ADAMS COUNTY BENCH BAR OCTOBER 30 2015 J

ADAMS COUNTY BENCH BAR OCTOBER 30, 2015 J. PAUL DIBERT

Discussion Points with Slides Definitions unique to the Act. Do you need to care about the 1919 & 1961 Acts? Pitfalls of 1982 Act. New REV-1500.

Discussion Points with Slides Schedule AU Schedule C-SB Regulations, Informational Notices Insight into the current Act Questions and hopefully answers.

Provisions of the ‘ 19 & ‘ 61 Acts Both Acts tax only the event that occurs after death. When that event ends, the original estate is reopened and the next event is taxed. Successive life estates will keep original estate opened for years.

Provisions of the ‘ 19 & ‘ 61 Acts When the estate is finally distributed outright; estate is closed. A financial institution may ask you to certify that it can distribute the trust principal to the remaindermen.

Provisions of the ‘ 19 & ‘ 61 Acts If you do not look into the Register of Will’s archives to verify that all inheritance taxes are paid on all taxable events in that estate’s existence, you could be liable for unpaid inheritance taxes.

Provisions of the ‘ 19 & ‘ 61 Acts Events that would generate a inheritance tax liability: Invasions of trust principal Distribution of annual 5 & 5 rights. Deaths of prior life tenants. Death of a remainderman prior to the death of a life tenant.

Provisions of the ‘ 19 & ‘ 61 Acts Power of appointment exercised by a life tenant to a class of beneficiaries other then the class on which the inheritance tax was prepaid. See Willcox Est. , 14 Fiduc. Rep. 314 (O. C. Del. 1964)

Provisions of the ‘ 19 & ‘ 61 Acts Financial institutions change ownership several times and have no record of what they were paying out and to whom they were paying the trust income and/or trust principal.

A POINT TO REMEMBER ABOUT ‘ 19 and “ 61 When you are up to your butt in alligators it is had to remember your initial objective was to drain the swamp! [Finalize the estate] The financial institution and the beneficiaies are the alligators.

Definitions Unique to Act Definitions § 9102 Property or Estate Value Business of Agriculture Date of Death

Pitfalls in the 82 Act § 9107 Transfers (C 3) Transfers within 1 year of death (c 5) Retained life interest in transferred asset

Pitfalls in the 82 Act …expressly or impliedly retain use, enjoyment, possession or the right to income from…

Pitfalls in the 82 Act Did the decedent keep a “string attached to the asset” transferred? Was the trustee allowed to give the decedent income and/or trust principal as needed?

Pitfalls of the “ 82 Act Was the trust noted as irrevocable? Did the decedent have any right to trust income, trust principal or the ability to change beneficiaries?

Pitfalls in the 82 Act § 9108 Joint Property 2 transfers by the decedent within the 365 days prior to the decedent’s DOT to 1 individual.

Pitfalls in the 82 Act Decedent added to joint account within 365 days of the decedent’s DOD. Account held by decedent, spouse and daughter. See Pelles Estate

Pitfalls in the 82 Act Decedent on deed to real estate which was by “all rights” owned by issue. Financial Institution required it for issue to buy property.

Pitfalls in the ‘ 82 Act Taxed at ½ of DOD value less ½ of mortgage value if decedent was also on mortgage.

Pitfalls in the 82 Act Any asset where the transferee was added within 365 days of decedent’s DOD is taxed under § 9107 (C 3).

Pitfalls in the 82 Act U. S. Savings Bonds purchased in 2 names and held in safe deposit box in single name are either 100% taxable or not taxable at all. See Beggy Estate, 446 Pa. 166 (1971),

Pitfalls in the 82 Act § 9111(R) Retirement accounts are taxable if decedent had the right before DOD to access account without 10% IRS excise tax penalty.

Pitfalls in the 82 Act Non-taxable retirement accounts State Teacher’s Pension State Employee’s Pension State Police’s Pension See Stegmaier Est. , 424 Pa. 4 (1967),

Pitfalls in the 82 Act County employee’s pension plans with language that prohibits the Commonwealth from taxing the distributions for any purpose are exempt from PA inheritance tax.

Pitfalls in the 82 Act See: County Pension Law, 1971 P. L. 398, 126 P. S. § 11677

Pitfalls in the 82 Act § 9116 Adopted issue and step issue have 2 lineal lines, biological and marital. Both are taxed at lineal rate.

Pitfalls in the 82 Act Lineal descendents are by blood and marriage to the decedent. Siblings are by blood alone to decedent.

Pitfalls in the ‘ 82 Act Assets devised to decedent’s spouse are taxed at the zero tax rate. The devise is not exempt. Assets held as Tenants by the Entireties are exempt.

Pitfalls in the 82 Act Debts and Deductions All deductions are paid out of the residue of the estate even if the residue passes to the surviving spouse at the zero tax rate.

Pitfalls in the 82 Act For a transferee to benefit from a deduction: Probate must be insolvent or transferee is liable for debt And transferee pays the debt.

Pitfalls in the 82 Act Common example: 2 individuals buy a house with a mortgage as JTROS. 1 dies before they get married

Pitfalls in the ‘ 82 Act One half of the mortgage passes to the surviving joint owner of the real estate as it is attached to that specific asset,

Pitfalls in the 82 Act 2 individuals buy a property as JTROS. They get married and do not change deed. 1 dies. Is it taxable to surviving spouse since it is not held as Tenants by the Entireties?

Pitfalls in the 82 Act Is accrued income tax liability on U. S. Saving Bonds allowable as a deduction? If redeemed by estate and reported on Estate’s fiduciary income tax return!

Pitfalls in the 82 Act If redeemed by estate and reported on decedent’s final lifetime IRS income tax return! See Stewart and Krazner, Fiduciary Review, July, 2001,

Pitfalls in the 82 Act Family exemption allowed for a surviving spouse. In default, a child living with the decedent at the time of the decedent’s DOD. Value is $ 3, 500 and it must be paid to the individual.

Pitfalls in the 82 Act Commissions for executor (trix) and Administrator(trix) are a question that has been discussed for the 32+ years I worked for the Department.

Pitfalls in the 82 Act Attached you will find a copy of the commissions calculated through the Johnson Estate. Remember La. Rocca is the basis for determining fees for work needed to finalize the estate.

Pitfalls in the 82 Act I only suggest that you use the attached chart as a guideline. You must look to the local Orphans’ Court rules to determine the correct procedure in a specific court.

Statement of Policy, Number 11– 1877 Ever since the Uniform Trust Act was passed the Department has been worried about trusts being terminated before the surviving spouse dies. Therefore the above Statement was issued with a revised Schedule “O”.

Statement of Policy, Number 11– 1877 A copy of the Statement was available on the web for you to bring to this presentation. There are several sections of the Trust Act which allows an estate to terminate a trust but the Department has only noted 20 Pa. C. S. § 7710. 1.

Statement of Policy, Number 11– 1877 I have not heard of this Statement being enforced as of this presentation. A copy of the revised Schedule “O” is attached for this presentation.

Agricultural Exemptions There are 2 exemptions available to an estate which has a farm as an asset. 1 st is the “business of agriculture.

Agriculture Exemptions Under the “business of agriculture, the exemption extends to the real estate and the farm buildings. It doers not include the farm equipment, livestock, crops or homestead + 1 acre.

Agriculture Exemptions The farm must have a profit of $2, 000 per year and is required to report that the farm is still in existence for a 7 year period after the death of the decedent. The beneficiaries can be of any blood relationship to the decedent.

Agriculture Exemptions If the farm fails to stay in business for 7 years, the beneficiaries of the farm owe inheritance tax plus interest from the decedent’s DOD.

Agriculture Exemption The second exemption is instant if the farm has qualified under one of the several types of exempt real estate. This exemption does not include the farm buildings, equipment, and homestead + 1 acre.

Exemption for “Small Business” The business must have a net worth of less then $ 5, 000. It must employ less then 50 “equivalent full time” employees. The business must report to the Department annually for 7 years after the death of the decedent.

Agriculture and “Small Business Exemption Forms and Regulations The regulations and forms are similar as the “Small Business” exemption legislation was developed on the basis of the initial agricultural wording.

REV-1500(4 -14) The latest inheritance tax return has some unique changes that I will point out. Line one is for SS#, DOD and DOB. Line 2 is for decedent’s last name, first name and middle initial.

REV-1500(4 -14) The new ovals are: 4: Agricultural exemption 10: Litigation proceeds received 11: Non-probate transferee return, Schedule F & G only. 13: Business Assets 14: Spouse is sole beneficiary, no trust involved.

Inheritance Tax Bulletin 2015 -1 This bulletin explain the effects of the May 20, 2014 Whitewood v. Wolf (992 F. Supp. 2 d 410(M. D. Pa. 2014) decision (“Whitewood”).

Inheritance Tax Bulletin 2015 -1 Basically the bulletin affirms that a decedent who was a party to a same-sex marriage, legally recognized within Pennsylvania, the surviving same-sex spouse shall be treated as a “husband” or “wife”.

Inheritance Tax Bulletin 2015 -1 for purposes of establishing rights and responsibilities under the Act. • Any natural or adopted child or a stepchild shall be recognized as a lineal descendent. • Accounts held as JTROS will be consider husband wife accounts.

Adams County Bench Bar Questions and hopefully answers.

Thank You J. Paul Dibert Consulting Harrisburg PA