Estate Planning for the Rest of Us: Planning for Estates with Less Than $10M

Posted on October 15, 2014

Authors: Robert G. Dwyer and Frances A. McCormick

Originally published in October 2014

Copyright © 2014 Knox McLaughlin Gornall & Sennett, P.C.

Considerations to Properly Plan an Estate

Age and Health of Clients

Younger healthy clients: Younger clients are generally concerned with guardianship issues and providing for their surviving spouses or their minor children in the event of an unexpected death. Consideration needs to be given as to whether the surviving spouse (or minor children in the event of a catastrophic event where both parents die) receive assets outright or in trust. Trusts for minor children, typically funded with life insurance, are commonly included in the estate plan.

Older clients: Older clients are often concerned about long-term health care issues and protecting their assets from nursing home expenses. In addition, these individuals are often interested in the legacy that will pass to their descendants and may want to incorporate charitable giving into their estate plans. Additionally, real estate located in other jurisdictions could require extra probate proceedings and trigger additional tax consequences if simple planning steps are not taken before death.

Clients with failing health: Special consideration should be given to financial and health care powers of attorney for clients with terminal illnesses or failing health due to age.

Family Situation

Sophistication of both spouses: If both spouses are involved in the management of their collective assets and have the ability to handle financial matters for the family, each should consider naming the other to the relevant fiduciary positions of their estate plan (i.e. Executor, Trustee, Financial Power of Attorney). Joint ownership of assets and outright bequests to the surviving spouse are often utilized. If one or both spouses are relatively unsophisticated due to age, illness, experience, or education, consideration should be given to naming a financially savvy adult child, trusted advisor, or corporate fiduciary to one or more of these positions.

Sophistication, maturity and ages of beneficiaries: The answers to these questions will help determine whether assets should be distributed to beneficiaries outright or in trust. If assets are to be distributed in trust, these issues will aide in determining who should be named as trustee, whether the trust will continue for the life of the beneficiary or terminate at a predetermined age, and whether (or to what extent) a special power of appointment should be granted.

Special concerns with beneficiaries:

  • Spendthrift: Does the beneficiary spend money in extravagant, irresponsible ways?
  • Substance Abuse: Does the beneficiary have a history of alcohol/drug abuse or gambling?
  • Divorce: Is it likely that the beneficiary will divorce his or her current spouse or encounter divorce in the future if not presently married?
  • Special Needs: Does the beneficiary receive government benefits to assist with medical, mental, or psychological disabilities?
  • Incapacity: Does the beneficiary have the physical and mental capacity to handle his or her own affairs?
  • Minors: Are any of the beneficiaries minors; and, if so, how close are they to reaching the age of majority?

Valuation and Type of Assets

It is important to have a general understanding of the value of assets that the client owns. Some assets like cash and marketable securities (whether held in bank accounts, brokerage accounts, or retirement accounts) are easy to value while other assets like closely held businesses may be difficult to value without undertaking a formal business valuation. While only a general understanding of the value of the estate is necessary for most planning purposes, if certain hard-to-value assets could potentially trigger federal estate tax, further investigation is warranted.

The nature of the assets will help determine their disposition. Closely held business interests may be distributed to heirs that work in the business while assets that can be easily liquidated or life insurance proceeds may be utilized to “equalize” distributions among descendants. Many clients wish to make specific bequests of property with sentimental value.

Titling of Assets

How assets are titled will determine their disposition upon the death of one of the owners.

Joint tenancy with right of survivorship: A type of shared ownership of property where each owner has an undivided interest in the property. This type of ownership creates a right of survivorship, which means that when one owner dies, the other owners take the deceased owner's interest.

Tenancy by the entirety: This type of ownership has the same attributes of the joint tenancy with right of survivorship, but is only available between spouses.

Tenants in common: Title to property is held by two or more persons, in which each has an undivided interest in the property, and all have an equal right to use the property, even if the percentage of interests are not equal. Unlike joint tenancy with right of survivorship and tenancy by the entirety, there is no right of survivorship if one of the tenants in common dies, and each interest may be separately sold, mortgaged or willed to another. Thus, unlike a joint tenancy interest which passes automatically to the survivor, upon the death of a tenant in common the estate must be probated to transfer the interest.

Transfer on death/payable on death accounts: Transfer on death (“TOD”) and payable on death (“POD”) accounts allow for assets remaining in investment, brokerage, or banks accounts upon the death of the account owner to pass to directly to the beneficiaries named by the account owner.

Does the titling of assets conform to the desired estate plan?

The titling of assets through tenancy or the use of TOD/POD accounts will “trump” the decedent’s Will, as these assets pass outside of probate.

It is critical that the titling of these assets is known so that a determination can be made whether their disposition conforms with the client’s wishes. It is prudent to review deeds and account statements to determine titling instead of relying on client recollection.

Beneficiary Designations

Much like TOD/POD accounts, beneficiary designations allow for assets to pass directly to beneficiaries, outside of probate, upon the client’s death.

Unlike TOD/POD designations, which are optional, beneficiary designations are required for the following types of accounts:

  • Life insurance policies
  • Retirement plan accounts
  • Annuities

Since beneficiary designations also “trump” the decedent’s Will, it is vital that they are determined and reviewed to ensure that they correspond with the client’s wishes.

Client Desires and Concerns

Specific gifts: Often arises with family heirlooms, jewelry, artwork, and collectibles, but can also include more significant assets such as closely held business interests.

Charitable inclination: Clients may wish to make a specific bequest of a dollar value or a percentage of their estate. However, designating a charity as a beneficiary of a retirement account may present the best tax savings opportunity and should be considered:

  • Example 1: Assume Mr. Smith, a widower, has a $100,000 estate, including a $10,000 IRA that currently names his son (and only heir) as the primary beneficiary. If he wishes to leave $10,000 to his favorite charity with everything else going to his son, he could make a specific bequest to the charity. The result would be that the son pays $4,050 in inheritance tax ($90,000 *4.5%) as well as income tax at his effective rate on the $10,000 IRA distributions.
  • Example 2: Assume the same facts from Example 1, except that instead of making a specific bequest of $10,000 to his favorite charity, Mr. Smith instead names the charity as the primary beneficiary of his IRA and leaves his son everything else under his Will. In this case, the result would be that the son pays $4,050 in inheritance tax ($90,000 *4.5%) and zero income tax because he did not inherit the IRA and will not have to pay income tax on the distributions.
  • In either case, the charity pays zero tax, so the result is that more assets are being passed to beneficiaries instead of being paid in tax.

Disposition of residue of estate: Once specific gifts, if any, are determined, the client needs to decide who will receive the residue of his or her estate.

Distributions outright or in trust: In addition to taking into consideration the sophistication, age, and maturity of the beneficiaries, the client should consider leaving assets in trust because of the following issues:

  • Spendthrift
  • Substance Abuse
  • Divorce
  • Special Needs
  • Incapacity
  • Tax on Future Generations

Estate Planning Structures

Basic Estate Planning Documents

  • Last Will and Testament
  • Durable Financial Power of Attorney
  • Health Care Power of Attorney and Advanced Directive for Health Care

Additional Strategies

Revocable or Living Trusts: Revocable or living trusts are created by the client during his or her lifetime to which they transfer assets to be managed by a trustee. The trustee can be the client, another individual or a corporation, such as a bank or trust company. These trusts can be altered or amended at any time prior to death. They are used to manage assets during the client’s life, in the event of disability, and the property held in the trust during life passes directly to the trust beneficiaries after the client’s death.

Probate Avoidance: By using a revocable or living trust, the client may be able to avoid probate upon their death. However, this requires that that client title ALL assets in the name of the revocable trust. This is rarely accomplished, with the result being that the decedent’s estate (all assets not titled in the name of the trust) will still need to be probated.

Advantages: The main advantage to revocable or living trusts is ease of administration. Creating a revocable trust is likely the best way to ensure that the client’s property remains available to be used for his or her benefit, should they become physically or mentally incapable of managing their own affairs. While continuity of management is also possible by utilizing a financial power of attorney, third parties such as banks, brokers and transfer agents sometimes have more difficulty in dealing with a power of attorney than with a trust. Assets in a revocable trust at the client's death are available to raise cash to pay inheritance and estate taxes, administration expenses and debts immediately after death, without waiting for a probate decree or issuance of letters testamentary.

Costs and Fees: Executor and Trustee Compensation: Generally, revocable trusts do not lower costs or fees associated with estate administration. Both an estate's Executor and the trustee of a revocable trust are entitled to receive compensation. Legal Fees: Most legal fees are incurred in connection with postmortem estate and income tax planning and the distribution of assets. These fees apply to both revocable trusts and estates. If an attorney charges a fee on a percentage basis, as is sometimes the case, that percentage is typically based on the estate tax value of a decedent's property, not on the value of the probate estate.

Irrevocable Life Insurance Trusts (“ILITs”): ILITs are irrevocable trusts created by the client and funded with enough cash either initially or on an annual basis (ideally in an amount that falls at or below the applicable annual federal gift tax exclusion) to pay for life insurance premiums on the life of the client. The ILIT is the owner and beneficiary of the life insurance policy. Upon the death of the client, the insurance proceeds are paid to the trust. Since the trust, not the client, is the owner of the life insurance policy, the proceeds will be excluded from the taxable estate of the client. The insurance proceeds are distributed to the beneficiaries pursuant to the terms of the ILIT.

Advantages: The proceeds of the life insurance policy are removed from the client’s taxable estate; The trust does not pass through the public probate process; Beneficiaries can use trust proceeds to pay estate taxes; and Proceeds held in the trust may be protected from the creditors of the trust beneficiaries.

Disadvantages: ILITs, by definition, are irrevocable. Once a life insurance policy is transferred to an ILIT, the client gives up control over that policy, can’t make loans or withdrawals of the cash value of the policy, and can’t change its beneficiaries. Professional trustees usually charge annual administration fees and may not agree to manage smaller trusts.

Special Issues

Considerations when selecting fiduciaries

  • Sophistication, education, experience
  • Maturity
  • Age
  • Different roles require different attributes:
  • An Executor is responsible for managing the affairs of and settling the client’s estate; including filing appropriate documents with the court and filing the client’s final tax returns. This role is for a limited amount of time, and the law firm assisting the Executor completes many of the essential duties, with the Executor overseeing the process.
  • A Trustee acts as the legal owner of trust assets and is responsible for handling any of the assets held in trust, preparing tax returns for the trust, and distributing trust assets according to the terms of the trust. This role may last for many years or multiple generations. Clients need to recognize the importance of long term reliability in the selection of a trustee.
  • Revocable or living trusts can serve as an alternate or partial solution to these issues.

Closely Held Assets

These entities can take any form: partnership, limited liability company, C corporation, S Corporation, etc. One potential way to divide assets of a closely held business between those children who are involved in running the business and those that are not is to recapitalize the company into voting and non-voting stock. Voting stock can be distributed only to those children who are actively involved in the company, with non-voting stock being distributed to all children. Another potential way to divide assets when a closely held is a substantial portion of a client’s estate is to distribute the closely held business to the descendants who are involved in the running of the company and purchase life insurance or fund an ILIT for the benefit of descendants who are not involved in the running of the company. If closely held business assets are going to be held in trust, consideration should be given to appointing a special business trustee. This fiduciary will have the limited role of voting the stock of the closely held business interests.

Pennsylvania Inheritance Tax

Although estates less than $10,680,000 (*now $22,500,000 for 2018*) will avoid Federal estate tax, these estates will still be subject to Pennsylvania inheritance tax. Rates are as follows:

  • To surviving spouse and charity – 0%
  • To direct descendants and lineal heirs – 4.5%
  • To siblings – 12.5%
  • To all else – 15%

For larger estates, funding an ILIT may be wise in order to provide liquidity to pay PA inheritance taxes.


Definition: When a decedent is survived by a spouse, any unused Federal state tax exclusion of the decedent transfers over to the surviving spouse.

Preservation: The Executor of the estate of the deceased spouse must file a Federal estate tax return, which includes a computation of the deceased spousal unused exclusion amount, and makes an election on such return that such amount may be so taken into account.

Timing: The normal time prescribed for filing a federal estate tax return is nine months after the date of the decedent's death, although the Executor may claim an automatic extension of six months, making the extended due date 15 months after the date of the decedent's death.

GST Exemption: Portability only applies to the Federal estate tax exemption, not the Generation Skipping Transfer (GST) tax exemption. In order to fully utilize GST exemption, assets need to be split between spouses if the combined estate is greater than $5,340,000.

Authors: Robert G. Dwyer and Frances A. McCormick

Originally published in October 2014

Copyright © 2014 Knox McLaughlin Gornall & Sennett, P.C.