Lancaster Law Blog : Lancaster PA Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Pennsylvania : Lancaster's Legal Link

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The writer of Ecclesiastes did not have tax law in mind when he said that there is a time to live and a time to die. However, because Congress did not act to extend the current federal estate tax law, the tax expires on December 31. The federal estate tax is scheduled to resurface in 2011 at a rate of 55% on estates valued at $1 million or higher.

During the time that the tax is not in effect, it will be replaced by a 15% capital gains tax on inherited property that is sold (subject to the taxpayer's right to use current values to save at least $1.3 million of assets from capital gains).

In short, there is great uncertainty regarding estate taxes which probably will not be resolved until some time next year. At that time, Congress could reauthorize the estate tax, possibly retroactive to January 1. Such a law, even though retroactive, could be constitutional.

On the other hand, perhaps this is the ideal time persons with a substantial estate should do the right thing for their families by reviewing their estate planning documents.

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Many of you may remember that back in 2001, Congress enacted legislation that was supposed to have repealed the Federal Estate Tax (the "FET"). However, anyone familiar with the Tax Reconciliation Act of 2001 (the "Act") knows differently.

In general, estates are only subject to FET if they exceed the Applicable Exclusion Amount (the "Exclusion"). Instead of permanently repealing the FET, the Act gradually increased the Exclusion from $1 million in 2002 to $3.5 million in 2009. In addition, the maximum FET rate was lowered from 50% to 45% over the same period. The Act is then scheduled to repeal the FET, but only for 2010. Starting in 2011, the FET reverts to pre-2001 levels with a $1 million Exclusion and a maximum rate of 55%.

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The financial tsunami that has passed over us since last September is bringing with it changes in tax laws. Existing law regarding the federal estate tax is surely one of those areas of the law that is bound to reflect the new conditions. Under the so-called Bush tax cuts, the federal estate tax was due to be phased out in 2010. Given the political and economic changes, that is not likely to happen. Accordingly, stay sensitive to the amount of the so-called equivalent exemption, or the amount of the credit that each of us is given against the federal estate tax. That equivalent exemption is currently $3.5 million and may be kept at that level or changed when Congress acts some time before December 31.

Another area to watch is that relating to health care powers of attorney and living wills. Currently, these documents are optional. People's reaction to the documents can vary depending upon their moral and ethical beliefs. Given the high cost of medical care, particularly in the last days of life, there is increasing discussion about some way of making Medicare coverage contingent upon a person having a Living Will or Advance Directive, or at least about giving a credit toward Medicare Part B premiums to people who have such documents.  Since the content of these advanced directives can vary somewhat from state to state, and involve a person's moral, ethical and religious beliefs about the difficult subject of end-of-life decision-making, such change is certain to be controversial.

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Joint bank accounts created after a decedent makes a will can leave executors to face problems when it comes time to administer the estate. Often these accounts beg the question, "What was the decedent's intention?" More specifically, did the decedent want to give the surviving party to the account ownership in the balance in the account or merely use of the account during life for convenience purposes? Under the Pennsylvania Multiple Parties Account Act, generally the surviving party or parties to the account own the balance after the decedent's death. If there is clear and convincing evidence, however, the executor could show that the account was only a convenience account and that the balance should be turned over to the executor for deposit in the estate rather than be paid to the surviving party to the account. 

Now, even that predictability has ended. In a case known as In Re Estate of Amelia J. Piet, the Pennsylvania Superior Court ruled that if a joint account is created after a Will has been executed, the surviving owner does not receive the account if registration of the account is contrary to the disposition of assets under the Will. Suddenly, there is less predictability as to the disposition of multiple party accounts.   At the moment, the only solution is to document one's intentions very carefully if a joint account is created after the execution of a Will. It's generally advisable to review your Will or Estate Plan every few years to make sure your assets are properly distributed. 

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Previously under Pennsylvania law, it was possible for a person to be a beneficiary of a trust and be unaware of the existence of the trust. This lack of information was particularly disturbing because protections for the beneficiaries generally depended upon the vigilance of the beneficiary to enforce his or her rights. 

Under the relatively new Pennsylvania Uniform Trust Act, trustees of Pennsylvania trusts have until November 6, 2008 to comply with the new notice requirements to send information about certain trusts, their investments and provisions.

The Act applies only to trusts that are funded and those where the terms are not going to change. Accordingly, the revocable trusts that are frequently used in estate planning would not be affected as long as the Settlor, the creator of the trust, is alive and competent. 

The events that trigger the sending of notices are as follows:

1. The death of the Settlor.
2. New current beneficiaries, for example, a beneficiary taking a deceased beneficiaries' share. The term "current beneficiary" is a person who is 18 years of age or older to or for whom income or principal of a trust must be distributed currently, or a person 25 years of age or older, to or for whom income or principal may, in the trustee's discretion, be distributed currently.
3. The change of trustee for an irrevocable trust.
4. The incapacity of the Settlor.
5.  Beneficiaries who "opt-in" which includes persons who sent the trustee a written request for notice.

 The notice must include the following:

1. The trust's existence.
2. The identity of the Settlor.
3. The trustee's name, address and telephone number.
4. The beneficiary's right to receive upon request a copy of the trust. 
5. The beneficiary's right to receive upon request a written report of the trust's assets and their market values (if that is possible).
6. The trust's liabilities and the trust's receipts and disbursements since the date of the last report.