For someone who has never probated an estate the duties may seem endless and confusing. Whether, as executor or executrix of an estate you decide to retain an elder law or estates attorney experienced in the field, which is recommended, or instead to strike out on your own there are a few things you should know. In Pennsylvania especially a primary duty is the filing of a Rev-1500, the Pennsylvania inheritance tax return, and the payment of inheritance taxes.
Inheritance tax is not income tax. One of the first points to realize is that inheritance tax is in a category of its own. Generally speaking it can be and often is paid from the assets of the estate before distribution to beneficiaries. Beneficiaries receiving bequests do not pay federal or Pennsylvania income tax on their receipt.
Inheritance tax is different from an estate tax. Pennsylvania, unlike many other states, has an inheritance tax, not an estate tax. Estate tax schedules often begin for estates over a given amount — probably over $1 million or more. Pennsylvania inheritance tax taxes from dollar one and the rate of taxation depends on the relationship of the beneficiary to the decedent. Spouses, for instance, are “taxed” at 0%, meaning that, in most cases, probate is not necessary especially where assets are jointly titled and the spouse is the beneficiary of remaining assets such as IRA’s. Life insurance proceeds are not taxed at all regardless of relationship.
Children, grandchildren, great-grandchildren and so on are referred to as “lineal descendants” and their inheritances are taxed at a 4.5% rate. Brothers and sisters of the decedent are taxed at 12% and others at 15%. Remember the inheritance tax is often paid from the estate before the beneficiary even receives the distribution.
The inheritance tax follows the jurisdiction of the decedent, not the beneficiary. If the beneficiary of an estate resides outside Pennsylvania but the decedent resided in Pennsylvania the proceeds are taxed under Pennsylvania inheritance tax rules. There is one exception where the non-resident decedent owned real estate in Pennsylvania it can be taxed for inheritance tax purposes.
Non-probate property is still 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 inheritance tax purposes. This is not true. POD, TOD, and assets in a revocable living trust are all fully taxable for the Pennsylvania inheritance tax. Jointly titled assets are taxable at the proportionate share of the value (unless made joint within one year of the decedent’s death in which case they could be taxable in full).
Out-of-state real estate is not taxed for Pennsylvania inheritance tax purposes. If the decedent owned property out of state, such as a shore or vacation property anywhere outside Pennsylvania, it is not taxed for Pennsylvania inheritance tax purposes. If the vacation property of the decedent is located in Pennsylvania, it is taxed for Pennsylvania inheritance tax purposes.
Although spouses are taxed at 0% rate, it is sometimes necessary to file an estate and submit a Pennsylvania inheritance tax return. It might seem ironic to tell the government you owe nothing when it should have seemed obvious from the mere fact you are claiming as spouse. In most cases we do not need to file an estate where the spouse is the sole beneficiary but occasionally it happens that we do. This most often occurs when the decedent spouse owned an account or other property titled only in his or her name or a refund check is made payable to the deceased spouse or the deceased spouse’s estate. Spouses still owe no tax but are expected to file the return to obtain access to the assets.
If you were co-owner of accounts with a decedent you might receive a notice stating you owe a given amount. If so, this should be scrutinized to determine whether the information is correct. On the death of a joint owner of a bank account the bank might release information to the government regarding joint ownership. This information may be incorrect. You may have already filed an inheritance tax return and paid the tax or you might receive a notice at a 15% rate when it should have been taxed at a lower rate. If you have questions, get advice.
Janet Colliton, Esq. is a Certified Elder Law Attorney. Her 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 member 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.