Animals that inherit money from their owners pay taxes on death like everyone else
Many pet owners would not 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 decision of the Chester County Orphans Court Division in Lesley G. King Estate clarified that Pennsylvania estate tax must be paid on trusts established to care for animals after the death of their owner and at what rate. The debate between the estate’s executors and the state has revolved, in part, over the use of the word “person” for Pennsylvania estate tax purposes.
Lesley G. King died on May 14, 2016, leaving an estate valued at nearly $410,000. His will established a trust to care for 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 principal for the maintenance and welfare of the animals. Upon the death of the last of the animals, the trust would terminate and any remaining capital and income would be distributed equally to King’s three siblings and their children.
When the executors filed the Pennsylvania Estate Tax Return in 2017, the Pennsylvania Department of Revenue imposed a 15% estate tax on the entire estate for a total tax bill of over $61,000. $. But the executors argued that a zero percent tax rate applied because transfers to animals are not subject to Pennsylvania estate tax.
The executors appealed the department’s assessment to Chester County Orphans Court, arguing that transfers to the animals upon their death are not subject to Pennsylvania estate tax because the animals are not not “persons” within the meaning of the law.
State Estate Tax Rates
The Commonwealth of Pennsylvania does not have an estate 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 all ownership, interest, income, possession, or enjoyment of trust property. An assignee is anyone to whom a transfer is made.
Inheritance tax is imposed as a percentage of the value of the deceased’s estate and the tax rate depends on the relationship between the assignee and the deceased. Pennsylvania estate tax rates are as follows:
Zero percent on transfers to a surviving spouse or parent of a child age 21 or younger;
4.5% on transfers to direct descendants and heirs in the direct line;
12% on transfers to siblings; and
15% 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 is subject to certain estate taxes, except those specifically exempted by law – including the United States, the Commonwealth of Pennsylvania and political subdivisions of Pennsylvania, as well as religious, charitable, scientific, or educational organizations. Substitute trusts are not listed as exempt assignees.
The executors relied on Section 9201 of the Taxation and Fiscal Affairs Act, which defines “assignee” as “any person to whom a transfer is made”. Thus, the executors countered that a transferee 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 held that a trust created for the benefit of a deceased’s horses was not subject to inheritance tax, holding that to have a taxable transfer there had to be both a transferor and a transferee. In the absence of a “person” registered as assignee, there was no statutory assignee subject to inheritance tax.
As the court of king’s domain noted, Westmoreland County’s decision is not binding and no appeal case has addressed this issue.
The court instead relied on Section 9111 of the Taxation and Fiscal Affairs Act for guidance, ultimately determining that even though the deceased’s animals and the trust for their benefit are not “persons”, they are not specifically included in the list of exempt assignees in the law. and are therefore subject to a 15% estate tax totaling $61,000.
That’s a lot of pet food!
With some creative planning, King might have been able to avoid the huge estate 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 one year after the date of his death in order to avoid inclusion of the assets in his taxable estate for Pennsylvania estate tax purposes.