The Duty of an Executor Regarding Pennsylvania Estate Tax [Opinion]

For someone who has never probated an estate, the homework can seem endless and confusing. Whether you decide, as the executor of an estate, to retain the services of a lawyer specializing in elder law or estates experienced in the field, which is recommended, or rather to manage on your own , there are some things you need to know. In Pennsylvania, specifically, the primary duty is filing a Rev-1500, Pennsylvania Estate Tax Return, and paying estate tax.

Inheritance tax is not an income tax. One of the first things to consider is that inheritance tax is in a class of its own. Generally speaking, it can be and often is paid out of estate assets before distribution to beneficiaries. Beneficiaries receiving bequests do not pay federal or Pennsylvania income tax on their receipt.

Inheritance tax is different from an inheritance tax. Pennsylvania, unlike many other states, has an estate tax, not an estate tax. Estate tax schedules often start for estates over a certain amount – probably over $1 million or more. Pennsylvania estate taxes from the first dollar and the tax rate depends on the relationship between the beneficiary and the deceased. Spouses, for example, are “taxed” at 0%, which means that in most cases probate is not required, especially where the assets are jointly titled and the spouse is the beneficiary of the remaining assets such as IRAs. Life insurance proceeds are not taxed at all, regardless of the relationship.

The children, grandchildren, great-grandchildren, etc. are called “straight line descendants” and their inheritances are taxed at a rate of 4.5%. The brothers and sisters of the deceased are taxed at 12% and the others at 15%. Remember that inheritance tax is often paid by the estate even before the beneficiary receives the distribution.

Inheritance rights are the responsibility of the deceased and not of the beneficiary. If the beneficiary of an estate resides outside of Pennsylvania but the deceased resided in Pennsylvania, the proceeds are taxed under Pennsylvania estate tax rules. There is an exception where the deceased nonresident owned real estate in Pennsylvania, it may be taxed for estate tax purposes.

Non-homologated goods are always taxed, unless otherwise excluded. Many taxpayers believe that property contained in a revocable living trust or property titled TOD (transfer on death) or POD (payable on death) is not taxed for Pennsylvania estate tax purposes. It’s not true. POD, TOD and the assets of a revocable living trust are all fully taxable for Pennsylvania estate tax. Assets held jointly are taxable at the proportionate share of the value (unless they are made joint within one year of the death of the deceased, in which case they could be fully taxable).

Out-of-state real estate is not taxed for estate tax purposes in Pennsylvania. If the deceased owned out-of-state property, such as land or vacation property anywhere outside of Pennsylvania, it is not taxed for Pennsylvania estate tax purposes. If the deceased’s vacation property is located in Pennsylvania, it is taxed for Pennsylvania estate tax purposes.

Although spouses are taxed at 0%, it is sometimes necessary to file an estate and file a Pennsylvania estate tax return. It may seem ironic to tell the government that you owe nothing when it should have seemed obvious just because you are claiming it as your spouse. In most cases, we don’t need to file an estate where the spouse is the sole beneficiary, but sometimes we do. This most often occurs when the deceased spouse had an account or other property titled only in their name or a refund check is made payable to the deceased spouse or the estate of the deceased spouse. Spouses still do not owe tax but must file the return to access the assets.

If you co-owned accounts with a deceased person, you may receive notice that you owe a certain amount. If so, this should be reviewed to determine if the information is correct. Upon the death of a co-owner of a bank account, the bank may release information to the government regarding the co-ownership. This information may be incorrect. You may have already filed an inheritance tax return and paid the tax or you may be notified at a rate of 15% when it should have been taxed at a lower rate. If you have any questions, ask for advice.

Janet Colliton, Esq. is a Certified Elder Law Attorney. His practice, Colliton Elder Law Associates, PC is limited to elder law, estate and retirement planning, life care, special needs, guardianship and administration, with offices at 790 East Market St., Ste. 250, West Chester, 610-436-6674, [email protected] She is a Fellow of the National Academy of Elder Law Attorneys and, with Jeffrey Jones CSA, co-founder of Life Transition Services LLC, a service for families with long-term care needs.

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