SETTLING AN ESTATE AND 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 some of their duties may entail.
Specific issues that may arise in a particular estate or trust should be discussed with your attorney.
The Will is the “blueprint” of the estate administration process. It will direct the executor to:
✔ Pay the decedent’s funeral and burial expenses, enforceable debts, estate administration expenses, and all taxes that are payable at or by reason of the decedent’s death.
✔ Satisfy the bequests of the decedent’s tangible personal property, such as jewelry, personal effects, and household goods.
✔ Pay any specific gifts of cash to named individuals.
✔ Make any charitable bequests under the Will.
✔ Distribute the balance of the assets (called the “residuary estate”) either outright or in trust to named beneficiaries or to members of a class to be determined as of the decedent’s death (e.g., “those of my nieces and nephews who survive me”).
Be sure to review with your attorney the meaning of the Will’s terms and conditions.
✔ Conduct a 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 executor(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 all business interests in which the decedent was actively involved.
● Review any existing agreements among shareholders or partners calling for the sale of the business interest.
✔ Manage the decedent’s digital assets and digital accounts as necessary to preserve their value and protect the decedent’s privacy.
✔ Obtain date-of-death values of all assets, both probate and non-probate.
✔ Maintain a complete list of all probate property, including their values.
● An Inventory will have to be filed with the Register of Wills Office.
✔ Record the sales price of all assets sold during the course of estate administration.
✔ Keep track of all income (e.g., interest, dividends, rents) received on estate assets.
Provide all of the above 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.
Recognize the distinction between probate property and non-probate property. Only probate property passes under the Will and is subject to the executor’s control.
includes 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”
is any property that does not pass under the Will. Examples:
✔ Tenancy by the Entireties (husband and wife) property
✔ Joint Tenancy with Right of Survivorship 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
✔ 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 or had a retained right of use at the time of death is subject to death tax, whether or not it passes under the Will.
Debts of Decedent
✔ Advertising your appointment as personal representative) provides notice to all 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.
✔ If the estate is insolvent, prioritize the payment of debts in accordance with Pennsylvania statute.
✔ 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.
✔ 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.
✔ 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.
✔ Appraisal fees for valuing certain estate assets
✔ 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 necessary in preparation of sale
✔ Costs of maintaining the home pending sale
✔ Real estate and other sales’ commissions payable to brokers and dealers upon the sale of real estate, securities, and other estate assets.
Holding assets in a revocable trust during lifetime has become an increasingly popular estate planning technique. At the death of the trust’s creator, some basic questions will arise. For instance:
Does the Trust End At the Decedent’s Death?
If the decedent was the owner of 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 if the trust is to continue for the benefit of one or more additional beneficiaries.
Who Are the Successor Trustees?
It is important to review the decedent’s directions, as contained in the trust document, regarding who should be the successor trustee, if the decedent was acting as sole trustee at the time of death. If no successor is named, or if the named successor is unable or unwilling to serve, the court may have to appoint the successor trustee.
Will the Trust Be Liable for Any of the Decedent’s Debts, Expenses, or Taxes?
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.
Does the Trustee Have A Duty to Notify Interested Parties?
The trustee will be required 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 applies to your case.
How Long Must the Trust Remain Open?
The owner’s Will may 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.
How Should the Trustee Work with a Personal Representative of the Estate?
A successor trustee taking over after the owner’s death will be responsible only for 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 (a/k/a executor or administrator) of the probate estate to ensure that the owner’s assets are correctly classified as belonging to either the estate or the trust.
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).
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).
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 exemption amount in effect for the year of death. The gross estate will include the assets held in the decedent’s revocable lifetime trust.
For deaths occurring in 2016, the exemption amount is $5.45 million.
Lifetime taxable gifts will affect the federal estate tax at death. The exemption 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.
Be Careful With the Portability Rule at the First Spouse’s Death
If the decedent was survived by a spouse, 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.
What Will Be the Source of Tax Payment?
Understand the sources of payment of the various death taxes. This issue may become especially important if there are non-probate assets that are included in the taxable gross estate.
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?
Likewise, will charitable beneficiaries have their bequests of the residuary estate reduced by the death taxes paid on the residuary bequests passing to non-charitable beneficiaries?
Will residuary individual beneficiaries in different classes for Pennsylvania inheritance tax purposes have the tax on their bequests assessed before — or after — the creation of the separate shares?
Duty to Account to Beneficiaries
The personal representative of an estate, and the trustee of a trust, have a fundamental duty to account to the beneficiaries, as well as to any unpaid creditors. This duty is fulfilled by preparing and then submitting to such parties a Fiduciary Account.
Because the format of the Fiduciary Account must conform to applicable Pennsylvania Supreme Court rules, the Account will differ significantly in form from financial statements that are used for most business purposes.
Your lawyer should have the expertise — and the software — to prepare the Fiduciary Account in the acceptable format.
Options for Terminating Estate or Trust
Two options will be available to the personal representative or trustee for terminating the estate or trust once all the work has been completed. The goal of both methods is to have the personal representative or trustee released and discharged from all further liability, in exchange for distributing the remaining assets to the beneficiaries. These options are to either:
● Obtain a Court Decree discharging the personal representative or trustee from further liability, following the Court’s review and approval of the Fiduciary Account that has been filed with the Court, or
● Enter into a private Family Settlement Agreement with the beneficiaries, in which they all agree to release the personal representative or trustee from liability after having reviewed and approved the Fiduciary Account.
As is apparent, the Fiduciary Account is a requirement of either approach.
● Discuss with your attorney the advantages and disadvantages of each option.
Final Advice: A Little Knowledge Can Create Lots of Problems
● Use a competent attorney who specializes in estate and trust administration.
Your goal should be to Do Things Right the First Time!