We Listen.

Estate Administration


Q: I established a living trust for my benefit and my wife’s benefit during our lifetimes. Can I transfer our real estate into this trust without incurring a realty transfer tax?

A: This questions hits upon a very problematic area of trust planning. Many people in recent years have begun using trusts as an attempt to avoid probate. While in Pennsylvania this technique is of limited cost saving value when compared to other states, it has nonetheless come into common usage. However, there are a number of potential pitfalls in using trusts and the imposition of realty transfer tax is one of them. Until recently, if you transferred your home or any other real estate into a trust and the trust could at any time in the future have beneficiaries other than realty transfer tax exempt beneficiaries the entire value of the property was subject to the realty transfer tax at the time that it went into the trust. For example, if you owned a $200,000.00 piece of real estate and you transferred into the trust and the trust at some point benefitted either a brother or sister, or a niece or nephew, the Pennsylvania realty transfer tax would be due at the time of the transfer and in the amount of $4,000.00. Due to recent changes in the law, a revocable lifetime trust would not be subject to this realty transfer tax or the primary beneficiaries are realty tax exempt (for example parents, children or brothers or sisters). However, if you are including beneficiaries who would not be realty transfer tax exempt, you must include a clause in the trust that prohibits distributions of the real estate being made to satisfy their share. In this way, there will be no realty transfer tax at the time of funding. However, absent this clause as stated above the entire realty transfer tax could be due. Therefore, you should be extremely careful in funding either revocable or irrevocable trusts with real estate and carefully consult your tax and legal advisors before doing so.

Q: If I have a safe deposit box joint with my husband will it be “frozen” in the event one of us predeceases?

In Pennsylvania the answer to this question is no. The reason is that jointly held safe deposit boxes are not subject to inheritance tax and therefore they are not frozen pending a state inventory. If however one spouse or the other has a safe deposit box an inventory might be necessary. The reason for this is that Pennsylvania inheritance tax is a zero percent tax on assets transferred to the spouse. However, there is still a requirement to file an inheritance tax return or report the asset on that return. Furthermore, if you hold a joint safe deposit box with a person other than our spouse the box will in fact be frozen pending estate inspection for inheritance tax purposes. However, it is possible for you to enter the box to obtain the will for any burial instructions that might be contained in the box. The contents of the box will be taxable at 6% to 15% depending on who the beneficiaries are under the will.

For your questions please write to David M. Frees, III, Esquire, 120 Gay Street, P. O. Box 289, Phoenixville, PA 19460.

Q: I have been told that after a certain period of time that bank accounts or other assets can “escheat” to the state and that the state can take them. Can they be recovered after this happens?

A: The answer to this question is basically yes. Each estate has its own office that handles property which has been claimed by the state either because its rightful owners cannot be located or because of a lengthy period of inactivity with respect to the asset. This happens occasionally with bank accounts where there is no activity for some term of years or where stock dividends are unclaimed. There are other ways in which assets can also escheat to the state such as in the case of an intestacy (dying without a will) where the heirs cannot be located. Furthermore, many of these assets held by the state can be recovered if you can prove that you are the rightful owner or heir. Each state has its own procedures for recovering such assets. In Pennsylvania, information on escheated assets can be obtained through the office located in Harrisburg which can be reached at 717-783-8922. A list of the lost property and escheat offices for each state is also available from our office. If you would like such a list with the contact person and telephone number for unclaimed property please send a self-addressed envelope to P. O. Box 289, Phoenixville, PA 19460-0289, Attn: David M. Frees, III.

Q: I have been told that if I execute a revocable lifetime trust and place all of my assets into that trust, that I can be the trustee and make changes anytime I want and that these assets will avoid taxation. This sounds too good to be true. What is the correct answer?

A: As you have correctly assumed, when it sounds too good to be true it is too good to be true. Under the Pennsylvania Inheritance Tax Act and under the Internal Revenue Code Section 2036, if you establish a trust, known as a grantor trust, and retain the right to revoke or alter that trust and/or to use the assets, the principal value of those assets are likely to be includable and taxable in your estate at their full market value. Many people attempt, in Pennsylvania, to use revocable trusts to escape taxation and probate. However, Pennsylvania has relatively low probate fees and much higher taxes and since these taxes apply to both estates and trusts people are often disappointed to find that their trusts had not performed one of the important functions that they hoped it would. There are, however, circumstances where trusts are still appropriate even without tax planning advantages. We generally recommend the use of revocable trusts (or irrevocable trusts for tax planning), when a client has assets in multiple states and we wish to avoid multiple probates, when there is a possible will challenge, or when an elderly or disabled client wishes to give up active management of their assets on an ongoing basis. In this way, a bank, trust company or trusted friend or family member can be appointed as a trustee to handle all of the investment decisions. Of course, active management of assets can also be obtained in a simpler way through a well drafted durable power-of-attorney.

If you are considering the use of a revocable trust you might also find that the cost is not worth the savings in fees. Typically, a will, durable power-of-attorney and living will will cost somewhere between $75.00 and $250.00 per person. Living trust arrangements still require a will and often a durable power-of-attorney and they can cost somewhere between $750.00 and $1,500.00 per person depending on their purpose and their complexity. Also be sure, that once you have created a revocable trust, that the assets are placed into the trust and that the trust is properly funded so that it will in fact avoid probate in Pennsylvania.

Q: I have been appointed as an executor of my aunt’s estate. While she is still alive I would like to know more about what an executor’s job entails. The executor (sometimes known as a personal representative) has a number of duties and those duties will vary depending on the nature and type of the assets in the estate. In general a very brief description of the executor’s job would be to initially collect and provide safe keeping of the estate’s assets. Thereafter, the executor/personal representative needs to identify and notify creditors and to pay all of the valid debts of the estate. If the executor fails to do this, the executor and the executor subsequently distributes the estate, he or she can be held personally liable for these erroneous payments. The executor’s job is also to collect any sums of money due or owing to the estate such as mortgages, car loans or other loans that the deceased person may have made to businesses friends, family members or others. In collecting the assets, the executor should file claims for pension, profit sharing plan benefits, social security benefits, veterans benefits, and any insurance benefits. However, before applying for these benefits care should be given to analyzing the tax consequences and whether or not one or more people should consider disclaiming or refusing these assets so that they go to other beneficiaries or to another generation.

The executor’s job is also to manage the estates assets. This may be relatively simple if the deceased person had all of their assets in bank accounts, stocks or bonds, or may end up being a highly complex task if the deceased party owned rental real estate, commercial real estate or ran a business. Executors should be very careful to see what powers have been provided for and in the event they do not have sufficient powers to properly run or liquidate such assets, then they should consider petitioning the court for a court order which would protect them in operating or selling these assets. Properly drafted wills can generally avoid this problem.

It may be important for the executor to sell other assets including real estate in order to pay estate expenses or bequests. Therefore, it is the job of the executor to higher advisers and appraisers to determine that the sale is taking place for a fair value. This can also protect the executor from later complaints by beneficiaries who feel that the property should have been sold for more. Obviously, the executor should keep detailed records for tax purposes and for estate administration purposes of all real estate and other transactions. In many cases in Pennsylvania, we attempt to settle estates informally without reporting all of these transactions to the court. However, this requires that we provide a basic accounting to the beneficiaries and that they agree that everything was administered properly. Before distributing assets to beneficiaries however it is the executor’s job to file the decedent’s final individual state and federal income tax returns together with any other local income tax returns that are required. Furthermore, it is the executor’s job to choose a tax year for the estate and to file the estate’s income tax returns, the Pennsylvania inheritance tax return, and if necessary the federal estate tax return. Federal estate tax returns are not required where the assets fair market value is $625,000.00 or less. However, where the assets exceed $625,000.00 even where there are deductions which take it below this figure a 706 is required to be filed.

As you can see, the job of executor or personal representative varies very significantly from estate to estate. Furthermore, if you are considering being an executor you should also consider obtaining appropriate legal and accounting advice to limit your own personal liability. If you are considering appointing an executor or trustee it is important that you be sure in your own mind that the executor is capable of handling the jobs described above and /or they will obtain independent advice from counselors that will permit them to do so.

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(610) 933-8069