assets."

Vanguard doesn't usually get bad press. Finance reporters really like its low-cost, customer friendly approach. But they got this one wrong. If Vanguard won't let you name the beneficiaries you want - go elsewhere.