In Defense of Will Based Planning

Spring is here – or almost so – and, with the season comes multiple invitations to attend programs espousing the use of trusts, living or otherwise, as a means to achieve estate planning objectives. There is nothing wrong with this, of course, and trusts are a valid method to attain certain goals However, this process might leave some individuals who have “merely” a Will believing that what they have is not enough. Not necessarily so. Like everything involved in planning, the answer depends on the circumstances. For many Will-makers (Testators) a Will with Power of Attorney, Health Care Power and Living Will is enough. Wills can even contain trusts (referred to as “testamentary trusts) and trusts for estate planning purposes often are paired with “pour-over” wills. The bottom line concerns the question – what are you trying to accomplish and what is the best way to achieve this.

So, here are some ideas and myths.

First. This analysis relates to Will-makers and Trustors whose residence (domicile) is in Pennsylvania. If you are a resident of Florida or California or any state other than Pennsylvania you should consult the rules of your state. In Pennsylvania, contrary to some popular belief, the mere fact of having a Living Trust instead of a Will does not absolve you from paying Pennsylvania Inheritance Taxes. The same is true of TOD (Transfer on Death) accounts. Your beneficiary still needs to pay. Pennsylvania is one of relatively few states in the US that imposes an Inheritance Tax (as opposed to an estate tax) from dollar one. It also does not do what many states do which is either to completely exempt from estate tax/inheritance tax property that is inherited by large groups of beneficiaries such as children (named as e.g. “Class One beneficiaries”) or exempt sizeable amounts – often millions – from estate tax. This is likely one explanation why potential beneficiaries in many states are counseled against the “horrors of probate.” Many in other states are able to pass their estates without necessarily reporting to the government or paying taxes.
In Pennsylvania there are classes of beneficiaries for Pennsylvania Inheritance Tax and percentages based on class. Husbands and wives are at “0 percent” inheritance tax so very often we do not probate a husband’s or wife’s Will unless there is some other reason to do so such as possibly change of titling. Children, grandchildren, great grandchildren and so on and stepchildren, step-grandchildren and so on are taxed at 4.5%. Siblings are taxed at 12%. All others at 15%. Life insurance proceeds are exempt no matter who inherits.
Generally speaking I would say that many financial planners prefer trusts, or at least certain trusts, as opposed to Wills. I often wondered about this but arrived at the conclusion that the concept of “AUM” or Assets Under Management has something to do with this. If assets such as real estate and investments are scattered through several states a living trust could pull together under one umbrella, so to speak, assets that could be subject to different tax treatments. Second, it does give additional assistance to planning to have these scattered assets considered together. Another point I believe is that large investment firms pay a great deal of attention as a matter of pride in describing the volume of their Assets Under Management.
There are other reasons for trusts besides issues regarding taxes and even other than general management. Special Needs Trusts (often referred to as Supplemental Needs Trusts) may be used to protect assets that otherwise would result in beneficiaries losing some government benefits. Spendthrift Trusts may be used to protect individuals who otherwise would (as the name implies) be subject to the claims of creditors.
Note that trusts can be contained in Wills. This is the idea of a “Testamentary Trust.” The two are not necessarily opposed although more complicated trusts can be prepared for special circumstances outside a Will. Also note that not all bank officers might recognize trusts in Wills and this might need to be pointed out to them.
Finally, there is nothing wrong with a basic Will and this is the starting point for many “Testators”. What should be done both under a Will and/or a Trust regardless is to coordinate these documents with your plans i.e. who your beneficiaries are, how and when you want your beneficiaries to inherit, and what taxes or other charges they may be subject to.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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In Defense of Will Based Planning

About the Author Janet Colliton

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