Animals that inherit money from owners pay death taxes like everyone else | Cozen O’Connor
Many pet owners wouldn’t hesitate to say that they love their pets as much as the people around them. But a Pennsylvania court recently clarified that even though pets aren’t people, they still have to pay taxes.
A recent ruling from the Chester County Orphan Court Division in Domaine Lesley G. King clarified that Pennsylvania inheritance tax must be paid on trusts established to care for animals after their owner dies and at what rate. Part of the debate between the executors of the estate and the state has focused on the use of the word âpersonâ for estate tax purposes in Pennsylvania.
Lesley G. King passed away on May 14, 2016, leaving an estate valued at nearly $ 410,000. His will established a trust to take care of his two horses, two dogs, two cats and a flock of chickens for the rest of their lives. Under the terms of the trust, the trustee was to use the income and capital for the maintenance and welfare of the animals. Upon the death of the last of the animals, the trust would end and any remaining principle and income would be distributed equally to King’s three siblings and their children.
When the executors filed the estate declaration in Pennsylvania in 2017, the Pennsylvania Department of Revenue imposed an inheritance tax of 15% on the entire estate for a total tax bill of over 61,000. $. But executors argued that a zero percent tax rate applied because animal transfers are not subject to Pennsylvania estate tax.
Executors appealed the department’s assessment to Chester County Orphan Court, arguing that transfers to animals in the event of death are not subject to Pennsylvania inheritance tax because the animals are not are not “persons” under the law.
State inheritance tax rate
The Commonwealth of Pennsylvania has no inheritance tax; however, it assesses an inheritance tax on the value of assets transferred to beneficiaries upon the death of a deceased. For estate tax purposes, a transfer of ownership occurs in Pennsylvania when a deceased person transfers ownership, interest, income, possession or enjoyment of property in trust. An assignee is any person to whom a transfer is made.
Inheritance tax is collected as a percentage of the value of the deceased’s estate, and the tax rate depends on the relationship between the transferee and the deceased. Pennsylvania inheritance tax rates are as follows:
Zero percent on transfers to a surviving spouse or parent of a child 21 or under;
4.5% on transfers to direct descendants and direct heirs;
12 percent on transfers to siblings; and
15 percent on transfers to other heirs, except charities, exempt institutions and tax-exempt government entities.
Animals are not people – but still have to pay taxes
In this case, the Department of Revenue argued that every transfer from a deceased person is subject to certain inheritance taxes, except for those specifically exempted by law – including the United States, the Commonwealth of Pennsylvania and Pennsylvania political subdivisions, as well as religious, charitable, scientific, or educational organizations. Trusts for the benefit of others are not included in the list of exempt assignees.
The executors relied on Article 9201 of the Law on Taxation and Fiscal Affairs, which defines âassigneeâ as âany person to whom a transfer is madeâ. Thus, the executors retorted that an assignee must be a person to be subject to inheritance tax and that horses, dogs and chickens are not persons. They cited a Westmoreland County decision, Shrock Estate ,, in which the court ruled that a trust established for the benefit of a deceased’s horses was not subject to inheritance tax, holding that in order to have a taxable transfer there must be both a transferor and an assignee. In the absence of a âpersonâ listed as assignee, there was no statutory assignee subject to inheritance tax.
As the court of King’s domain noted, the Westmoreland County decision is not binding and no appeal cases have addressed this issue.
Rather, the court relied on Section 9111 of the Taxation and Fiscal Affairs Act for advice, ultimately determining that although the deceased’s animals and the trust for their benefit were not “persons.” , they are not specifically included in the list of exempt assignees in the law. and are therefore subject to a 15 percent inheritance tax totaling $ 61,000.
That’s a lot of pet food!
With creative planning, King could have avoided the massive inheritance tax by transferring funds to a similar irrevocable trust during her lifetime for the benefit of her animals, provided she made the transfer more than a year from from the date of his death in to avoid inclusion of the assets in his taxable estate for Pennsylvania estate tax purposes.