Rothman Gordon: Back to Basics Estate Planning: Why A Will

Back to Basics Estate Planning: Why A Will - Part V

In the fifth installment of our back to basics series that examines the need for having a Will, we will examine the final (and perhaps most important) consequence of dying without a Will (intestate) - how your heirs will receive their inheritance, especially if minors or incapacitated beneficiaries are involved.

In Pennsylvania, minors (generally those under 18 years of age), are not able to be outright beneficiaries of estates, life insurance polices or retirement plans. Since minors are not allowed to receive inheritances, etc., Pennsylvania law dictates how these beneficiaries will receive assets to which they are entitled.

In most cases, where there is no Will and a minor is a beneficiary of an estate, insurance policy or retirement plan, the assets to which the minor is entitled will be held in a sequestered bank account for his or her benefit. The consequences of such an account to the minor are numerous and undesirable.

First, the account is just what was stated - a bank account. This means that the funds deposited into the account will earn interest at current rates (1.5% or less). Sequestered accounts are not permitted to invest in stocks, bonds or mutual funds, so the return on the investment for the minor is minimal - it does not even keep pace with inflation.

Second, most withdrawals from a sequestered bank account cannot be made without prior court approval. As a result, someone will be running to the court quite frequently in order to be able to access funds that you intended to leave to support the minor.

Lastly, when the minor attains 18 years of age, the assets are given to the minor in one lump sum. If you left even a modest estate and a life insurance policy to a minor, the minor could receive hundreds of thousands of dollars when he or she turns 18 years of age - a scary thought to most adults.

A carefully crafted Will, along with correct beneficiary designations, can eliminate all of these problems by creating a trust for the benefit of the minor. The trust can allow the trustee to invest in securities, allow the trustee to use the trust assets for the minor's benefit without having to run to court, and delay the minor's outright receipt of his or her inheritance until older ages (e.g., 25, 30, 50, etc.). This solution allows for greater returns on the investments, easier and more efficient access to funds for the minor's benefit and the reduced chances that inheritances will be squandered.

To ensure the intended results, however, the Will must create the trust and you must coordinate the payment of Non-Probate Assets (e.g., life insurance and retirement plans) with the new Will by using proper wording on beneficiary designation forms.

We will continue our back to basics series with a discussion of the importance of durable powers of attorney for both health care and financial matters.

Articles are not intended to be comprehensive. Readers should not act upon any information herein without seeking specific legal advice from the Firm's attorneys.

We are required by Treasury Regulations to advise that this writing is not intended as a reliance opinion and cannot be used for purposes of avoiding IRS penalties.