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Estate and Elder Law

McNees Wallace & Nurick LLC Insights: Estate Planning


by David M. Watts, Jr.


Durng the estate planning process a question we are frequently asked relates to the best way to protect assets from creditors. The easy answer, although not the most satisfactory, is to give the assets in question away, before any claims arise. If you do anything to impair the rights of your unsecured creditors, then the Courts will simply undo what you have done. All states and the federal government have statutes governing fraudulent transfers. Basically, once a creditor issue arises, it is too late to transfer assets. Asset protection planning must be done before debts are incurred arise. Other points to consider:


  • If you make a gift to keep an asset away from existing creditors, but you really still control the gift, then the gift may be considered a fraudulent transfer.
  • If you make a gift which renders you insolvent, then that gift may be considered a fraudulent transfer.
  • A transfer to an asset protection trust, whether established offshore or in the United States, may be ineffective if there is even a potential claim, i.e., an event has occurred generating a potential malpractice action, and the transfer may be set aside pursuant to the fraudulent transfer statutes if there is a subsequent judgment. In addition, the Patriot Act has made it much easier for plaintiffs to discover information about assets transferred to an off-shore asset protection trust.
  • Transfers for valid consideration are not fraudulent transfers.
  • Transfers into limited partnerships or corporations are not fraudulent transfers in and of themselves, because the transferor receives limited partnership interests or stock in exchange.


Some Strategies:  At the business level, the most basic of liability protection strategies is to operate a business through a limited liability entity, rather than as a sole proprietorship. Some entity choices include the corporation, limited partnership and the limited liability company. But regardless of the type of entity used, a limited liability entity will not provide liability protection if the “corporate formalities” are not respected. For example, contracts should be in the name of the entity; separate bank accounts should be maintained for the entity; there should be no inter-mingling of personal and entity funds. Most importantly, there must be adequate insurance coverage.


At the individual level, the best asset protection strategy is to hold property jointly with a spouse. When a husband and wife hold property jointly, the form of ownership is known as “tenancy by the entirety.” This type of property is generally protected against claims by a creditor of only one of the spouses.  Not all jurisdictions recognize tenancy by the entireties, although Pennsylvania is still a strong tenancy by the entireties jurisdiction. Generally, the relevant law will be determined by the jurisdiction where real estate is located, and by the law of Pennsylvania for a Pennsylvania resident with respect to personal property wherever located. However, there may be countervailing factors for putting property in joint names. For example:


  • Jointly held property is marital property in a divorce situation.
  • Property may be at odds with the estate-planning goal of having sufficient property in each spouse’s name to make full use of each spouse’s unified credit amounts.
  • Right of survivorship prevents the first spouse to die from designating any interest in the property to pass by will to another person, such as a child by a prior marriage.


Note also a variation – title assets solely in a spouse’s name. So long as not a fraudulent transfer, this should provide enhanced liability protection; but it also comes with obvious “non-liability” risks.


The Pennsylvania Judicial Code contains a number of exemptions from execution on judgments, including wages, salaries, and commissions “while in the hands of the employer.” Generally, a participant’s account under a federally tax-qualified retirement plan maintained by a corporate, partnership (to include an LLC), or sole proprietor employer, as well as a regular, Roth, or Education Savings Accounts, is exempt from creditor attachment or execution on a judgment. However, the fact that an IRA beneficiary has control over the IRA assets may leave the IRA vulnerable to a future attack by a judgment creditor, at least where the debtor does not have other substantial assets. Other excluded assets include a certain amount of personal property, annuities not allowing assignment, and certain types of life insurance.     


Another strategy is to make outright gifts to family members. As a general rule, the transferred property would not be subject to claims by a creditor of the transferor as long as the gift is made before the claim arises. Another exception is if the donor did not really relinquish control over the property.


One way to make gifts while retaining some control is to make gifts through a trust or family limited partnership. Trusts are typically used in an estate-planning context, although they can be used in other areas as well, such as trusts for the benefit of “special needs” children. A family limited partnership (FLP) is an entity used as an estate-planning vehicle. In a typical FLP transaction, owners of appreciated property will form the FLP, contribute the property to the FLP, and after a time make gifts of FLP interests to family members.


Another strategy is to transfer property to an asset protection trust. A key difference between an asset protection trust and a regular trust is that the
settlor may retain interests in the trust property without – in theory – the interests being subject to creditors’ claims. However, it must be


emphasized that an asset protection trust offers poor – or nonexistent – protection against claims existing before the transfer to the trust. The essence of an asset protection trust is that the trust assets are held by an out-of-state trustee, usually a bank, that is protected by the laws of the other state. An “off-shore” asset protection trust is a trust created in a non-U.S. jurisdiction (such as the Cook Islands or the Cayman Islands) with a foreign trustee that might refuse to enforce the judgment of a U.S. court or where the costs of seeking to enforce a U.S. judgment would be prohibitive. Creating an off-shore asset protection trust is a more aggressive (and expensive) technique than creating a domestic trust. There is a loss of control over the assets and also the fact that non-U.S. law would apply to the assets.


Lastly, if worse comes to worst, there is bankruptcy. A Chapter 7 bankruptcy is a liquidation by a trustee (under court supervision) of the debtor’s “equity” in non-exempt assets. There are broad exemptions currently available to the debtor under the Bankruptcy Code, including specific monetary amounts for real estate, motor vehicles, etc. In a Chapter 7 case, the debtor is discharged from most unsecured debt, subject to certain exceptions (e.g., some types of tax claims, alimony, spousal or child support, etc.). A Chapter 13 bankruptcy is designed for individuals with regular income who desire to make monthly payments to a trustee pursuant to a court-approved plan. A debtor’s interest in an ERISA-qualified plan is generally excluded from the bankruptcy estate, and with some exceptions, is not subject to the claims of creditors or bankruptcy trustees in Chapter 7 or Chapter 13 cases.


Asset protection strategy means planning ahead. If you think there is a risk that you might run into creditor issues at some point in the future, you should discuss planning with your attorney now.


Estate Planning for Real Estate

by Vance E. Antonacci


Almost all estate planning clients own real estate in one form or another – a residence, a vacation home, or rental property. Real estate presents unique challenges in estate planning because debt is often associated with the property and because it may be difficult (or not desirable) to sell the property.


Primary Residence

The most common property ownership is a client’s residence. A residence is often sold as part of the administration of an estate and the net sale proceeds are then distributed as part of the residue of the estate. The residence, however, may be given to a particular beneficiary, and, if that is the desire the Last Will and Testament should clearly provide for this disposition. If there is a mortgage, the beneficiary’s receipt of the residence can be conditioned on the assumption of the mortgage or the Last Will and Testament can state that the beneficiary must pay off the mortgage.


Clients sometimes will jointly or solely title real estate with a child to “avoid probate.” Although titling the property this way may simplify or

avoid an estate settlement, the sale of the property likely will have adverse income tax consequences. Most homeowners take for granted that a primary residence can be sold without the recognition of a capital gain provided the capital gain is less than $250,000 for one resident or $500,000 for joint residents. This exclusion, however, only applies to a property that is a primary residence of the seller for two of the last five years. For example, if a house is purchased for $100,000 and later is sold

for $300,000, then the $200,000 capital gain does not result in any capital gains tax. However, if the residence was gifted to a child during the parent’s lifetime, the child will not satisfy this rule if the child’s primary residence is elsewhere. The tax due would be $47,600 (20% for the
capital gain and 3.8% for the net investment income tax, if it applies).


Vacation Properties

Vacation properties present special planning challenges. There is often a desire to keep a vacation property within a family but this may not be practical. Joint ownership among heirs can create a variety of issues. How are the costs of ownership to be divided? What happens if an owner fails to contribute his or her share of the costs? How is the use of the property determined? Should the property be rented to third parties? What happens if an owner wants out of the arrangement? What if an owner goes through a divorce or bankruptcy? It is important that a client have realistic expectations. Although a trust can own a vacation property instead of individual heirs, these issues must still be addressed and ultimately resolved by a trustee.


One advantage of a vacation property is that a property located outside of Pennsylvania generally can avoid a state-level inheritance tax or estate tax upon the death of an owner. Pennsylvania taxes all transfers of property at death (transfers to spouses are taxed at 0% and transfers to children are taxed at 4.5%) with no amount of property transferred being exempt. Pennsylvania’s inheritance tax, however, does not apply to property located in another state. New Jersey does not tax transfers at death to children. Delaware has a tax but provides for an exemption of over $5,000,000. Therefore, ownership of real estate in these jurisdictions is a way to avoid Pennsylvania inheritance tax.


Investment Properties

A client with investment properties (whether residential, commercial, or industrial) has a variety of issues to consider in his or her estate plan. These issues generally consist of (1) planning for payment of estate tax and inheritance tax, (2) planning for the transfer of ownership of the investment, and (3) dealing with debt.


As with a family-owned business, real estate presents the problem of being valuable but not liquid. A client with a significant portfolio of investment properties will need to plan carefully to create liquidity in the estate in order to pay the inheritance tax and the estate tax, if applicable. Many clients will address this issue through the ownership of life insurance. Life insurance is not subject to the Pennsylvania inheritance tax and life insurance ownership can be structured so the death benefit is not subject to federal estate tax (generally speaking, the life insurance is owned by an Irrevocable Trust). If there is sufficient equity in the properties, then consideration can be given to borrowing against the equity.


A client will need to give consideration to how a real estate investment will be disposed of at death. There is sometimes a desire to continue ownership for the benefit of a surviving spouse so the surviving spouse can continue to benefit from the cash flow of the investments. If there is bank debt, however, the transfer to a surviving spouse or to a trust for the surviving spouse’s benefit often will require the consent of the lender. If the investment is owned with other investors, then any agreement governing the transfer of ownership (a “buy-sell” agreement) must allow for such a transfer.


Often, the buy-sell agreement requires the sale of the investment in the event of death. Careful attention needs to be given to the terms of a required sale. Is a down-payment required? Is seller-financing required? If there is seller-financing, then is the debt secured or unsecured? How long is the financing term and how frequently will payments be made (monthly, yearly, etc.)? What happens if the other investors cash out of the investment (that is, will the surviving spouse be paid in full if there is such an event)?


Another key consideration with buy-sell agreements or retaining the real estate investment in-kind is the payment of death taxes. Generally speaking, if there is a transfer to a surviving spouse (or in trust for the surviving spouse’s benefit) there is no federal estate tax or Pennsylvania inheritance tax due. If taxable heirs (children) are to receive the real estate investment in-kind or are to receive installment payments under a buy-sell agreement, then your estate’s liquidity must be analyzed to ensure that the death taxes can be paid at that time. For example, if the real estate or buy-sell payments have a $2,000,000 value, this value could trigger $90,000 of inheritance tax and $800,000 of federal estate tax. From the buyer’s perspective, will there be sufficient cash flow to meet the payment obligations? For example, cash flow from a residential development project may be years away or unpredictable.


Real estate is and will continue to be a valuable asset for most clients. Residential real estate, vacation properties, and investment real estate all provide clients with potential for capital appreciation and, in the case of rented vacation properties and investment properties, the potential for income. Clients should give considerable thought to the disposition of these assets in the event of death to make sure that taxes are minimized and the client’s intent is carried out.



Estate Planning for Young Families

by Andrew S. Rusniak


Proper estate planning for young families is essential, despite often being overlooked by both clients and attorneys. Many young families view their estate as being “simple” because in their minds they “don’t have much,” and many attorneys do not focus on each client’s specific and unique set of circumstances. Compounding the problem is the fact that many young couples have difficulty thinking about what would happen to their family if something were to happen to one of them, and, to the extent they are concerned, many young couples are apprehensive of the unknown cost of retaining an attorney to prepare an estate plan. Despite these potential roadblocks, proper estate planning is essential for all young families, and a good estate planning attorney will address each of these concerns. Even an otherwise young, healthy adult can pass unexpectedly, and a good estate plan will provide for the surviving family and will leave them in a better place.


Understanding the Ways in which Assets are Disposed of at Death

It is important to understand that different types of assets pass at death in different ways. For purposes of estate planning, there are, in general, three categories of assets:  individually owned assets, jointly owned assets, and “non-probate” assets. Individually owned assets are assets held solely in the name of the decedent, such as an individually owned bank account, a tenant-in-common interest in real estate, or individually owned stock in a business. Jointly owned assets are assets held by one or more persons that are coupled with rights of survivorship, such as joint bank accounts and real estate held by husband and wife as tenants by the entirety. Non-probate assets are assets that contain a beneficiary designation, such as life insurance, annuities, 401(k)s and IRAs.


Jointly owned assets pass by operation of law to the surviving joint owner without probating the decedent’s Last Will and Testament. Non-probate assets pass pursuant to the beneficiary designation. Jointly owned assets and non-probate assets pass without regard to the terms of a Will. Stated another way, a Will cannot control the disposition of non-probate assets and jointly owned assets.


A Will controls only the disposition of a person’s individually owned assets. As a result, a good estate plan will coordinate the disposition of a client’s individually owned assets with the client’s non-probate and jointly owned assets. For this reason, it is imperative that an estate planning attorney have a solid understanding of the assets owned by the clients, the way in which the assets are titled, and any debt associated with the assets. This is typically accomplished through the preparation of a personal financial statement, which is usually prepared by the client or in connection with the client’s financial planner or accountant.


What Happens if I Die Without a Will?

There are many common misconceptions about what happens to a person’s assets if they pass away without a Will. Some incorrectly assume that all assets will automatically become the assets of the surviving spouse, while others believe that all property will go to the Commonwealth of Pennsylvania.


When a person dies without a Will, his or her individually owned assets will pass pursuant to the provisions of the Pennsylvania “intestacy” statute. If the decedent died with no children, but was survived by a spouse and one or more parents, the statute provides that the surviving spouse is entitled only to the first $30,000 plus one-half of the balance. The other one-half of the balance is to be distributed to the decedent’s parents. Where a decedent dies and is survived by children, all of whom are the children of the surviving spouse, the surviving spouse is entitled to the first $30,000 plus one-half of the balance. The other one-half of the balance is to be distributed to the decedent’s children. This result is often contrary to the desires of the decedent, as many young couples typically prefer to leave all of their assets to the surviving spouse before benefitting children or parents.


Last Will and Testament

The cornerstone of any estate plan is the Last Will and Testament, which controls the disposition of a client’s individually owned assets. Typically, Wills for young couples are reciprocal and will often be structured to leave all assets to the surviving spouse upon the death of the first spouse. Upon the death of the surviving spouse, all assets are typically left equally to the clients’ children. If the clients are charitably inclined, their desire to benefit charities can be incorporated into their estate plan as well.


When there are minor children, the Will should provide for someone to manage each child’s inheritance. This is often accomplished by including trust provisions in the Will that name a trustee to hold and administer each child’s inheritance in separate trusts for their benefit until they reach a certain age, such as 30 or 35. In general, the trustee will be authorized to make distributions to or for the benefit of the beneficiaries for their health, education, maintenance and support. These distributions are meant to ensure that the beneficiaries can maintain a minimum standard


of living but do not foster or underwrite an unproductive or irresponsible lifestyle. In addition, the trustee may be authorized to make distributions to assist the beneficiary with the down-payment on a principal residence, the costs associated with a first wedding or the starting of a business. “Incentive” distributions may also be included in the trust to provide

for the matching of a beneficiary’s earned income, graduating from college, or rewarding a beneficiary who engages in missionary work. In addition, the payout of the trust is often structured to be spread out over a period of time. For example, the trusts could be drafted to provide for a distribution of one-third of the trust at age 25, one-half of the trust at age 30 and the full balance of the trust at age 35.


Although the trust will be designed to manage the children’s financial assets, the Will of a client with minor children (younger than 18 years of age) should recommend a guardian. The guardian is responsible for raising the children and has the legal authority to care for them. It is important that this information be communicated to the court when it is determining who will care for minor children.


The Will also names an Executor who will be responsible for administering the estate of the decedent. Typically, spouses appoint each other as the primary Executor, and an alternate Executor should be appointed. The Executor gathers the decedent’s assets, pays his or her outstanding debts, and distributes the estate pursuant to the terms of the decedent’s Will.


Durable General Power of Attorney and Health Care Power of Attorney

In addition to a Will, any complete estate plan will include a Durable General Power of Attorney and a Health Care Power of Attorney. The Durable General Power of Attorney appoints an agent to make financial decisions for the principal. The Health Care Power of Attorney appoints a health care agent to make health care decisions for the principal and generally includes a Living Will component. Typically, spouses appoint each other as their primary agent. It is important to name an alternate agent and an alternate health care agent in the event the primary is unable to serve.



The complexity of estate planning for young families often arises due to the nature of the clients’ beneficiaries rather than the nature of their assets. Because assets pass in a variety of ways, and because wealth is often accumulated in non-probate assets such as retirement accounts and life insurance policies, a good estate plan will coordinate the disposition of a client’s individually owned assets with the client’s non-probate and jointly owned assets. A good estate planning attorney will assist a young family with these and many other issues, such as ensuring adequate financial support for a surviving spouse, as well as the ability to ensure that adequate funds will be available to provide an education for the children. By establishing an estate plan, a young family will enjoy peace of mind in knowing that their family will be taken care of in the unlikely event of an untimely death.



© 2015 McNees Wallace & Nurick LLC

McNees Insights is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.