Estate Planning for Millennials and the “Middle Class”

by McNees Wallace & Nurick LLC
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With all the changes in the new tax laws, some people may be hesitant to move forward with an estate plan. It is important, however, to keep in mind that most clients will not be subject to the federal estate tax and therefore the changes to the federal estate tax laws do not impact planning. Estate planning is still important for a multitude of reasons, including:

  1. Pennsylvania Inheritance Tax

Unlike the federal estate tax, in Pennsylvania everyone is subject to state inheritance tax. The tax rates are currently at 0% for spouses, 4.5% for children, 12% for siblings, and 15% for everyone else. There are still techniques to minimize the Pennsylvania inheritance taxes paid by those who inherit from you. For example, life insurance is not subject to Pennsylvania inheritance tax. In addition, real estate located outside of Pennsylvania is not subject to the tax and in certain cases agricultural use property is exempt from the tax.

  1. Children

Providing for your children is one of the most important pieces of estate planning. Even if you do not think you have much to give them, you may have more than you think – for example, many employers offer life insurance as an employee benefit. Also, term life insurance is relatively inexpensive if you are younger and healthier.

There are two primary options to provide for minor children: a custodian account or a trust.  For a custodian account, you designate a custodian to manage the account for the benefit of your child (or children). A custodial account is not as flexible as a trust but offers many of the same features. A custodial account can last until the child is twenty-five years of age.  A trust is more flexible than a custodial account but requires more effort to administer. For example, a trust can last as long as you want. The trustee has discretion to distribute funds to benefit your child.  You can specify certain events, such as buying a house, buying a car, getting married, or starting a business, at which your trustee is encouraged to make distributions from the trust for your child. You can also authorize your trustee to permit your children and their guardians to live in your current house (rather than selling the house) and to pay for the expenses of the house from the trust.

If you or your spouse has children from a prior relationship, there are often unintended consequences of dying intestate (meaning without a will). In these situations, it is important to make absolutely clear who is to be provided for and how much of your estate should go to each child. Often the intestate laws of Pennsylvania, in these situations especially, do not accurately carry out your wishes.

  1. Unmarried Couples 

For those of you who are not married but wish to provide for your significant other, you must have an estate plan for those wishes to be carried out. Pennsylvania intestacy laws provide for your estate to pass entirely to relatives, so even if you are living together, your significant other will not receive anything unless you are married. Also keep in mind that anything passing to a non-relative will be taxed at the 15% Pennsylvania inheritance tax rate. Any jointly titled assets will have 50% of its value attributed to each of you, which can result in tax owed on half of the funds in your joint bank account, for example.  In these situations, life insurance can be especially beneficial since it is exempt from inheritance tax.

  1. Business Owners

Small business owners who have not yet reached the federal estate tax exemption should still think about who you would want to take over your business if you were to die.  Normally, a successor is identified in a “buy-sell” agreement or similar contractual arrangement. Alternatively, your business can be transferred at death under the terms of your Last Will and Testament. It is important to plan for the orderly disposition of your business so that you do not lose the value that was created during your lifetime.

  1. Powers of Attorney

In addition to a Last Will and Testament, you should have a healthcare power of attorney and a financial power of attorney.

Your healthcare power of attorney designates one or more people to make medical decisions for you if you are incapacitated. In addition, your health care agent is authorized to receive HIPAA protected information (this is especially important if you are single). A health care power of attorney also sets for your wishes regarding end-of-life medical care.

Your financial power of attorney allows someone to act on your behalf for any financial matters. This could include anything from writing checks for you if you are out of town, to applying for government benefits for you, to dealing with real estate transactions on your behalf. You may also need to use this power of attorney if you are out of the country, for example.

Every person’s situation is unique, so your estate plan should be crafted to address your goals, family circumstances, and assets. But, having an estate plan is the first step in ensuring that your wishes are carried out and that taxes are avoided to the extent possible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McNees Wallace & Nurick LLC | Attorney Advertising

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