Pennsylvania Trusts and Estates Blog

            Let's talk of graves,

           of worms and epitaphs;

           Make dust our paper . . .

            Let's choose executors and talk of wills

                                             Richard II, Act III Scene ii

One of the hardest things for a beneficiary to understand is why he has to wait to get his inheritance. Most beneficiaries think that when the funeral is over, it is time to distribute the decedent's property. Not so fast.

If the decedent left a will, the named executor must be sworn in and given authority by the Register of Wills. If the decedent left no will, (or left a will but the named executor cannot serve), then an administrator must be appointed. As used in this column, the term "executor" also includes an administrator.

The executor becomes the actual owner of the decedent's personal estate. During the period of estate administration, the property belongs to the executor. The executor is responsible for gathering and taking possession of all of the decedent's property and safeguarding it.

If grandmother passed away and bequeathed her sterling flatware to you in her will, you are not entitled to the silver until the executor distributes it to you. When grandmother dies, the executor becomes the owner of the silver. The executor will not be in a position to distribute the silver to you until he determines what claims there are against the estate. Creditors' claims and taxes must be paid first. It is always possible that property, including the sterling, would have to be sold to meet estate obligations. If you take the sterling out of the house, whether it was given to you in the will or not, you are stealing.

The executor must value all the assets. For things other than bank accounts and marketable securities, this means getting appraisals. After determining that the estate is solvent, the executor must pay the decedent's debts, expenses of the last illness, funeral expenses, and taxes. Anyone who has a claim against the estate has one year from the date of the publication of the estate notice in the newspaper to come forward. For a period of one year, then, the executor could receive bills or claims against the estate's assets. The executor must file and pay all taxes. The decedent's final federal and state income tax returns must be filed by the executor. The executor must review prior returns to make sure they were filed, and filed correctly. The IRS is not barred by the one-year claims period to come back to the estate looking for unpaid income taxes. The executor is also responsible for filing 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 save money for the estate. To mention a few, tax savings could come from disclaimers, the choice of a fiscal year for the estate other than the calendar year, making elections regarding the deductibility of administration expenses, making elections regarding the taxation of Series E Bond interest, election of marital deduction treatment, valuing real estate as "special use" property, and electing the installment payment of estate taxes. Obviously, a lay person acting as an executor cannot be expected to know about all these strategies and will need competent advice to make the appropriate decisions. Also it is obvious that the matter of income, estate and inheritance taxes for the estate are going to take time. Death taxes, both state and federal, must be paid within nine months from the date of death unless the estate can qualify for an extension. Often the actual tax is paid at the nine month date but the tax returns themselves are put on extension. Extensions are available for 6 months, which would make the return filing 15 months after the date of death. Unlike 1040's, every single death tax return is looked at by IRS or Pennsylvania Department of Revenue personnel. The taxes are not settled until the taxing authority affirmatively accepts the return and the tax and communicates this to the executor. During the period of administration, the executor must 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. 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 to the beneficiaries in accordance with the terms of the will. An executor is entitled to a fee 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 she will hire professionals who will do almost all of the work. Usually the executor hires a lawyer and possibly an accountant to help with the estate settlement. Often the lawyer who wrote the will is hired, but that is not required. The executor is free to hire legal counsel of his or her own choosing. The lawyer advises the executor of their duties, the due dates for various actions, assists with the preparation of tax returns, resolves disputes, makes 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. Being an executor is a job. It carries a lot of responsibility and takes time. Can the person you named as executor handle the task?

 According to census bureau statistics, nearly half of married couples will at some time go through a divorce. If you are going through the divorce process, you've got a lot of company.

So, do you need a new will? What does the process of divorce do to your estate plan?

You need to remember that in Pennsylvania you are considered legally married until the judge signs the final divorce decree. There is no such thing in Pennsylvania as a legal separation.

This means that if you die before the divorce if final, your soon-to-be ex is still considered to be your husband or wife and is entitled, under Pennsylvania law, to claim his or her spousal share, approximately one-third, of your estate.

If you have a will giving everything to your spouse, and you die before the divorce is over, then the spouse gets everything! The will is still valid! It doesn't matter if the divorce was been going on for 3 years. It doesn't matter if you have been separated for 10 years. It doesn't matter if the divorce will be final next week. It doesn't matter if you're living with a new boyfriend or girlfriend. The spouse gets everything unless you have changed that will. And if you have changed that will, your spouse may still elect to take his or her spousal share.

If you are in the midst of a divorce and die without a will, your spouse will be entitled to a share of your estate, as decided by intestacy laws, and he or she will also be in charge of the administration of your estate.

Once the divorce is final, if you don't have a will, the state intestacy statute governs and your children would be your heirs, or if you have none, your parents, or brothers and sisters, etc.

If you made a will while you were married, and are then divorced, the will is still valid, but any provisions naming the former spouse are interpreted as if the former spouse had predeceased you. After the divorce is final, your will may be satisfactory, interpreted as if the ex-spouse had predeceased you.

This doesn't apply to trusts, however. If your estate plan includes a trust, mentions of the ex-spouse must be affirmatively amended to be deleted.

It's a different story with powers of attorney. Because most married couples name each other as the first choice of agent in their powers of attorney, Pennsylvania law protects people filing for divorce by automatically revoking the soon-to-be ex-spouse's authority under the power of attorney. This makes good sense. Otherwise the power of attorney is a loaded gun: the soon-to-be-ex-spouse could be able to sell your house and clean out your bank accounts.

As a practical matter, however, the divorcing spouse may still be able to access the funds in your name. (Maybe I shouldn't be writing this.) The power of attorney may not be valid, but the bank relying on it has no way of knowing if the process of divorce has been commenced. Maybe you should let your bank know!

The terms of living wills and medical directives survive the divorce. No legislation or case law has yet tested this issue. You may be well advised to rewrite your living will and medical directives if you don't want your ex to "pull the plug."

What about your 401(k) plan? If you are domiciled in Pennsylvania when you die, the state legislature has done your thinking for you. If there is a divorce, any beneficiary designation for a life insurance policy, annuity contract, pension, profit-sharing plan or other contractual arrangement, providing for payment to a spouse, will be construed as if the former spouse had predeceased. Comparable to the wills situation, the divorce must be final for this rule to apply. In many other states it is up to you to change the beneficiary designation.

However, if your insurance is in an irrevocable life insurance trust, which is a common vehicle, the protective statute won't change the terms of the trust, and benefits may be given to or used for your ex-spouse. And irrevocable trusts being, well, irrevocable, there is no fix. Most life insurance trusts are drafted to take care of this by addressing what happens if the current spouse becomes the ex-spouse.

If you remarry, the federal law enacted as part of the Retirement Equity Act automatically makes the new spouse a beneficiary of qualified plans. Qualified plans include 401(k) plans, profit-sharing plans and pensions plans, but not IRA's. If you are married, your spouse is automatically the beneficiary of your qualified plan unless he or she has consented in writing to another beneficiary designation.

Even after the divorce is final, it is important to have your estate planning attorney review your divorce decree or agreement. Your obligations under the agreement may effect your retirement plan. Your ex-spouse may retain rights in a retirement account, or the divorce decree may require maintenance of life insurance payable to the ex-spouse or children.

Thank you to Neil Hendershot and his blog for drawing attention to National Estate Planning Awareness Week.  I had no idea the statistics were this bad:

"a 2004 survey from Lawyers.com finding that:

• 58 percent of Americans lack a basic will, generally considered to be the first document in an individual's estate plan.
• In addition, 69 percent lack a living will or medical directive (both documents communicate an individuals wishes for medical life support if that person is terminally ill or permanently unconscious).
• Only one-in-five, or 21%, have created a trust as a part of his/her estate plan. "

In addition to grief, loss, and loneliness, widows and widowers are faced with many practical problems. There are arrangements to be made, financial matters to deal with, and children to care for, just to name a few. The death of a spouse is a time when the surviving spouse will need love and support. The survivor also will be bombarded with advice, suggestions, demands, fears, and concerns. Here is a guide to help you through this difficult time.

1.    Take your time. Get through the funeral and the initial period of mourning before you tackle the paperwork. Usually there is nothing that needs immediate attention. This may not be true if these is a business that needs attention or a transaction about to close.

2.    Keep a record of everything you spend in connection with the estate. These items may be tax deductible and you are probably entitled to reimbursement from the estate.

3.    Cancel services and memberships, like cell phones, gym memberships, credit cards.

4.    Postpone making any changes in your life. Many counselors recommend not selling your house for one year. Give yourself time. Don't do anything suddenly. If at all possible, do not rush into a decision you might later regret.

5.    Don't start giving things away. Until you know what your legal rights and responsibilities are and what your spouse's will and other estate planning documents require, don't give away or destroy any personal possessions or any other belongings of your deceased spouse.

6.    Don't let anyone drive your deceased spouse's car. If it is not in your name, avoid driving it yourself until you get the title changed. Make sure it is properly insured.

7.    Collect the documents needed to settle your spouse's estate and locate assets - bank statements, current tax information, insurance policies, investment records, property deeds, and the will. To locate these documents check your safe deposit box, personal files, and contact your attorney, accountant, and other advisors.

8.    Determine what liabilities were owed by your spouse, for example, mortgages, loans, credit card balances, outstanding bills for medical treatment not covered by insurance,

9.    Before closing any accounts, withdrawing any sums, changing how accounts are titled, and collecting benefits - consult an estate attorney. There may be important tax reasons not to take possession of assets. For example, a disclaimer may be an appropriate tax planning technique for you. Disclaimers are not available for stock if the dividend check gets cashed or deposited. Don't deposit or cash any checks in the decedent's name until after you have consulted an estate attorney.

10.    Find out what benefits are available to you as a surviving spouse from pensions, social security, and veteran's benefits. Find out what life insurance death benefits you are entitled to and check for other insurance. Sometimes there is life insurance to pay off mortgages and credit cards through these lenders.

11.    Figure out a monthly budget showing your income and your expenses. At first, be cautious about spending. Don't make big purchases or charitable contributions until you are sure of where you stand financially. Wait until you have settled your spouse's estate and paid all the fees. The worst thing would be realizing you did not have the money to be so generous.

12.    Family and friends are great for giving you emotional support, but don't take your legal and financial advice from them.

13.    Don't let your sentimentalism guide your financial decisions. Don't feel you have to stick with the same investments, or the same insurer, or the same advisors because they were chosen by your deceased spouse. Advice given years ago may no longer be prudent or applicable.

14.    Be on you guard for people trying to take advantage of you. If someone comes into your life and shows an uncommon interest in your financial affairs, be cautious and keep that information to yourself.

15.    Consult professionals for financial and legal advice. You need to get help and advice to deal with probate, death taxes, income taxes, and property title issues. If you are put under pressure or arguments begin - refer these people to your lawyer. Don't try to field these kinds of questions and challenges yourself.

16.    Review your own estate plan. Who will get your assets when you die? Who is your executor? Who is your agent under a power of attorney? Who is your surrogate under medial directive and living will? Choose people for these positions who are competent and willing to do the job - do not choose someone because of their status or to honor them.

17.    Be patient. Finally settling an estate takes at least one year.