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Settling Estate & Trust

 

 

The following is an outline of the steps that are taken in settling a typical decedent's estate and/or revocable lifetime trust in Pennsylvania. It is intended to acquaint new personal representatives and trustees in a general way with what their duties may entail.

Specific issues that may arise in a particular estate or trust should be discussed with your attorney.

 

 

 

 

Probating the Will and Qualifying as Executor

 

 

  •   Follow the steps necessary for probating the Will and being appointed as executor.

  •   Determine where the Will should be probated.

  •   What to do if there is no valid Will?

NOTE:  Pennsylvania's intestate succession statute will dictate who will receive the decedent's probate property if there is no valid Will, as well as who will be eligible to serve as the administrator of the estate.

  •   Provide notice of your appointment as executor or administrator (known together as "personal representative") in the required format to the beneficiaries and certain family members.

  •   Advertise the grant of letters in qualified newspapers.

 

 

 

 

Understanding the Terms of the Will

 

  •  The Will is the "blueprint" that instructs the personal representative how to administer the estate and where to distribute the assets.

  •   Be sure to review with your attorney the meaning of the Will's terms and conditions.

 

 

Collecting the Estate's Assets

  •   Recognize the distinction between probate and non-probate property.

  •   Only probate property passes under the Will and is subject to the personal representative's control.

 

Probate Property is all the property that is:

  •   Titled in the decedent's sole name

  •   Titled in the names of decedent and others, but without survivorship rights

  •   Contract-based benefits (e.g., life insurance or annuities) that are payable to the "estate"

 

 

 

 

 

Non-Probate Property is any property that does not pass under the Will. Examples:

  •   Jointly owned property with right of survivorship

  •   Tenancy by the Entireties (husband and wife) property

  •   Contract-based property payable to anyone other than the "estate"

  •   Lifetime (a/k/a Inter Vivos) Trust assets not payable to the "estate"

  •   "ITF" "POD," or "TOD" property

  •   "PUTMA" and "PUGMA" assets where the decedent was acting as custodian.

 

 

 

 

Review With Your Attorney:

 

 

  •  Title on deeds, bank account signature cards, stock certificates, etc. to determine if they are probate or non-probate property.

  •  Beneficiary designations on contract-type assets, such as

  •  Life insurance policies

  •  Annuities

  •  Retirement accounts, etc.

 

  •  TAX NOTE: For purposes of the federal estate tax and Pennsylvania inheritance taxes, the distinction between probate and non-probate property is ignored. Generally, all property that the decedent owned at the time of death is subject to death tax, whether or not it passes under the Will.

 

 

 

 

Getting Started in Estate Administration

 

 

  •   Conduct thorough search to uncover all of the decedent's property and debts.

     

    •  The search should include the decedent's residence, office, and safe deposit box.

     

    •  Check the decedent's mail for several weeks.

     

  •   Close out the decedent's bank accounts, and open up a new bank account in the name of the estate.

  •  The personal representative(s) should be the only signator(s) on the account.

 

  •   Obtain a Tax Identification Number (a/k/a "EIN") for the estate from the IRS.

 

  •   Make sure the decedent's real estate and tangible personal property are adequately insured and protected. 

 

  •  Determine if there is any real estate or tangible personal property located in other states.

  •   In such event, ancillary administration in such states may be necessary.

 

  •   Examine any business interests in which the decedent was actively involved.

 

  •   Manage the decedent's digital assets and digital accounts as necessary to preserve their value and protect the decedent's privacy. 

    •  "Digital assets" includes emails, documents, images, audio, video and other files stored on desktops, laptops, tablets, storage devices (including cloud storage), and cell phones. 

  •  "Digital accounts" refers to email accounts, software licenses, social network and media accounts, file sharing accounts, and financial and bill-paying accounts.

 

  •   Obtain date-of-death values of all assets, both probate and non-probate.

 

  •   Maintain an inventory of all probate property

  •   An Inventory will have to be filed with the Register of Wills Office.

 

  •  Provide information to your attorney on a regular basis so that a Fiduciary Account can be regularly updated in the format required by the local Orphans’ Court.

    •   A Fiduciary Account detailing all transactions that will have occurred during the estate administration process will have to be presented at the conclusion of the estate.

  •   It is far better to maintain the Account as you go, such as on a monthly basis, than to start one from scratch at the end of the administration process.

 

 

 

 

Paying the Decedent's Debts, Income Taxes,

and Estate Administration Expenses

 

 

Debts of Decedent

  •   Give notice of your appointment to known creditors of the decedent.

  •   Determine if the estate is subject to a claim for reimbursement under the Medicaid estate recovery program.

  •   If so, give required notice to the Department of Public Welfare.

  •   Review with your attorney the enforceability of any questionable claims asserted against the decedent.

  •   Prioritize the payment of debts if the estate will be insolvent.

 

Income Taxes

  •   Satisfy the decedent's personal income tax liability (filing and, if necessary, payment) for the year of death and any prior open years.

  •   Have fiduciary income tax returns prepared and filed for each fiscal year in which the estate remains open, to report all post-mortem income, deductions, and credits.

  •   Choose a tax-wise fiscal year for estate.

 

      Estate Administration Expenses

  •   Review with your attorney the anticipated costs and expenses of the estate.

  •  Executor's Commission

●  Understand how it is computed.

●  When to take it?

NOTE:  The commission is both taxable income to the executor and a deduction to the estate for death tax purposes.

● When you may want to waive it.

 

  •   Attorney's Fees

●  Understand the various methods for computing a reasonable fee.

●  Agree on the method that you and your attorney are both comfortable with.

●  Once agreed upon, the basis for computing the fee should be set forth in the engagement letter that you sign with the attorney.

                   

  •   Miscellaneous Expenses

●  Appraisal fees

●  Probate and inventory filing fees

●  Costs of packing, storing, and shipping items of tangible personal property

●  Repairs and improvements to the decedent's home, if applicable

● Costs of maintaining the home pending sale

● Real estate and other sales' commissions payable to brokers and dealers

 

 

 

 

Terminating a Decedent's Lifetime Trust

 

 

  •  Holding assets in a revocable lifetime trust has become an increasingly popular estate planning technique.

 

  •  Does the Trust End At the Decedent's Death? If the decedent was the owner of such a revocable lifetime trust, the estate attorney should analyze the trust document to discern the decedent's intent as to whether the trust is to terminate in its entirety at the owner's death, or whether the trust is to continue for the benefit of one or more additional beneficiaries.

 

  •   Who Are the Successor Trustees? It is also important to review the owner's directions as to who should be the successor trustee, if the owner was acting as sole trustee at the time of death.  If no successor was named, or if the named successor is unable or unwilling to serve, the court may have to appoint the successor trustee.

 

  •  The successor trustee's responsibilities will extend only to those assets -- if any -- that were titled in the trust's name at the owner's death.  The trustee will need to coordinate with the personal representative of the probate estate to ensure that the owner's assets are correctly classified as belonging to either the estate or the trust.

 

  •   Payment of the decedent's funeral expenses, debts, and taxes are the primary responsibility of his or her probate estate.  However, if the probate assets are insufficient to pay all such items, creditors may then be able to reach the assets of the revocable lifetime trust.

  •  Consulting with your attorney regarding the extent of the trust's liability in this case is essential.

 

  •   The trustee will also have the duty to notify certain parties of the trust's termination.  Discuss with your attorney how this duty should be discharged.

 

  •   Advertising the trust's existence in approved newspapers may also be necessary. Discuss with your attorney whether this step is required in your case. 

 

  •  In many cases, the owner's Will will direct that all the remaining probate assets are to be transferred to the trustee of the revocable lifetime trust for addition to the trust property for ultimate distribution to the trust beneficiaries. The trustee thus may need to keep the trust open until the estate administration process has been completed.

 

 

 

 

 

Paying Federal and State Death Taxes

 

 

Federal Estate Tax

 

  •  The federal estate tax is a tax imposed on the value of the decedent's "taxable estate" (gross estate reduced by allowable deductions), offset by the applicable credit amount in effect for the year of death plus a special deduction for state death taxes paid to one or more states. The gross estate will include the assets held in the decedent's revocable lifetime trust.

  •  Discuss with your attorney the amount of the estate tax credit (and its exemption equivalent) applicable in the year of death.

  •  Lifetime taxable gifts will affect the federal estate tax at death.

     

    •  The applicable credit amount otherwise available at death may have been partially or completely used up by the decedent’s lifetime taxable gifts.

     

    •  Be aware of the executor’s duties regarding unreported lifetime gifts.

     

  •  Deductions for funeral and burial expenses, fiduciary commissions, attorney's fees, and legal fees and other reasonable costs are allowed to reduce the taxable estate.

 

  •  Portability Rule. If the decedent was survived by a spouse, check to see if the portability rule is in effect as of the year of death.  If it is, a federal estate tax return for the first spouse to die might need to be filed even if no estate tax is due, in order to compute the first spouse's unused exemption amount and to make the election to have the unused amount available to the surviving spouse at his or her subsequent death.

 

  •   Understand the sources of payment of the various death taxes.

    •  This issue may become especially important if there are non-probate assets. Will all death taxes be payable from the residue of the probate estate, or will the beneficiaries receiving non-probate assets be responsible for paying their pro rata share of the taxes?

 

 

 

Pennsylvania Inheritance Tax

 

  •  The inheritance tax is assessed on the transfer of taxable property to the decedent's probate and non-probate beneficiaries (except the surviving spouse).

 

  •  It differs from the federal estate tax in its definition of what constitutes the "gross estate."

 

  •  The inheritance tax is imposed at different rates, depending on the relationship between each beneficiary and the decedent.

  •  There is a zero (0%) tax rate on transfers to the surviving spouse.

 

  •  If a trust is to be created after the decedent's death for the sole lifetime use of the surviving spouse, the executor can elect either to have the value of the non-spousal remainder interest taxed at the decedent's death or to have the value of the entire trust property taxed when the surviving spouse dies.

 

  •  Discuss with your attorney the advantages and disadvantages of each option.

 

  •  Review with your attorney the prepayment discount option.

 

NOTE: Other states will have the right to impose their own death tax on the decedent's real estate or tangible personal property that is located within such states (Pennsylvania will not tax such items).

 

 

 

 

Closing the Estate and Trust:

Distributing the Assets and Being Discharged from Liability

 

 

  •  The personal representative and trustee have a fundamental duty to account to the beneficiaries, as well as any unpaid creditors.

 

  •  This duty is fulfilled by submitting to such parties a Fiduciary Account, which is a written statement of all the transactions that have occurred during the course of estate or trust administration.

 

  •  Fiduciary Accounts must conform to the applicable Pennsylvania Supreme Court rules. The format of a Fiduciary Account differs significantly from that of a business financial statement.

 

  •  Discuss with your attorney whether or not it may be prudent to make advance distributions to the beneficiaries prior to the termination of the estate or trust.

 

  •  There are two options available at the conclusion of the estate or trust for the personal representative or trustee to make a final distribution of assets to the beneficiaries and to be released from liability. These options are:

  •   Court Decree discharging the personal representative or trustee, following the Court's review and approval of the Fiduciary Account after it has been filed with the Court, or

  •   Private Family Settlement Agreement, where the Fiduciary Account is provided to the beneficiaries along with an agreement whereby they release the personal representative or trustee from liability. 

 

  •  Discuss with your attorney the advantages and disadvantages of each option.

 

  •  Review with your attorney how long the administration of your particular estate or trust should be expected to last.

 

 

 

 

Final Advice: A Little Knowledge Can Be a Dangerous Thing.

 

Use a competent attorney who specializes

in estate and trust administration.

 

  The goal is to "Do Things Right the First Time."

 

 

 

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DISCLAIMER. Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use; it is not intended to solicit clients, and any information contained in or obtained from this web site is not intended to be used or relied upon as legal advice.

IRS CIRCULAR 230 DISCLAIMER. Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

 

 

Send your questions or comments to mhagan@haganlaw.net .
Copyright © 2013  Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1402
Last Updated: 05/17/13