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McClellan Legal LLC Estate Planning & Tax Assessment Blog

Tuesday, January 17, 2017

Trusts: Federal Estate Tax Planning (Article 3 of 8)


Using trusts for federal estate tax planning has been a very common estate planning strategy, but is becoming less critical for the vast majority of people.  Historically, most tax planning strategies were intended to reduce the amount of federal estate tax owed by an estate because the federal estate tax rate has been very high (max rate is currently 40%, but was 55% 20 years ago).  The federal estate tax is only implemented when an estate is valued above a certain threshold, called the applicable exclusion amount.  That is, the federal government only taxes the value of an estate over the exclusion amount. 

Over the past twenty years the applicable exclusion amount has increased from $600,000 per person to the current value of $5.
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Wednesday, July 13, 2016

Naming Guardians for Minor Children


For couples with minor children, there is no more important estate planning decision than naming guardians for your children.  In fact, the birth of a child is one of the major life events that triggers my clients to begin estate planning.  A guardian is an adult that you designate in a will to care for a child if both parents pass away before the child reaches the age of majority.  While it’s difficult to imagine that situation, it is important that parents designate a guardian so that the decision will not be left to a court. 

Quite often parents struggle to designate a guardian.
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Saturday, July 9, 2016

Five Myths of Estate Planning


There are numerous myths associated with estate planning and I have listed five that I commonly see in my practice. 

Myth #1

I do not need estate planning because I’m not wealthy, sick, or old.  This is by far the most common estate planning myth and it is simply not true.  If you have people in your life that you care about, then you need estate planning.  Most of the time estate planning is not about the money.
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Wednesday, July 6, 2016

Pet Trusts


About 10 years ago, Pennsylvania joined numerous other states by allowing pet owners the option of setting up a trust to care for their pets.  Pennsylvania’s pet trust statute is important because pets would otherwise be treated like property and not be eligible to receive a portion of your estate for their care. 

Your pet trust should name a trustee to manage the pet trust assets and to take care of your pet.  Alternatively, your pet trust may appoint someone other than your trustee to manage day-to-day care.  You will want to provide the trustee and care giver instructions regarding your pet’s food preferences, medical care (e.
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Tuesday, July 5, 2016

529 Plans and Estate Planning


The vast majority of people believe that a college education is important, but only a small minority of people are adequately saving for the ever growing costs of their children’s education.  While college education is definitely not the only path to future financial success, it is a proven head start that should not be ignored.  Over the past couple decades, Congress and state governments have shifted their priority from subsidizing higher education costs via grants and direct institution support to tax incentives for individuals. 

Therefore, if an individual does not adequately plan to take advantage of tax incentives offered via 529 plans, then the net cost of college will increase at an even faster rate than the current average 5% increase.  529 plans allow parents/grandparents to more efficiently save for college expenses in a tax favorable environment without income-based limitations that are found in most tax laws.
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Wednesday, June 22, 2016

Planning for Estate and Inheritance Taxes in Pennsylvania


Planning for Estate and Inheritance Taxes in PA

One of the most common goals of my estate planning clients is to minimize the tax burden on their estate.  No one should pay more taxes than legally obligated.  There are two potential taxing authorities that we consider when minimizing your estate tax burden: the federal government and your state government. 

From a federal perspective, very few estates are taxable because the taxable threshold is over $5 million per individual.  Therefore, you must leave an estate worth more than $5 million (currently $5.
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Monday, June 20, 2016

Planning for Retirement Assets


For most people, a very large amount of their wealth is associated with their retirement accounts including traditional IRAs, Roth IRAs, 401ks, etc. However, retirement assets are often overlooked during the estate planning process. Do you have retirement assets that would result in a payout of over $100,000 per beneficiary? If so, you must keep reading. Even if you do not currently have a large retirement account, this article provides some solutions to common mistakes regarding inheriting retirement assets. Ignoring retirement assets is the single biggest mistake that I've seen in estate planning.


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Tuesday, January 27, 2015

Trusts for Minor Children (Article 2 of 8)

It is a common myth that minors cannot inherit property.  Minor children may inherit equitable title in property but cannot hold legal title until they reach the age of majority (21 years old in Pennsylvania).  Equitable title simply means that the assets must be used for the benefit of the child.  Legal title is directed to how the assets are managed.   Since a minor cannot hold legal title, a custodian or trustee will manage the assets for the child’s benefit.

There are two primary ways to manage inherited assets for minor children:

  • Uniform Transfers to Minors Act (UTMA)

  • Child’s Trust

Uniform Transfer to Minors Act

If a parent with minor children passes away without a Child’s Trust set up in an estate plan (either in a Will-Based Plan or a Revocable Living Trust-Based Plan), then the minor child could alternatively inherit the assets via the Uniform Transfers to Minors Act (UTMA).  UTMA was adopted by many states (including Pennsylvania) and is intended to be an efficient way to transfer assets to minors without the use of trusts.  Generally, a UTMA custodian has wide discretion to use the assets for the benefit of the child and must transfer legal title to the child when the child reaches 21 (could be delayed until 25 in Pennsylvania).  While transfer to minors via UTMA is intended to be simple, it does not include sufficient flexibility to allow a parent to customize the terms of the child’s withdrawal rights or define the custodian’s discretionary terms for managing the assets. 

Child’s Trust

As a more flexible alternative to transferring an inheritance to a minor child than using the UTMA, parents often draft Child Trusts in their Will or Revocable Living Trust.  Using a Child Trust allows for highly customizable withdrawal rights, including tiered withdrawals.  In lieu of the UTMA’s automatic withdrawal right by the child at 21, many people prefer to gradually grant their children withdrawal rights as they mature.  Holding inherited assets in a Child Trust is meant to protect the assets from creditors, failed marriages, and the child’s own financial maturity. 

A reasonable indicator of financial maturity is the child’s age.  For example, it is common for parents to set up tiered withdrawal rights for their children as follows: one-third of the assets at 25 years old, one-third at 30, and the remaining balance at 35.  Since age alone is not always a good indicator of maturity, the trustee may be instructed via the Child Trust to delay or fast-forward the tiered withdrawal rights dependent on other factors (e.g., recent history of drug/alcohol abuse, credit history, mental/medical conditions, marriage issues, continued higher education, etc.), which may serve as a better indicator of the child’s financial maturity.  

A Child Trust also allows the parents to define clear rules regarding how the trustee manages the assets for the child.  For example, a Child Trust may provide that trust assets are to be used for certain discretionary expenses, such as private school.  The UTMA simply does not provide this level of flexibility for parents to customize their child’s inheritance.  At some point, parents may also want to appoint their child as co-trustee or sole trustee of their Child Trust in order to encourage the child continue to protect the assets within the trust.

Pot Trust for Multiple Children

If a parent has more than one child, the parent may want to consider initially managing the children’s inheritance in a single Pot Trust instead of automatically splitting the total inheritance into individual Child Trusts.  At some later point in time, the Pot Trust will be split into individual Child Trusts upon the occurrence of a triggering event (e.g., the youngest child graduates from college or turns 25 years old).  If the parents survive the triggering event, then the Pot Trust will never be implemented and each child’s share will be immediately distributed to an individual Child Trust. 

The rationale for the Pot Trust is that older children may have already received a substantial “gift” (e.g., college tuition, wedding expenses, etc.) prior to their parent’s death, because older children often reach expensive life events before younger children.  Therefore, a Pot Trust manages all of inherited assets in a single pot to reduce the administrative burden and to ensure that each child’s individual share is fairly distributed.

If your children are minors or young adults, there is nothing more important than properly planning for their well-being.  By utilizing trusts for your children, you will have the tools to design the right balance between asset protection that children need and the beneficiary control that children desire.

If you have any questions regarding utilizing child trusts in your estate plan, please call our office at (610) 444-5552 to schedule an appointment.

Tuesday, January 6, 2015

Trusts: The Basics (Article 1 of 8)

Some of my clients are initially hesitant to implement trusts in their estate plan.  They may think that a trust is too complicated, too expensive, or simply not necessary for their relatively modest estate.  We have drafted a series of eight articles to define the different types of trusts and explain how trusts may be used in different situations to protect your assets while you are alive and/or for your beneficiaries after your death.  This first article explains trusts basics and is a good starting point for explaining how trusts may be used in seven common situations:

 

  • Trusts for Minor Children

  • Trusts for Second Marriages

  • Trusts for Tax Planning

  • Trusts for Adult Beneficiaries

  • Trusts for Retirement Accounts

  • Trusts for Life Insurance

  • Trusts for Special Needs Beneficiaries

 

What are the Different Types of Trusts?

Trusts come in many different varieties.  The two most common initial options when designing a trust include: living trust v. testamentary trust and revocable trust v. irrevocable trusts.  Living trusts are created while you are alive and testamentary trusts are triggered upon your death when certain conditions exist (e.g., you have minor children). 

Additionally, trusts may be either revocable or irrevocable.  Quite simply, you can change a revocable trust and it is difficult (although not always impossible) to change an irrevocable trust.  Irrevocable trusts add greater asset protection than revocable trusts.  As we progress through each of the next seven articles, we will explain how these basic categories of trusts are used to create asset protection for different specific situations.   

 

What Are The Different Trust Roles?

It is important to broadly define a trust.  A trust is a legal relationship that defines rules for how trust assets are to be managed by a trustee for a beneficiary.  Each trust has three roles: grantor, trustee, and beneficiary.  The grantor creates the trust and defines the trust rules.  The trustee manages the trust assets as defined by the rules.  The beneficiary is the role that we all want; the beneficiary receives trust assets in accordance with the trust rules.  Quite often, one person may serve more than one of the three trust roles.  In fact, sometimes one person may be the grantor, the trustee, and the beneficiary at the same time. When discussing the specific types of trusts over the next several weeks, we will explain how each role is implemented in the specific trusts. 

 

What is the Primary Purpose of a Trust?

There are two primary ways for your beneficiaries to receive an inheritance:

  • An outright distribution or

  • A distribution via a trust.

The decision to use a trust is often based on your desire to add some level of asset protection for your beneficiary.  Asset protection planning is concerned with legally reducing the opportunity for creditors, former spouses, government entities, or taxing authorities from reaching your assets or your beneficiary’s inheritance. 

Outright distribution is the method of distributing assets without any restrictions.  For most types of assets, outright distributions do not naturally provide any meaningful asset protection.  A few possible situations where assets may have asset protection even without a trust include some home equity, some retirement accounts, and some business interests covered by an LLC or a partnership.  However, even in these situations, the asset protection may not exist or may be very limited. 

In contrast, trusts may provide a huge amount of asset protection or very little asset protection.  The amount of asset protection is dependent on the amount of control the beneficiaries have over the trust assets.  That is, a trust with a large amount of asset protection will likely not provide very much control by the beneficiary over the trust assets.  In contrast, if you would like your beneficiary to have a great deal of control over the trust assets, then the trust will not likely provide very much asset protection.  

While most of my clients implement one or more trusts in their estate plan, a “simple will” with outright distributions may be the best option for some people.  We simply do not know if a simple will is adequate until we discuss your particular family and financial circumstances.   It is not our goal to overcomplicate an estate plan.  In every situation, your facts will dictate the strategies that we recommend.

The upcoming seven articles will describe how we design different types of trusts for specific situations by balancing the amount of asset protection created via the trust with the loss of control by the beneficiary.  If you are interested in exploring the use of trusts in your estate plan, please call our office to schedule a free consultation (610.444.5552).   


Tuesday, June 24, 2014

Planning for Your Children’s Inheritance

One of the biggest decisions that people need to make when drafting their estate planning documents is determining how and when their children will receive their inheritance.  The law requires that a minor child’s inheritance be managed in a trust until they reach adulthood, usually 18 or 21 years old.  However, the problem arises when the child reaches 18.  Do you really want your 18 year old (or 23 year old for that matter) to have full access to all of your assets, which includes retirement accounts, life insurance payouts, home equity, etc.?  If you do not execute effective estate planning documents, this is exactly what will happen.

A better solution is to draft a Will that places the inherited assets in a child’s trust to be managed by a trustee (usually a family member), wherein the trustee will be responsible for managing the assets and paying the child’s expenses.  The child will receive the benefit of the trust assets but will not be able to demand principal until a triggering point that attempts to predict when child will have sufficient financial maturity to independently manage the assets.  Holding the assets in a child’s trust will provide asset protection from the child’s immature spending, from creditors, and from predators (e.g., a potential failed relationship).  Determining when a child will be financially mature is extremely difficult, especially when the children are very young. 

The most convenient method of predicting financial maturity is age.  In your Will, you can instruct the child’s trustee to allow the child to take more control of the inherited assets as the child reaches different age milestones.  For example, the child may be permitted to withdraw one-third of the principal at 25 years old, another third at 30 years old, and the remaining third at 35 years old.  The suggested age range may be set higher or lower depending on the child.  Often my clients prefer an older age range (e.g., 30, 35, and 40 years old).  However, age alone may not be a good indicator of financial maturity. 

In addition to age, you may also set additional trigger points to fine tune your child’s control over their inheritance based on other indicators of financial maturity, such as, obtaining advanced degrees or avoiding addiction problems.  Setting these additional triggers allows you to incentivize desired behavior and disincentivize against poor behavior.  Further, upon certain conditions, you may want to transfer management of the child’s trust to the child entirely. 

The final issue to consider is how your children will receive inherited assets that are controlled by beneficiary designations that will not naturally flow through the terms of your Will (e.g., life insurance, retirement accounts, etc.).  Often these beneficiary designation controlled accounts are your most valuable assets.  Unless the beneficiary designations are coordinated with the terms of your Will, your children may receive these assets outright at the age of majority.  In order to avoid this problem, you will need to prepare and submit custom beneficiary designation statements to the account custodian so that the custodian will know how to distribute the assets in accordance with your wishes.   

If you have any further questions regarding planning distributions for children, please call our office to schedule a meeting to discuss these issues.


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McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove. We also serve the following towns in Lancaster County: Lancaster, Lititz, Strasburg,Millersville, Ephrata, Leola, Manheim, New Holland, Willow Street, Quarryville, Elizabethtown and Mountville.



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113 South Broad Street, Kennett Square, PA 19348
| Phone: 610-444-5552

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