Estate Planning FAQ
What are the different types of Powers of Attorney and what are their purpose?
Financial Power of Attorney
The financial power of attorney is by far the most important document you can have in your estate plan. At Heritage, we refer to it as your estate plan’s cornerstone. Unfortunately, most financial power of attorney documents we see are not powerful enough.
The flip side of that statement is that while it is the most important document you can have, it can also be the most dangerous if it is put into the hands of someone untrustworthy. In Pennsylvania, once you sign the document, your agent has the ability to step into your shoes and make decisions without telling you what he or she is doing. There is more to the conversation than just naming an agent and signing a power of attorney. You have to be very specific as to what powers you are giving them. Do they have the ability to gift and why might that be extremely important down the road? If they are exercising their power, are there any hoops they have to jump through first?
Financial powers of attorney are often referred to as durable, which means that if you become incapacitated, it is still effective. Powers of attorney can be effective immediately or they can become effective sometime in the future, referred to as a springing power of attorney. For example, this can be done if you have younger children and don’t want them to have the access and control that an agent would possess until sometime in the future.
Commonly, a spouse is put in control as power of attorney right away. However, when it comes to successive agents or the kids, maybe you don’t want them to be able to manage your assets unless they prove that you have a mental incapacity. There’s no right or wrong answer for all families. What are your planning goals? What are your needs? What are your concerns and who, within your family, do you trust? That conversation starts by sitting down with the elder law professionals at Heritage to help you navigate these questions.
On January 1, 2015, some changes were made to the power of attorney law in Pennsylvania. Now, two witnesses and a notary are required for the document to be valid. If you have an older power of attorney, as long as it was valid under the old law when it was put into place, it is still valid today. However, other significant problems could be lurking within your old planning documents. For example, often a power of attorney doesn’t give your spouse the ability to make adequate transfers between each other. Without adequate authority granted in the power of attorney, instead of being able to save all the assets we are left with the threat of losing everything.
Health Care Power of Attorney
Health care directives, commonly referred to as a health care power of attorney, health care proxy or health care agent, can be broken down into two parts. The first part is a health care power of attorney, which authorizes somebody to make medical decisions on your behalf should you lose your mental capacity. Unlike a financial (durable) power of attorney, your agent cannot make decisions for you unless you have lost the ability to speak or communicate. Once you’ve lost the ability to speak or communicate, then your agent can make those decisions for you. You can allow multiple people to make the decision for you or can name the agents in successive order. It is common for families to want multiple people to be able to make the decision, but when it comes to the power of attorney, having a clear pecking order does have its advantages should there be a conflict that would arise in the future.
The second part of the health care directive is the living will. If you were in really bad shape, the living will becomes the rule book. Your health care power of attorney reads this rule book should you never be able to regain the ability to make decisions going forward. If you have an end-stage medical condition with no hope of a significant recovery, then your living will kicks in. The living will addresses any wishes that you might have, such as whether you do or do not want resuscitation or a feeding tube and how you want to be treated if you never regain your mental capacity.
Why should I have a Last Will and Testament?
A last will and testament simply names who gets your assets and when they get them after you pass away. It also names who is in control of your stuff and who is in charge of making sure everything is distributed correctly. The last will and testament only controls assets that are owned individually and do not have a beneficiary designation.
One thing to remember, though, is that a will has to go through probate. Although probate is not in itself an inherently bad process, it does require you to jump through the governmental hoops and the government is in control the entire time. Probate is also public, so everyone gets to see what you had and who you gave it to.
If you end up in front of the court, the probate process is designed to settle disputes. For example, even if your last will and testament states that your assets are to be split evenly between your kids, should one of them contest what your wishes were the judge is bound by law to settle the dispute, valid or not.
What types of Trusts are there and how can they work in my estate plan?
Revocable Living Trust
Families often wish to avoid the probate process, reduce administrative costs, lower expenses, and guarantee that the kids can not fight with each other in court. This is where a revocable living trust comes into place. Very similar to a wagon you might have had when you were a child, a revocable living trust is a place where you can put your assets, control where they are and decide who has access to your stuff while you are alive.
The revocable living trust also becomes a detailed family rule book, making it clear who has access to your stuff, control of your assets and the timing of distribution after you pass away. Having a revocable living trust largely, if not completely, cuts the government out of the rules you leave for your family. A tax filing will need to be made when you have a revocable trust. However, when compared with probate, the revocable trust reduces costs and keeps it simple for your family while preventing fighting through the probate process.
There are many types of irrevocable trusts, but the irrevocable asset protection trust is one commonly done through our planning sequence to protect your assets from the government and from being lost to long-term care. The irrevocable asset protection trust makes sure there is a clear list of authority in the case you become incapacitated, lists who is in control of your assets, and sets the timing of when the distribution is going to occur.
The asset protection trust also allows the creator of the trust, often referred to as the “grantor,” to control everything and receive all of the income off the trust. Essentially, when we create an asset protection trust, we put your stuff away, trusting that it will be there in the future for your beneficiaries. By doing that, you are afforded protection.
After five years of assets being inside the asset protection trust, they are no longer available for your healthcare costs moving forward. The day after putting assets into an asset protection trust, they are invisible and protected from creditors, such as lawsuits.
There are many advantages to an asset protection trust, but there are many different versions of an irrevocable trust and not all trusts are created for the same purpose. Generally speaking, if you are looking to protect assets from the government, long-term care and creditors, an asset protection trust is an extremely powerful tool used to do that. It is also the least expensive route to accomplish those goals as long as you are healthy and plan to be healthy for some time.
What is an Irrevocable Tax Trust?
Irrevocable tax trusts were developed to, in most cases, avoid the federal estate tax. This is a fairly complicated subject matter, but the main premise of a tax trust is that you write a set of rules for your family, such as who gets access to the income in the future and who gets access to the principal in the future. Once you write your set of instructions, you also have to put somebody else in control of your assets forever. After the trust is signed, you hand over the family rule book, never to touch it or change it again. By doing so, you have made a full relinquishment of your assets, retaining no power to modify or amend. This is a very different type of a trust.
However, the irrevocable tax trust does have its place. If you are one of the lucky few to have a net worth in excess of $11 million, it can serve as a great option to protect assets from federal estate tax after three years. However, very few people have this problem in our country.
More often, this kind of trust is used for avoiding Pennsylvania Inheritance Tax. When someone other than a spouse or a charity inherits your estate, that person will pay an inheritance tax to the Commonwealth of Pennsylvania. If a child or grandchild inherits the estate, Pennsylvania is entitled to 4.5%. When assets are left to a brother or sister, Pennsylvania takes 12%, and if the estate is left to anyone else, such as a niece, nephew, or friend down the street, Pennsylvania is entitled to 15%. Therefore, by using a tax trust, the inheritance tax that would have been due is protected as long as the assets are in the trust long enough. In Pennsylvania, that time period is 12 months.
However, this is just the beginning of the conversation. There are other considerations, such as capital gains tax, that may outweigh the benefits of the tax trust. Only your qualified estate planning attorney can walk you through these pitfalls and help you make the right decision for you.
How do I protect my assets if I pass away and my spouse remarries?
Regardless of the estate planning option that you believe is most appropriate for you, whether it be a will or any version of a trust, we may consider a plan with the ability to have remarriage protections. Unfortunately for happily married couples, sometimes happily ever after is cut short. Sometimes a couple’s goals and plans may shift and be altered if one of them passes away.
Fortunately, your rule book can change as your life circumstances change. If there is an untimely death or a divorce, we can make sure that if you pass and your spouse remarries, that either they are protected or they and the children’s interest is protected to the extent that you want them to be. We often talk about a young spouse passing away and leaving all of the assets to the survivor. We assume that life is going to go as we plan. However, if the surviving spouse passes, guess who could inherit all of the assets? If it is a non-blood relation to previous children, what chance do those children have of receiving everything that you and/or your spouse may have worked for? This is just one of many scenarios that we can walk you through, so if something terrible unexpectedly happens, we can guarantee that your spouse, your family and your family’s heritage is taken care of.
What are the different types of Special Needs Trusts available?
First-Party Special Needs Trust
A first-party special needs trust is a planning tool that allows individuals with disabilities to retain not only their government benefits but also their funds while not going over resource limits, allowing the best of both worlds when it comes to the long-term sustainability and support of persons with physical or intellectual disabilities. Normally the problem arises when mom and dad want to leave money to a child with a disability and do so in their Last Will and Testament or through an outright gift. Assets are then transferred and distributed outright with no strings attached to a person with disabilities. Therefore, what often happens is, if the child is receiving government benefits, he or she becomes over resourced because they are holding on to, have control of and have direct access to more resources than are allowed under the programs providing their benefits, whether it be for housing or other support. The danger arises because the child with a disability will remain over-resourced until their personal assets that were just recently gifted to them are expended.
Once those assets have been expended and they are below the resource limit, then the child can reapply for the benefit. There is often a delay in the process and then financial hardship occurs. The real tragedy is that the gifted assets desired to provide for the long-term sustainability of a loved one are consumed rapidly, and once those assets are gone they have provided very little long-term benefit. The child with a disability is then back on government resources, in either the same or, arguably, worse shape than they were prior to receiving the gift.
A first-party special needs trust denotes that when a first person receives finances, that person can place those funds into a trust (sometimes referred to as a Sole Benefit Trust) where there can be $10,000 or even $1 million dollars dedicated to the sole purpose of providing for the disabled person for the remainder of his or her life. However, there is a catch: The person receiving the funds cannot be directly responsible for making distributions.
In a first-party special needs trust, the assets are used for supplemental needs, not for direct-support needs. The language commonly calls for the funds to supplement any government benefits – not replace or supplant them. For the remainder of the disabled person’s life, a third-party individual will control the checkbook and use the funds for any supplemental needs, such as transportation, recreation or education. However, the funds are not required to be used for support for health maintenance or primary educational purposes.
The downside to a first-party special needs trust is that any funds remaining in the trust at the time the beneficiary passes away are returned to the government. This is often referred to as a Payback Trust under Statute d4a. The first-party special needs trust is a great tool, but there are better planning options. Please look at pooled trust and/or the third-party special needs trusts as they may be a better fit for your situation, especially if the funds have yet to be transferred to the disabled beneficiary.
Third-Party Special Needs Trust
A third-party special needs trust is for situations where a third-party individual is healthy and looking to use his or her assets to benefit a person with a disability for the remainder of his or her life. A very common scenario is when a parent or grandparent wants to leave money for a person with a disability but is somewhat aware that by leaving assets outright to this person could affect his or her benefits. In this case, a third-party trust is a better option than a first-party trust.
In a third-party trust, an individual can set aside assets for anybody else to benefit from them for the remainder of his or her life and a third party will again be holding on to the assets and making decisions regarding when and how to make distributions. Just like with the first-party trust, a third-party supplemental needs trust is there to supplement but not supplant or replace basic needs such as housing and medical and expenses. However, it is used to provide for supplemental expenses such as transportation, recreation and educational activities that are beyond the realm of primary education.
Again, there can be $10,000 or $10 million in a third-party supplemental needs trust, and it will not affect government benefits the individual with a disability might be receiving. The added benefit is that upon the death of the disabled beneficiary, the person establishing the third-party trust decides where the remaining funds can go. In a typical scenario, we leave inheritance and, if possible, plan ahead so it won’t be lost and disrupt benefits for a disabled beneficiary. We also want to make sure that if all of the funds are not used at the time of the disabled beneficiary’s passing, the remaining assets go to other named beneficiaries, such as other children or a charity that might be named after the passing of the disabled beneficiary.
Third-party special needs trusts are a very powerful tool, however, they are best utilized if set up well in advance of the passing of the donor of the funds. Please look to our other sections to see if other special needs options might be more viable. These trusts are especially important when leaving significant assets to a beneficiary with a disability. What counts as a significant asset varies from family to family. However, if there are not significant assets or assets that do not warrant the continued oversight of a trusted family member, sometimes a pooled trust is a more viable option. Pooled trusts offer the benefit of streamlined management of the funds and less family involvement over a longer period of time. Please look to a pooled trust if this may fit your scenario.
Pooled Special Needs Trust
A pooled special needs trust is a viable option for family members or individuals who want to leave assets to an individual with a disability but not disrupt any public benefits they might be receiving. However, this tool is often used for assets that are not significant in the eyes of the family. In a pooled special needs trust, assets are distributed to a collective manager of funds who will use all of the funds placed into the trust only for the sole benefit of the recipient, as similarly described for the first-party and third-party special needs trusts.
For a pooled trust, a third-party individual is tasked with managing the assets, investing them, and making distributions for things such as transportation, recreational, and/or supplemental needs that may arise in the life of the beneficiary. However, unlike the first-party and third-party trusts, when the beneficiary passes away and there are remaining assets in the pooled trust, these assets remain in the pooled trust for the benefit of the other beneficiaries that comprise the pool. This could be one other person or, more often, hundreds of other beneficiaries that would be associated with the pool.
It is not common that attorneys set up pooled special needs trusts themselves; there are dedicated companies. At Heritage, we have the ability to work with multiple pooled special needs trust firms, however, one that we have had good success with is ACHIEVA Family Trust. To secure funds and walk through their process, the company would be able to describe their procedures and costs directly one-on-one. A pooled special needs trust is often one of multiple strategies that are utilized in a sequence of planning. Again, please refer to our other special needs trust sections if a pooled trust does not sound as if it would be appropriate for your family’s situation.
Hybrid Special Needs Trust
A hybrid special needs trust is a variation of the previous special needs trusts described above. In a hybrid special needs trust, we have to physically modify the trust to conform with the situation that is not often encountered by practitioners. In this situation, we would have a third party looking to set aside funds for an individual with a disability. However, the party that is designating the funds for the person with a disability is also either wanting to receive benefits or is already receiving special needs benefits.
It is a situation where the person creating the trust is also the person receiving the funds in the trust and will be receiving government benefits for their support for the remainder of their lives. While the government does authorize us to set aside funds – even significant amounts of funds – for individuals with disabilities, creating a trust and distributing assets into a third-party situation can sometimes create penalty issues for the person distributing the funds for the benefit for their own support and/or medical needs in the future.
Therefore, we can still achieve Medicaid eligibility for both the grantor and the grantee who is creating the trust and receiving the benefit of the trust, though there has to be modified provisions that resemble the payback provisions in the first-party trust described on this page.
Although there is more to the planning aspect it is fairly straightforward; you have a beneficiary with a disability and the person who wishes to support another beneficiary who is also disabled or receiving government benefits. This is where the hybrid trust works miracles. The hybrid trust gets Medicaid eligibility for both and sets aside assets for the benefit of a person with a disability over their lifetime, whether that be liquid assets or real estate. Upon the death of the person granting the trust, we have to look back to see if there were any government benefits paid to that person in order to satisfy the payback provisions to make the whole scenario work.
Though the hybrid supplemental needs trust is a fairly rare planning tool, for the right scenario and the right family it works wonders to maintain eligibility for both the grantor and the recipient of the funds placed into the trust.
Should my family set up a caregiver agreement when caring for a loved one?
Care contracts, or caregiver contracts, are essential tools to document expenses and/or care that is provided between family members when a person is receiving care, but they are not in a personal care setting or a skilled nursing facility.
The scenario often plays out as follows: Mom and dad need additional care and as the care increases, there is a child that often takes care of mom and/or dad. He or she may or may not live inside the home and this situation can go on for months or many years. Out of kindness and the love that exists between the family members, the care is often freely given. This care usually continues until the family members get to the point where additional care is needed and the family members cannot provide it.
The loved one then goes into the nursing home, only to find out that to gain eligibility for medical assistance the assets have to be spent down. This prompts the family member to then say, “Can I get paid for the time I provided services for mom and dad?” The general answer is, no. Going back retroactively, trying to receive assets that were freely given for a period of time is often difficult. Depending on the situation, we can go back a little bit, but not as far as when the care began. Therefore, the opportunity is lost.
Anytime you have a family member taking care of another family member within a caregiving situation, it is extremely important that you document the care provided, hours worked and amount of resources transferred in exchange for these services with a valid contract. This contract will allow mom and dad’s assets to compensate a family member, whether it be now or later down the road. Once the contract is enforceable and in writing, it creates a planning opportunity should the level of care elevate and the family needs to look for medical assistance in the future.
Do not let opportunity pass you by for failure to understand what needs to be in place in order to be an enforceable contract within family members. Please reach out to our office if you are caring for a loved one and you want to make sure you are not throwing money away and/or wasting planning opportunities, whether it be in the short-term or long-term future.
How important are Deeds and Property Transfers when preparing an estate plan?
Our office handles hundreds of property transfers each year. A very common type of property transfer is to deed the house to a child. Often families come in and say, “I have heard that I need to give my house to my children.” It’s true that there is a benefit in planning for long-term care by dissipating assets or giving assets away. By doing this it will start the five-year look-back period of time to start. At the end of this five-year period, you could be eligible for medical assistance. Please refer to the asset protection and Medicaid sections of our website to learn more.
When planning for long-term care, we often talk about preparing for a skilled nursing facility. However, some of our families never end up in skilled nursing. Should a loved one need to pay for personal care, under Pennsylvania law the only way to pay is privately out-of-pocket or with long-term care insurance, should you be fortunate enough to qualify or afford it.
Unfortunately, the house is often the last asset remaining as people approach their final years of life. The value of the house can become the only asset available to ensure a good quality of life or maintain a decent standard of living should a loved one not be in a nursing home and wants to be taken care of at home. All too often, when a house is transferred to a child, it is done so inappropriately. Once that transfer has occurred, there is no way to forcibly have the transfer come back. We have seen many cases where a house has been transferred to a child or another family member and the house is either modified or sold out from underneath the person who transferred the house, with no regard to the person’s long-term care needs.
We have a common saying here at Heritage: “Never give up the ship.” It is uncommon for us to recommend a planning strategy where we give assets directly and outright, especially when it involves real estate to multiple children. In very rare cases, it is appropriate to transfer a house outright to a child. However, that is beyond the scope of the explanation in this section. Again, our general advice is to never give up the ship just in case you or your loved ones have personal care needs later in life.
We routinely do transfers of deeds for real estate sales or transfers between family members. However, there are multiple ways a deed can be transferred. By default, in the Commonwealth of Pennsylvania, when you deed a piece of property to a husband and wife, it is deeded jointly. If one spouse passes away, the surviving spouse will own the entire property. This is sometimes referred to as rights of survivorship or by a tenancy of the entireties. However, when you deed property jointly to anyone but a husband and wife, you have what is referred to as a tenancy in common. A tenancy in common means that there are two owners and they own an equal interest in the property, but it’s not clearly defined as to which part of the property you own. This becomes problematic when we have multiple owners on parcels of land or a wooded acreage. A farm is another common piece of property where these points become difficult to work out. For example, who owns the northern half of the pasture or the southern part of the farm that has the creek and the low lying hunting grounds? Sometimes it is hard to determine, and although when the property was transferred the family members were on the right page, when you pass away there is no surviving right to the other joint owner.
Therefore, if I own a piece of property with my brother and I pass away, my wife now owns my portion. My wife and brother may have a different understanding of what should be happening to that property or what it might be worth. In our experience at Heritage, this is a common reason why properties end up in tax sale: There are multiple owners with no defined goal or strategy that have to manage the property and pay for the taxes. Due to the frustration, everyone just throws their hands in the air and nobody pays the taxes, which results in the property going back to the government.
There are multiple ways to prevent this scenario, often by creating a contract or choosing another avenue of ownership. Whatever the solution, it is best to deal with the issues before we lose control of the situation and bring in parties that may not be able to agree in the future.
Be careful not to give up the ship and avoid creating a family problem with real estate by not understanding the implications and the outcomes of deed transfers. These are just two or three high-level concepts of property transfer, but there are many other ways you can also transfer a property. Each one has its pros and cons.
How can a Life Estate Deed help a loved one obtain Medical Assistance for nursing home care and keep my relative in his or her home?
A life estate deed creates a partial interest for the remainder of your life on the property of somebody else. It is a powerful tool to transfer ownership of property while guaranteeing that your family can’t kick you out of the house. This is a safer alternative to selling or transferring the house to a family member. It also allows the person that is either buying or selling the life estate deed to appropriately and adequately distribute who pays the real estate taxes and utility costs on the property without having issues down the road in achieving benefit eligibility or medical assistance. Life estates can also be used to reduce penalties and transfer property at a reduced value. We commonly refer to a life estate when dealing with these matters.
For example, if an unrelated individual asked to spend the night at a property you own, there is most likely a fee that you would charge to spend that one night in that piece of property (similar to an Airbnb). However, the situation becomes a lot more complicated if the unrelated individual asks to spend the remainder of his or her life in that piece of property. Each property is probably going to have a different value – depending on how big or how small it is – for somebody else to occupy that particular parcel.
When the scenario is split and families are asked, “How much would you charge your parents to stay in your house or how much is it worth for you to buy a house with your parents to remain in that house?” often the answer is zero. However, what we’re trying to highlight here is that there is a number and whether you’re buying or selling a life estate, it comes with pros and cons.
A life estate can reduce the future penalty for medical assistance while freeing up capital for quality of life as the person is able to remain inside his or her own home. It does not matter whether a family member is purchasing the home or mom and dad sell it to a child that might be moving in. Also, a life estate adequately accounts for reducing property values if Medicaid eligibility is being pursued and there are not enough funds available to sell the entire property outright. Life estates have to be in place for at least a year if someone purchases a life estate and then looks to maintain eligibility down the road for their own medical needs.
If the person does not live a year, the funds can be returned and the process starts from scratch. It comes down to controlling assets and having trusted family members. Life estates are a valuable tool in the planning arsenal. They let us figure out how to free up excess resources and or have a sense of security that while you are giving up some interest in your property, you are not giving up all of your interest. Also, even though you love and trust your children, there is a deeded and secured interest that you will not be forcibly removed from your home because you have a piece of paper requiring your ability to remain for the rest of your life.
If you believe the life estate may be a viable planning tool for you, please reach out to Heritage for a no-cost consultation to learn more.