Estate planning is similar to other financial and tax planning in that a good estate plan must be updated regularly along with changes in life circumstances and the law. An addition to the family, unexpected medical expenses, and marriages and divorce can mean that a previous estate plan is out of date. State and federal legislators constantly debate changes to tax laws, meaning that what once was a solid estate plan may no longer be optimal. And just like with any other financial plan, a setback or sudden windfall may mean that a previous plan is unworkable or unwise.
That is why it makes sense to revisit an estate plan after a significant life event or every couple of years to keep on top of current state and federal estate tax laws.
Updates on Pennsylvania law
Pennsylvania residents cannot be expected to keep abreast of current tax laws and court rulings. That is why it is a good idea to check in every couple of years with your estate planning attorney.
In Pennsylvania, for example, a recent case may prove beneficial to certain residents who have set up a trust for beneficiaries. In McNeil v. Commonwealth of Pennsylvania, the Commonwealth Court found that the state could not impose a tax on the income of a trust simply because the beneficiaries (the people who will receive assets from the trust) reside in the state.
The trust in question was created in Pennsylvania in 1959 and the beneficiaries all live in Pennsylvania. However, the beneficiaries did not have access to the trust funds and the trust itself did not have any assets or income located in the state. Instead, the trustees operated in Delaware and the trust was created under Delaware law. Therefore, the Commonwealth Court ruled, Pennsylvania’s attempt to tax the income of the trust was unconstitutional under the Commerce Clause of the U.S. Constitution. In plain terms, the state did not have the right to tax the trust income since there was not enough of a relationship between the trust, its income, and Pennsylvania to make it constitutional
This means that Pennsylvania residents who wish to create a trust for beneficiaries do not necessarily have to pay state tax on the trust income if it is set up correctly. However, there are no hard-and-fast rules for when the state has enough of a connection to trust income in order to impose a tax burden. When setting up a trust, therefore, a Pennsylvania resident must obtain experienced help to avoid paying unnecessary tax.
An attorney can help
People in Pennsylvania who do not have an estate plan, or have not revisited theirs in years, should speak to an experienced estate planning attorney to discuss their estate planning goals to create or alter their estate plan accordingly.