Last month, I wrote a blog about the importance of proper estate planning for newlyweds.
After your wedding, you and your new spouse may be blessed with a child. As you prepare the nursery and debate potential names, you should also consider an update to your personal estate plan.
If you don’t update your personal estate plan, Pennsylvania law assumes that you want your child to inherit a portion of your estate after your death (even if your spouse survives you). Ideally, your surviving spouse would be able to serve as custodian of your child’s funds. However, even if your spouse is able to serve as custodian until your child reaches the age of 21, the creation of this custodial fund will result in an avoidable tax. Pennsylvania assesses an inheritance tax of 4.5% against almost all property received by a decedent’s child, but no inheritance tax is assessed against any property received by a surviving spouse. Therefore, the failure to update your estate plan could result in your minor child receiving a portion of your estate and a tax of 4.5% being assessed on that property.
In addition to avoiding an unnecessary tax, there are several other reasons to consider updating to your personal plan:
1. Create a trust for your minor children. Without a trust, Pennsylvania law allows your child to use the assets inherited from you for any purpose as long as he or she is at least 21 years old. Depending on the value of the inheritance, you may want to consider establishing a trust so that a trustee can manage the funds for your child. Many people are uncomfortable with the concept of their 21-year old graduating from college and having no motivation to establish a career because the child will have access to $1,000,000 from your estate (including your retirement plan and life insurance proceeds).
A trust can easily be incorporated into your estate plan. By establishing a trust, you can dictate how old your child must be before he or she can use funds beyond reasonable expenses such as tuition, books and educational supplies, medical costs, rent, groceries, and clothing. You can also name a trustee to manage the funds and make distributions for your child’s benefit.
2. Update your beneficiary designation forms. If you do establish a trust for your child’s benefit, you should also review the beneficiary designation forms to your retirement plans and insurance policies. Your Will does not control the disposition of these assets, so you’ll likely need to update your beneficiary designation forms to ensure that the trust receives your retirement benefits and life insurance proceeds.
3. Nominate a guardian. If you and your spouse should both tragically die before your child is 18 years old, the court will need to appoint a guardian with legal authority to act on your child’s behalf. Among the factors that the court will consider in determining the proper person to serve as your child’s guardian will be the person that you nominate in your Will.
4. Allow your Agent to make gifts. Your personal estate plan should include a general Power of Attorney. This document allows a person whom you appoint as your Agent to manage your assets for you while you are alive. It is most commonly used when a person is incapacitated. If you are incapacitated and you have a minor child who is dependent on you, your Agent will be permitted to use your assets to support your child only if your Power of Attorney specifically grants the Agent permission to do so.
For questions about this or any related topic, please do not hesitate to contact Estate, Trust, and Individual Tax Group co-chairs Judith A. Harris or James J. Costello, Jr. or a member of our Estate Planning & Administration Group or Taxation Group.