VIEWS: 16,610 PAGES: 32

      Prepared by: John C. Becker and Anthony D. Kanagy,
                       September, 2000

               The Pennsylvania State University
              University Park, Pennsylvania 16802
                          TRANSFER OF PROPERTY AFTER DEATH:
                             “GUIDE TO ESTATE SETTLEMENT”

Transfer of Property After Death                                                         1
      By Operation of Law                                                                1
      By the Intestate Law                                                               2
      By a Last Will and Testament                                                       3
      By a Living Trust                                                                  5
      Inheritance Tax Effects of the Transfer                                            5
      Federal Estate Tax Effects of the Transfer                                         7
      Federal Gift Tax Effects of the Transfer                                           8

The Steps Involved in Estate Settlement                                                  9
      Initial Decisions                                                                  9
      Appointment of Personal Representative                                            10
      Beginning the Administration                                                      12
      Review of Income Tax Issues                                                       12
      Valuing Property in General                                                       14
      Date of Valuation                                                                 14
      Fair Market Value                                                                 14
      Value of Types of Property                                                        14
      Notification of Heirs                                                             18
      Settlement of Small Estates on Petition                                           18
      Filing the Inventory                                                              19
      Initial Payment of Inheritance Tax                                                19
      Administration of Assets                                                          19
      Preparation of the Pennsylvania Inheritance Tax Return                            20
      Payment of Pennsylvania Inheritance Taxes                                         22
      Preparation of Federal Estate Tax Returns                                         22
      Payment of Federal Estate Taxes                                                   24
      Preparation of Account, Schedule of Distribution Audit                            25
      Family Settlement Agreement                                                       26
      Receipt and Release                                                               26
      The Final
Steps                                                                                   26

Summary                                                                                 27

Levels of Property Distribution Under the Intestate Law of Pennsylvania                 28

Glossary                                                                                30

Prepared by John C. Becker, professor of Agricultural Law and Economics, Director of Research
for the Agricultural Law Center of the Dickinson School of Law of the Pennsylvania State University
and Anthony D. Kanagy, Research Assistant for the Agricultural Law Center. Revised September,

        A death is a traumatic event for most           a corporation that owns property goes out of
families. Whether the death is sudden or                business, dissolution of the business will
expected, most people need an adjustment                address the question of transfer of property.
period to cope with the reality of the death of         When property is abandoned by its owner,
a family member. While this period runs its             the original ownership continues. But
course, surviving family members may be                 someone who finds the property and controls,
distracted and have difficulty dealing with             uses, and protects it may acquire an
business and personal problems.                         ownership interest, if the original owner fails
        Nonetheless, during the adjustment              to exercise control of the property. Each of
period, distribution of property owned by the           these examples points to the need to identify
deceased must be considered. In some                    the owner of property at all times.
families this is cause for anxiety because the                  This publication discusses the transfer
situation involves the legal system and the             of property owned by people at their death
services of an attorney. For some people,               and the tax consequences of the transfer.
death of a family member may bring them in              This can generally take place in one of four
contact with the legal system for the first time.       ways: by operation of law, by the intestate
Inexperience with the legal system and the              law, by a last will and testament, or by a trust
emotional adjustment to the death can                   created during their lifetime that provides for
combine to create even greater anxiety for a            this transfer.
bereaved family.
        This publication will address legal              By Operation          A transfer by operation
issues and procedures for the settlement of              Of Law                of law takes place when
an estate. The settlement process refers to                                    a person makes a
the method of transferring property owned by                                   lifetime decision to share
a person at the time of death. This discussion                                 ownership of property,
will cover a typical estate situation and will                                 and provides that at the
refer to the steps needed to complete the               death of one of the joint owners the surviving
process. The discussion is general and does             joint owner(s) will become the owner(s) of the
not cover all possible contingencies. Some              property. A typical example of such a transfer
situations may require additional steps to              is joint ownership with the right of
complete the process.                                   survivorship.
        Anyone who has questions concerning                      In this case, ownership is shared with
a procedure used in a particular case should            one or more people, and each person is
consult someone familiar with the situation or          treated as the owner of an equal share in the
his or her personal attorney. This publication          property. This property can be either real or
does not provide legal or tax advice to the             personal property, or tangible or intangible
reader and is not intended to be a substitute           personal property. During the lifetime of the
for such advice or service. The reader should           joint owners, their rights to the use of the
seek such advice or service on his or her own           jointly-owned property are dependent on the
before making a decision or taking any action.          intent of the property owners when the joint
                                                        ownership interest was created. In the case
       TRANSFER OF PROPERTY                             of a bank account, unless there is clear and
           AFTER DEATH                                  convincing evidence of a different intent at the
                                                        time of creation of the account, each joint
        Why should we be concerned with                 owner has access to the account in an
transferring property following a person's              amount that equals their net contribution to
death? A simple answer to this question is              the account. For example, if a property
that all items of property are owned at all             owner decides to add an additional owner to
times by someone, or something such as a                an account, thereby creating a joint
corporation. When a person dies owning                  ownership interest, the question would be
property, some disposition of the property              whether the original owner intended to give
must be made to provide a new owner for the             the added owner a present gift of a one-half
property. When an artificial “person” such as           interest in the account, or did the owner

simply intend that the new owner receive              circumstances that it cannot be determined
whatever balance remains at the original              which owner died first. Since surviving the
owner's death? If clear and convincing                death of the other owner is the key
evidence of an intent to create a present gift        requirement to transfer of ownership, time of
is established, then each owner would have            death of the first party to die must be
access to an equal share of the account.              established to make that determination.
Each owner would be treated as having                         To resolve the problem Pennsylvania
contributed an equal amount to the account.           law provides that, unless a will, living trust,
If such evidence cannot be established, then          deed, or insurance contract provides
each owner would have access to the                   otherwise, when there is no sufficient
account in whatever amount is equal to the            evidence that joint tenants or tenants by the
proportion of their net contributions to the          entirety died other than simultaneously, the
account. If the original owner contributed all        property held in these forms will be distributed
of the funds and the added owner failed to            one-half as if one had survived and one-half
contribute any funds, then the original owner         as if the other had survived. If there is a joint
would have lifetime access to the full account        tenancy of more than two and all die under
and the added owner would have no lifetime            such circumstances, the property distributed
access to the account. At the death of one of         under this rule will be in the proportion that
the owners, the survivorship feature transfers        each owner bears to the whole number of
the deceased owner's share to the surviving           joint owners, i.e. one of three or one-third;
owner(s), who acquire an equal share of the           one of four or one-fourth, etc. As mentioned
portion previously owned by the deceased.             above, a person can change this result by
        For example, if three people were joint       specifying in a will their own rule for
owners with the right of survivorship, at the         determining the order of death in such
death of one person, that person's share              situations. This decision is frequently made
would be divided equally between the                  when planning to minimize federal estate
surviving owners. Their ownership share               taxes.
would increase by one-sixth; their new
ownership share would be one-half (1/3 or 2/6                               If a person owns
                                                       By the
+ 1/6 = 3/6 or 1/2). At the death of one of the                             property in his or her
two owners, the surviving owner would                  Intestate            name      alone,     the
become the sole owner of the property by               Law                  transfer of ownership
receiving the deceased's one-half share and                                 will be made either
adding it to his or her one-half share.                                     under a will prepared
Transfer takes place automatically upon the           during the person's lifetime or under the
death of a person who owns property as a              provisions of the intestate law of the state
joint owner with the right of survivorship.           where the owner resides. If a person does
Documents which show ownership must                   not have a will, the intestate law creates a
specifically state that it is owned as joint          schedule for the distribution of separately
tenants with right of survivorship.                   owned property. Within the schedule, the
        Property owned by a husband and               statute specifies who is to receive the
wife is generally classified under a special          property, how much they are to receive, and
form of joint ownership called tenants by the         any special conditions that apply to this
entireties. At the death of the first spouse,         transfer.
the surviving spouse becomes the owner of                     For example, under Pennsylvania's
the property automatically. When two people           intestate statute, the following distribution
are married and property is placed in the             would be made of the sum of $70,000 owned
names of both of the persons, a presumption           by a person at death when the person is
arises that the property is held in a joint           survived by a spouse and two children who
tenancy by the entirety relationship.                 are children of the marriage. Following the
        One situation in which joint ownership        payment of debts, administrative expenses,
can create a problem is the simultaneous              and an exemption, the spouse receives the
death of both owners under such                       first $30,000 plus one-half of the difference.

The children share equally the remaining                ourselves or one that has been prepared for
one-half of the difference. If $70,000 remains          us by the legislature.
after the obligations are paid, the spouse
receives $50,000 from the $70,000 ($30,000                                      Property owners who
+ one-half of $40,000). The children each                By a                   want       to      control
receive $10,000 of the remaining $20,000.                Last Will              distribution of their
         If one of the children is not a child of        And                    property after death
the marriage between the deceased person                 Testament              can do so by preparing
and the surviving spouse, but was born from                                     a will. Like the intestate
a prior marriage or other relationship, then the                                law, a will only provides
shares of the spouse and children change.                                       for the distribution of
The spouse is entitled to one-half of the               separately owned property.            Unlike the
amount or $35,000 (1/2 of $70,000). Each                intestate law, which primarily benefits family
child’s share increases to $17,500 (1/2 of              members, a will can bestow benefits and
$35,000).                                               property on family members, strangers,
         If the deceased person and spouse              corporations, charities, churches, and other
did not have any children from their marriage           beneficiaries.
or a prior relationship, but the deceased                       A valid and enforceable will in
person is survived by parents, then the                 Pennsylvania is one prepared by a person
spouse receives the first $30,000 plus one-             eighteen years of age or older and of sound
half of the difference. The deceased person's           mind and understanding.           The document
parents receive the remaining one-half of the           must recognize an intent to distribute property
difference. The surviving spouse receives the           after death and be signed at the end by the
entire estate only when the deceased spouse             person making the will. A will can be formally
is survived by the spouse but no surviving              prepared by an attorney trained in these
children, grandchildren, or parents.                    matters or by the property owner.
         In addition to provisions for surviving                Pennsylvania, unlike other states,
spouses,      children,    grandchildren,    and        does not require that people witness the
parents, the intestate law controls the                 signature of the person who prepared the will.
distribution of property when none of the               Although witnesses are not required in order
previously listed relatives survive the                 to have a valid will, most wills are witnessed
deceased.         Additional provisions cover           by several people since the signature of the
distribution to brothers, sisters, and their            person who prepared the will must be proven
children; grandparents; aunts, uncles and               when the will is filed with the Register of Wills
their children; children of first cousins; and          after a person's death. At that time the
finally the Commonwealth of Pennsylvania. If            witnesses will come to the Register's office to
a person dies but is not survived by a relative         sign a document that confirms their role as
who is closer in relation than grandchild of a          witness and the validity of the person's
first cousin, ownership of that person's                signature.
property passes to the Commonwealth.                            An alternative procedure is available
Except when the Commonwealth would                      that eliminates the need for the witnesses to
receive the property, each listed heir must             appear before the Register of Wills. This
survive the deceased for at least five days in          procedure is known as "self-proving." Under
order to receive the share designated by the            this procedure, when a will is executed, the
schedule.                                               person making the will signs a separate
         The intestate statute can be revised           acknowledgement before a notary public that
by the legislature, and the distribution of             he or she executed the document as his or
property described above can change. Since              her last will and testament and that it was
this plan of distribution applies to those              done voluntarily. Witnesses then sign an
people who have not made their own                      affidavit stating that they were present and
decisions about the transfer of their property,         saw the person sign the will; that it was
it can be said that we all have an estate plan--        signed voluntarily; that the witnesses signed
either one that we have prepared for                    the will in the hearing and sight of the person

who made the will; and that to the best of               increase or decrease depending on which will
their knowledge the person who made the will             is admitted to probate. Some of the common
was eighteen years of age or older at the                grounds for a challenge to a will are that the
time, of sound mind, and under no constraint             decedent was not of sound mind when the will
or undue influence. The acknowledgement                  was prepared, that someone unduly
and affidavits are notarized and attached to             influenced the decedent to prepare his or her
the will. When the will is ultimately filed, the         will with particular terms, fraud practiced on
register    of    wills   can     accept      the        the decedent, that the decedent intended to
acknowledgement and affidavits to support                give property away during lifetime rather than
the statements made therein. This procedure              at death, and that the decedent failed to
eliminates the need to locate witnesses to the           properly execute the document.
will and helps the register of wills proceed                     In addition to cases where a will is
quickly.                                                 challenged, a will can also be modified as a
        Within six months after a person's               result of certain events. For example, if a
death or before the expiration of six months             married person prepares a will that provides
after the date of probate, whichever is later, a         for his or her spouse, and the marriage is
surviving spouse has a right to elect against            later ended by divorce, the termination of the
what the will provides and take what                     marriage voids all provisions in the will for the
Pennsylvania law has designated as a                     divorced spouse. In a somewhat reverse
surviving spouse's share.         This election          situation, if a single person prepares a will
requires the surviving spouse to give up his or          and then marries after the will is prepared, the
her claim to certain property in return for a            surviving spouse will be entitled to an
statutory share of one-third of certain other            intestate share of the decedent's property if
specifically identified property. In deciding            the person has not provided for the spouse in
whether to elect against a will, a surviving             a will. If a person prepares a will and a child
spouse should calculate what the spouse’s                is born to or adopted by that person's family
share would be with an election and without              after the will is prepared and before the
an election. Whichever choice provides the               person dies, the share of the after-born or
surviving spouse with the most beneficial                adopted child could be either an intestate
treatment can be selected.                               share comparable to that of all of the children,
        A surviving spouse’s right to elect              a share mentioned in the will, or nothing if the
against a will can be forfeited for failure to           person clearly expressed an intention to leave
financially support the deceased spouse, for             nothing to after-born children. If a person
desertion, and for participation in the willful or       participates in the willful and unlawful killing of
unlawful killing of the deceased spouse. In              someone, the slayer will be prevented from
addition, the right to elect can be waived, as           receiving any benefit or acquiring any
in the case of an agreement made by two                  property from the estate of the person who
parties before they marry. This agreement,               was killed.
which is often called a premarital agreement,                    If a person who is a resident of
is subject to its own standards and rules for            Pennsylvania at the time of death is divorced
enforcement. Other family members do not                 from his or her spouse, but after having
have this right to elect against what the will           designated that spouse to be the beneficiary
provides.                                                of a life insurance contract, annuity, pension
        Although a will provides some                    or profit-sharing plan or any other contractual
assurance that a person's property will be               arrangement that provides benefits to the
distributed according to its terms, a will can           spouse, the designation of the divorced
be challenged either before or after it is               spouse to receive the benefit will not be
presented to the register of wills after the             effective. An exception to this result applies
person's death. Some of the people who can               where the document that designates the
challenge the will are beneficiaries who are             spouse to receive the benefit, or a court
named by the decedent in one will but not in             order, or written contract between the parties
another, the intestate heirs of the decedent,            clearly expresses the intention that the
and beneficiaries whose share would                      designation is to survive the divorce.

         Transfers by a will have other                 the property owner and trustee negotiate an
advantages that are important to the estate             agreement that controls the trustee's
and the heirs. A person with a will can name a          ownership of the property, and its eventual
guardian for the children and thereby                   distribution to a beneficiary. A trust created
somewhat reduce the time and expense                    during an owner's lifetime is called a living
involved to obtain the necessary court ap-              trust in contrast to a testamentary trust which
pointment. Guardians have legal authority to            is created in a will. Under a living trust ar-
hold property for a minor child until the child         rangement, an owner may reserve the right to
reaches eighteen years of age.                          receive some benefit from the trust property
         At a person's death, a personal                during his or her lifetime. At the owner's
representative is appointed to deal with the            death, the trust agreement would direct the
deceased's separately owned property. The               trustee to distribute the property to an
personal representative has the authority to            eventual beneficiary. In this context, a living
deal with the estate assets and the obligation          trust becomes an effective way to transfer the
to administer the assets according to the will          property to the designated beneficiary after
or intestate law. This obligation includes filing       the owner's death. Many living trusts also
all necessary estate, inheritance, and income           grant the property owner the right to termi-
tax returns for the estate. The person who              nate the trust and re-acquire the property.
prepares a will can select the personal                 This gives the property owner flexibility to
representative to perform these duties and              deal with changing circumstances. Such
responsibilities. If the deceased did not have          trusts are commonly called revocable trusts.
a will, the personal representative is                  Trusts that cannot be changed after being
appointed from a list of those eligible to              created are called irrevocable trusts.
petition the court for appointment to this posi-
tion. Pennsylvania law determines who is                 Inheritance             For      Pennsylvania
eligible to petition the court.                          Tax Effects             residents          and
         In the case of a business owned by              Of the                  nonresidents       who
one person, a will gives the owner the                   Transfer                own real or tangible
opportunity       to     name    a     personal                                  personal      property
representative to operate the business for the                                   located in the state,
benefit of heirs or other beneficiaries.                                         an inheritance tax is
Without such authority the personal                     imposed on the transfer of property following
representative must seek court approval to              an owner's death. The tax is imposed at one
get the authority. This procedure may be                of three rates.
time consuming and expensive.                                   Tax-free transfers include transfers
                                                        to recognized charities; to federal, state, or
                      Transfer of property              local governments; transfers to a surviving
 By a                 under terms of a living           spouse which occur on or after January 1,
 Living               trust reflects the owner’s        1995; transfers from a child aged 21 or
 Trust                lifetime decision to use          younger to his or her natural or adopted
                      the trust vehicle to own,         parent(s) or stepparent, transfers of life
                      control, and manage               insurance proceeds and social security death
                      property,       and     to        benefits. No inheritance tax is imposed on
                      designate those who               these transfers. Transfers under a trust for
have a beneficial interest in the property. To          the sole use of a surviving spouse are not
create a trust, a property owner transfers real         necessarily taxable in the estate of the first
or personal property to a trustee who has               spouse who dies, but can be included in the
ownership of the property subject to the                surviving spouse’s estate when that spouse
interests of the beneficiary selected by the            dies. The exclusion of the asset from the
owner.     Following the trust beneficiary's            estate of the first decedent may be bypassed
death, the living trust by its own terms can            if the estate elects to include the trust in the
provide for the transfer of ownership to some           first decedent’s estate. This election is made
other beneficiary. When the trust is created,           on a timely filed inheritance tax return in the

first decedent's estate. Retirement benefits           survivorship, the transfer of the deceased
and individual retirement accounts may also            owner’s interest to the surviving owner or
be exempt from inheritance tax if the                  owners is subject to inheritance tax in an
decedent was younger than age fifty                    amount equal to the value of the deceased
nine-and-one-half years at death, or                   owner’s share. In cases in which the joint
otherwise did not have the right to withdraw           ownership interest is created within one year
the retirement funds without penalty.                  of the deceased owner’s death, the full value
         Transfers taxed at 4.5 percent                of the property above $3,000 may be subject
include transfers to decedent's grandparents,          to inheritance tax if the decedent was the
parents, lineal descendants, or to the wife or         person who created the joint ownership by
widow, husband or widower of a child. Lineal           giving the interest to the surviving owner.
descendants, for inheritance tax purposes,                      Pennsylvania law also provides for an
include natural children and their de-                 estate tax. This tax applies only in situations
scendants, adopted children and their                  where federal estate tax is payable and the
descendants, and stepchildren and their                amount of the inheritance tax paid to the
descendants.       Adopted      children     are       Commonwealth and other states is less than
considered to be natural children of their             the state death tax credit amount that is
adoptive and their natural parents for                 allowed under federal law. For a person who
inheritance tax purposes.                              resides in Pennsylvania at death, the amount
         Transfers taxed at 12 percent                 of the Pennsylvania estate tax is equal to the
include transfers on or after July 1, 2000 from        difference between the amount of the state
a decedent to a sibling.           A sibling is        death tax credit allowed by federal law and
considered to be a person who has at least             the total amount paid in inheritance taxes and
one parent in common with the decedent,                state death taxes.         For a resident of
whether by blood or adoption.                          Pennsylvania who dies owning property in
         Transfers taxed at 15 percent                 Pennsylvania, as well as other states, the
include transfers to any other person or entity        Pennsylvania estate tax is reduced by the
that does not fall into the tax-free, 4.5              greater of either the amount of death taxes
percent, or 12-percent tax categories,                 actually paid to other states, or an amount
including for example a decedent's aunt,               computed by multiplying the state death tax
uncle, nephew, niece, all other family                 credit by a fraction of the numerator of which
members, and all nonfamily members.                    is the value of property located in other states
         Property may be transferred before            and the denominator of which is the value of
death. Transfers by gift may still be subject to       the decedent's gross estate for federal estate
inheritance tax if the gift takes place within         tax.
one year of the person's death and the value                    For a person who is not a resident of
of the property given away to a single person          the Commonwealth at the time of death, the
is more than $3,000. In this context, the              amount of the estate tax is calculated by
property transfer means to give away                   determining the ratio of property subject to
something of value yet receive nothing in              Pennsylvania inheritance taxes compared
return, such as a gift. If something is given in       with the decedent's gross estate for federal
return, the amount of the gift equals the              estate tax purposes.        This ratio is then
difference between the value of the item               applied to the allowed state death tax credit
given away and the value of the item received          under federal law. If the amount of
in return.                                             Pennsylvania inheritance taxes paid does not
         Other provisions of the inheritance tax       exceed the amount determined by applying
law affect transfers that restrict the right of        the ratio above, then a Pennsylvania estate
the person receiving the property to                   tax in the amount of the difference is applied.
immediately use and enjoy it, that reserve a                    For example, if assets subject to
right to use the property during the original          Pennsylvania inheritance tax comprise 50
owner's lifetime, or that reserve the right to         percent of the assets in the federal gross
alter, amend, or revoke a gift. In the case of         estate, 50 percent of the state death tax
jointly owned property with the right of               credit is allowed against these assets. If the

Pennsylvania inheritance tax paid is less than           2005 it will be $950,000; and for 2006 it will
the death tax credit allowed, the difference in          be $1,000,000. Estates valued below these
amount is imposed as the Pennsylvania                    amounts will not be subject to estate taxes.
estate tax.                                                      The rules which determine whether an
        The amount of state death tax credit             estate tax return must be filed reflect the
allowed under federal law is calculated as a             amount that is equivalent to the credit. If the
percentage of the taxable estate of the                  estate value does not exceed the amount of
deceased and is limited to taxes actually paid.          the credit equivalent, there is no need to file a
The first $60,000 of the taxable estate is not           federal estate tax return. This rule only
considered when calculating the credit.                  applies to the amount that is equivalent to the
Percentages used to calculate the credit                 credit which is available to the person's
range from 0.8% to 16%.                                  estate. To determine the amount of the credit
                                                         available to the estate, the personal
                       In addition to state              representative must carefully examine the
 Federal               inheritance tax, a federal        decedent's records, including prior year gift
 Estate Tax            estate tax applies to the         tax returns. If some portion of the credit has
 Effects               transfer    of     property       been used, the available credit will be
 Of the                following   an     owner's        reduced. When the available credit is
 Transfer              death. Unlike the fixed           determined, an amount that is equivalent to it
                       rates of Pennsylvania             can be calculated from the graduated tax rate
                       inheritance    tax,    the        table that is part of the federal estate and gift
                       federal estate tax has a          tax law.
graduated tax rate that currently starts at 18%                  A second factor in calculating the
and goes to a maximum tax rate of 55%.                   property amount that is finally subject to
Therefore, under federal estate tax rules, the           federal tax is the list of available deductions.
greater the property subject to tax, the                 Current tax law provides that estate
greater the tax can be. But, for two reasons,            administration fees, attorney’s fees, casualty
not all estates are affected by the federal              losses, debts, and a marital deduction are
estate tax.                                              allowed in calculating the amount subject to
          First, the federal tax law gives each          tax. Of the deductions on this list, the marital
person a credit that can be applied against              deduction is the most significant; it allows one
either federal estate or gift tax liability owed.        spouse to transfer practically an entire estate
The amount of this credit for 1998 is                    to the other spouse and have the full value of
$202,050. As a credit, it is a dollar-for-dollar         the transfer deducted when calculating the
offset against either federal estate tax or              amount subject to federal estate tax.
federal gift tax. To generate $202,050 in tax,           However, when the surviving spouse dies,
an estate would have to have $625,000 of                 that property will be part of the surviving
property subject to tax or a person would                spouse's estate and the full value may be
have had to make taxable gifts of $625,000.              subject to tax at that time. Various types of
The $625,000 is called the exclusion amount.             transfers to a surviving spouse can qualify for
If the estate had the full amount of the credit          marital    deduction      treatment,    including
available to it and no portion of it was used            transfers to a surviving spouse as a tenant by
during a person's lifetime to offset gift tax            the entirety or as beneficiary of life insurance
liability, the credit would entirely offset the          proceeds.
estate tax due on the transfer of an estate of                   Another important federal estate tax
$625,000 or taxable gifts of $625,000.                   concept is the gross value of a decedent's
          Over the next several years the                estate (gross estate). This is the amount that
exclusion amount will be rising, and therefore           is calculated and compared to the exclusion
the credit due to estates will be rising as well.        amount available to the estate. To calculate
For 1999, the exclusion amount will be                   the gross estate, include all separately owned
$650,000; for 2000 and 2001 it will be                   property, one-half of all property owned as
$675,000; for 2002 and 2003 it will be                   tenants by the entirety, and that portion of the
$700,000; for 2004 it will be $850,000; for              current value which represents the portion of

amount paid or contributed by the decedent             from a direct transfer by gift or inheritance,
toward the cost of an item of jointly owned            transfers at the termination of a trust or
property. If the decedent at the time of death         transfers in the form of distributions from the
had the right to control the payment of                income or principal of a trust. In each case,
insurance proceeds through a change in                 the transfer must be to a person who meets
beneficiary, a right to cancel the policy, or a        the generational requirement for the tax to
right to borrow against its cash value, then           apply.
the insurance proceeds will be included in the                 If this tax applies, it is calculated at the
calculation of the gross estate. As in the             flat rate which is equal to the maximum
case of the Pennsylvania inheritance tax, if a         federal estate tax rate in effect at the time of
person restricts the right of the person given         the transfer.       Currently, that rate is 55
the property to immediately use and enjoy it,          percent. Individuals have an important
or reserves a right to use the property during         exemption of $1,000,000 from the generation
the original owner's lifetime, or reserves the         skipping transfer tax. In addition, this tax
right to alter, amend, or revoke the gift, the         does not apply to gifts that are eligible for the
value of property transferred under these              $10,000 per person, per year, federal gift tax
conditions is included in the calculation of the       annual exclusion, and the tuition and medical
gross estate of the deceased person.                   expense exclusions, which are discussed
        This discussion has illustrated several        below.
differences in estate, gift and inheritance tax                Individuals whose estate values are
calculations. Many different kinds of property         high enough to merit concern about federal
and     special    rules   are included in             estate taxes or federal gift taxes, should also
determinations of the gross estate. Some               evaluate the impact of this tax on the
different rules are used for the federal estate        distribution of property during lifetime or after
tax system and the Pennsylvania inheritance            death.
tax system.      The treatment afforded life
insurance proceeds is a good example, since                                      Giving property away
the Pennsylvania system excludes these                     Federal               during      a    person's
payments from the calculation of inheritance               Gift Tax              lifetime is sometimes a
tax while the federal system includes the                  Effects               means         to    avoid
value of the proceeds if specific conditions               Of The                inheritance taxes. A
are met. Note that including the amount of the             Transfer              federal gift tax applies
insurance proceeds in the calculation of a                                       to transfers of real or
gross estate does not bring the proceeds                                         personal property for
back to the estate, but that the value of the                                    less than the value of
proceeds is part of a calculation to determine         the property given away. These transfers are
how much tax is due. The proceeds of the life          taxed at the same rates as the federal estate
insurance policy will be paid to the beneficiary       tax. The credit that can be applied to federal
named in the policy.                                   estate tax liability may also be applied to
        Federal estate tax law also provides           federal gift tax liability. There is only one
for a generation skipping transfer tax. This tax       credit, however, and if that credit is used to
is designed to prevent the tax free transfer of        offset federal gift tax liability, then the amount
property from one generation to a generation           of the credit available to offset estate tax
of beneficiaries who are more than one                 liability is reduced or eliminated.
generation below the transferor's generation                     The current federal gift tax has an
(grandparent and grandchild or lower or a              annual exclusion that permits a person to give
non-family member who is more than                     up to $10,000 to any one person or any
thirty-seven-and-one-half years younger than           number of people, in a calendar year, free of
the transferor). This tax is a separate tax            federal gift tax liability. (This $10,000 limit will
which is involved in planning for the transfer         be adjusted for inflation in upcoming years. It
of property to these younger generations of            is important to check the statute in order to be
beneficiaries. Transfers that are typically            sure of the current exclusion amount.) For
subject to this tax include transfers that arise       example, a person who has $100,000 to give

away can give $10,000 to each of ten                     willing to accept the appointment, and to
grandchildren in any year without any gift tax           share information about funeral arrangements
liability or loss of the credit. No federal gift         and where documents are located.
tax is due on the transfer and, therefore, no
portion of the credit is needed to offset this                                  After the deceased's
tax liability.                                              Initial             funeral, the person in
          Federal law allows special treatment              Decisions           charge will survey the
for joint gifts by married individuals. Each                                    deceased's       personal
spouse can contribute his or her $10,000                                        papers and other records
exclusion to any gift made by the other                                         to    identify   property
spouse. This raises the amount excluded in               owned by the deceased and to locate a will, if
such gifts to $20,000 per person per year.               one was prepared. This survey is important
This is called splitting a gift. Similarly, a            to the estate for a number of different
married couple can write one $20,000 check               reasons, including inheritance taxes and
from their joint checking account to make a              distribution of estate property. If a will is
combined gift.                                           found, the document may name the person
          Gifting during a person's lifetime may         who will take over administration of the
avoid some taxes.            Gifting allows a            estate. Responsibility may be transferred
substantial amount to be transferred out of              from the person in charge initially to the
one's federal gross estate. If the annual                person named in the will.
exclusion limits can be followed, then such                       The search for a deceased person's
transfers will also be free of federal gift taxes.       will may require access to a safe deposit box.
One problem in this situation, however, is that          Following a death, access to such boxes is
the Pennsylvania inheritance tax applies to              limited until an inventory of the contents is
gifts in excess of $3,000 if they are made               taken for inheritance tax purposes. Before
within one year of a person's death. The                 the inventory, a family member can open a
federal gift tax annual exclusion amounts may            safe deposit box, but only to review the
eliminate federal gift tax concerns but                  contents in search of a will or cemetery deed.
perhaps not the state inheritance tax                    If a will or cemetery deed is found, it can be
concerns. Aside from the inheritance tax                 removed. If neither of these is found, nothing
treatment of gifts, Pennsylvania does not tax            can be removed from the box until an
gifts. But other states have separate gift tax           inventory is made. These access rules apply
laws, and these may entail separate                      whether the deceased owner is listed as the
consideration.                                           sole owner of the box or as a joint owner with
                                                         someone else. If the deceased owned the
    THE STEPS INVOLVED IN ESTATE                         box jointly with his or her spouse, these
            SETTLEMENT                                   access limitations do not apply and the
                                                         surviving spouse may open the box and
        Immediately after a person's death,              remove items from it before an inventory. If
the question arises, who will take charge of             items removed are subject to inheritance tax,
the situation? The person in charge will have            these items must be included when the tax
many       concerns,      such      as     funeral       calculations are made.
arrangements, security of property, care for                      At this point, three questions must be
dependent children or adults, and notification           answered. First, how will the deceased's
of family members. Frequently, the person                property be transferred after death? Second,
named as executor in the will is asked to take           will it be necessary to use the estate
charge. An executor who is already aware of              settlement process to accomplish these
the appointment and is willing to serve in that          transfers? Third, who has the authority to see
capacity usually can take charge soon after              that the property is transferred?
the death. Individuals who prepare wills                          The first question requires a review of
should take time to speak with the person                the property's ownership. If the property was
they plan to name as executor to inform him              owned as a joint tenant with the right of
or her of their intentions, to ask if he or she is       survivorship or as a tenant by the entirety,

nothing need be done to transfer ownership                       Third, insurance proceeds of $11,000
to the surviving joint owner or tenant by the            or less held by an insurance company (under
entirety.    This     transfer    takes    place         a policy of life, accident, or endowment
automatically at the moment of death, as                 insurance or annuity contract) and owed to
described above, and the estate settlement               the estate of an individual who resided in the
process does not apply. The surviving joint              Commonwealth may be paid to the spouse,
owner generally will face the need to establish          child, father, mother, sister, or brother of the
the death of the joint owner, but the survivor           deceased in the order stated. A requirement
controls the situation.                                  to receive these funds is that at the time of
         Other types of property may pass from           payment the personal representative has not
a deceased owner without using the formal                made a claim for the funds.
estate settlement process. These include:                        Fourth, upon the death of a person
• living trusts created during a person’s                who is a patient in a county-affiliated nursing
    lifetime for the purpose of accomplishing            home, up to $3,500 from the patient's care
    this transfer after a person’s death;                account can be paid to a funeral director for
• tentative trusts created during a person’s             burial expenses. The facility may pay these
    lifetime where the trustee’s death                   funds to the funeral director and pay an
    transfers control of the trust property to           additional amount to the spouse, child, father,
    the beneficiary, such as an account                  mother, sister, or brother of the deceased
    opened by a parent “in trust for” a child;           patient in that order.        The total of all
• social security and veteran's death                    payments made by the facility may not
    benefits;                                            exceed $4,000. In each of these cases, if it is
• employee         benefits;   and     individual        later determined that payment to the person
    retirement accounts being transferred to             was improper, and payment should have
    the designated beneficiary;                          been made to someone else, the person who
• automobiles;                                           received the improper payment may have to
• savings bonds paid to or registered to                 return the funds.
    someone sharing in the decedent's                            If the decedent owned other property
    estate; and                                          in his or her own name, it may be necessary
• the family exemption which is explained                to use the estate settlement process to
    later.                                               transfer the property and to appoint a
                                                         personal representative to accomplish the
         Four other transfers of property can            transfer by a person who has the authority to
be made without using the formal estate                  do so. If the decedent had a will, that
settlement process in limited circumstances.             document will determine who is entitled to
First, if a person is entitled to wages, salary,         ultimately receive the property.         If the
or employee benefits at the time of death, the           decedent did not have a will, the intestate
employer may pay up to $5,000 of such                    distribution schedule will determine ultimate
benefits to the deceased's spouse, children,             entitlement to the property.
father, mother, or any sister or brother, in the
order stated. This payment can be made by                                         To begin the process,
                                                          Appointment             a representative is
the employer without regard to whether a                  Of Personal
personal representative of the estate has                                         appointed    for   the
                                                          Representative          estate.   Except    as
been appointed.
         Second, a transfer of up to $3,500 can                                   listed above, no one
be made from the decedent's bank or savings                                       has the right to deal
account. This amount can be transferred to               with separately owned property until a
the spouse, child, father, mother, sister or             personal representative is appointed. If a
brother of the deceased in the order stated.             person prepared a will, the executor or
The person receiving the funds must present              executrix named in the will is the personal
a paid funeral bill or an affidavit showing that         representative. (Executor signifies a man,
arrangements have been made for the                      executrix signifies a woman.) If a person did
payment of funeral services.                             not prepare a will, the personal representative

of the estate is an administrator if a man, or           not just a place where a person resides for a
an administratrix if a woman. A personal                 period of time.
representative can be a person or a                               Under the Probate, Estates, and
corporation that has authority to act in that ca-        Fiduciaries Code of Pennsylvania, the register
pacity, such as a bank or trust company that             of wills of the county where the petition is filed
has a trust department. In preparing a will, a           may grant letters of administration to one or
person       can     name        one    personal         more people in the following order:
representative or several representatives who            • Those entitled to the residuary estate
share the position and authority.                             under a will.
        To achieve official status, a petition is        • The surviving spouse.
presented to the register of wills of the county         • Those who are entitled to the estate
where the decedent has his or her last family                 under the intestate law and who are
or principal residence. If the decedent did not               determined to be best able to administer
have a domicile in Pennsylvania, but had                      the estate.
property located in Pennsylvania, the petition           • The principal creditors of the estate.
can be filed with the register of wills of the           • Other fit persons.
county where the property is located. If an                       If any of the above parties renounce
executor or executrix files this petition, it is         their right to be appointed and nominate
called a petition for letters testamentary. If an        someone to act in their place, the register of
administrator or administratrix files the                wills may, at his or her discretion, accept the
petition, it is called a petition for letters of         nominee of the person who renounces the
administration.                                          appointment.
        The petition must provide the following                   Certain persons cannot act as a
information:                                             personal representative.          Such persons
                                                         include minors, corporations not authorized to
•   Personal information about the deceased              act as fiduciaries in the Commonwealth,
    and the place and date of death.                     people found by the register to be unfit to be
•   If the deceased died without a will, the             entrusted with the administration of the
    names and addresses of the deceased’s                estate, and, in certain cases, the nominee of
    surviving spouse and heirs.                          a beneficiary who is a citizen of a foreign
•   If the deceased died with a will, whether            country (if it appears doubtful to the register
    the will was modified by divorce,                    that the distribution of the estate will actually
    marriage, or birth of a child after the will         be received by the beneficiary).             If a
    was prepared.                                        nonresident of Pennsylvania petitions for
•   If the deceased was domiciled in                     letters of administration, the register can
    Pennsylvania at death, the estimated                 refuse to grant the petition.
    value of all personal property and the                        In addition to the petition, the original
    estimated value and location of real                 signed copy of the deceased's last will and
    property within the state.                           testament is filed with the petition. In most
•   If the deceased was not domiciled in                 cases the deceased's death certificate is also
    Pennsylvania at death, the estimated                 filed with the petition. The petition can be
    value of personal property located in the            filed anytime after the deceased's death.
    state, the estimated value of personal                        A     personal     representative       is
    property located in the county where the             responsible for the true and faithful
    petition is filed, and the location of real          performance of his or her duties. In some
    property in the state.                               cases, this security is provided by a bond for
•   Name and address of the person who is                twice the estimated value of personal prop-
    requesting that letters be granted.                  erty in the estate. The bond is purchased
                                                         from a company authorized to do business in
       In this context, domicile refers to the           Pennsylvania. In many situations, however, a
place where a person lives and intends to                bond is not needed. This could be a case
stay and call his or her home. A domicile is             where the appointed personal representative
                                                         is a bank and trust company incorporated in

Pennsylvania, or a national bank with a                    the grant of the letters and the opening of the
principal office in Pennsylvania. In addition,             estate administration. This notice runs once
the personal representative may be excused                 a week for three successive weeks in one
from this requirement by the deceased when                 newspaper of general circulation published
the executor is a Pennsylvania resident.                   where the deceased resided. If the deceased
Many wills make that provision to eliminate                did not live in Pennsylvania, a newspaper in
the need for a bond. If the executor is not a              the county where the letters are granted is
Pennsylvania resident, but will serve as co-               selected to publish the notice. In addition to
executor with a resident excused from the                  this notice, an advertisement will also appear
bond requirement, the nonresident may also                 in a legal periodical once a week for three
be excused from the bond requirement if the                successive weeks.        This is a publication
nonresident acknowledges that all assets will              designated by the local court as a place
remain in the custody and control of the                   where legal notices are published. In many
resident co-executor. A bond is not needed                 counties, this is a law journal published by the
by a resident who is granted letters of                    local bar association and distributed to
administration and is the sole heir to the                 lawyers, other professionals, and libraries.
residuary estate or by a resident who is the                       The notice specifies the name of the
next of kin. If the court orders the personal              deceased, the name and address of the
representative to be bonded, the requirement               personal representative, and requests all
must be fulfilled.                                         people having claims against the estate to
         When presented with a petition for                make the claims known to the personal
letters testamentary and the original copy of              representative or the attorney to the estate
the decedent's will, the register will determine           without delay. Giving this notice is important
whether to accept the will as the last will of             because it affects the rights of the estate and
the deceased and require proof that the will               its unpaid creditors as they deal with debts
was signed by the deceased. This proof may                 and expenses of the estate and the decedent.
come from witnesses present when the will
was signed and who signed the will                          Beginning the          After being appointed
themselves, or from persons familiar with the               Administration         to     represent     the
deceased's handwriting. If the self-proving                                        estate, the personal
procedure was used, the register of wills can                                      representative collects
accept the acknowledgment and affidavits to                                        as much information
support the statements made therein. This                  as possible about the assets of the estate and
procedure eliminates the need to locate                    the heirs who are to receive them. If the
witnesses to the will and helps the register of            person originally in charge prepared lists of
wills proceed quickly. The process followed                property, these lists will form a portion of the
by the register of wills is called probate or              personal representative's inventory.        The
probating the will. Probate means that the                 personal representative should attempt to find
register of wills is determining the validity of           all assets and heirs.
the will.
         After the petition for letters is granted,                               Following an individual’s
the register of wills issues a certificate of               Review of             death, important state
authority, which is formal proof of the                     Income Tax            and federal income tax
personal representative's authority to act on               Issues                issues     arise.    For
behalf of the estate. The register issues                                         example,       if    the
short-form certificates that the personal                                         individual died before
representative uses to close bank accounts or              filing a tax return for the prior tax year, the
otherwise deal with the deceased's property.               need to file that return must be addressed.
These certificates are commonly called                     Likewise, from the beginning of the current
"shorts" or "short certificates."                          tax year to the date of the decedent's death, a
         After letters of administration or letters        short tax year is created and an income tax
testamentary are granted, the personal                     return would be filed for that period as well.
representative arranges to publish a notice of             In addition, the creation of an estate for the

transfer of property creates a new tax entity             may be a substantial difference between
that is obligated to file an income tax return in         basis and fair market value which will be
a timely fashion. Each of these three in-                 subject to income tax as gain from the sale.
stances provide significant opportunities for                     When appreciated property passes to
the surviving spouse, personal representative,            an estate, however, the tax basis of the
and heirs to plan a tax strategy that                     property is increased from its value in the
accomplishes specific goals and may                       hands of the decedent to the value of the
minimize the tax burden that arises. Important            property as reported by the estate. This
decisions must be made and should not be                  reported value can be either its fair market
overlooked.                                               value as of the date of the decedent's death
         The first important decision is filing of        or the special use value which has been
state and federal income tax returns for a                elected by the estate. Both of these concepts
prior tax year when the decedent had not                  of valuing property are explained below.
done so. These returns are generally due by               When the personal representative sells
April 15 of the following year. For example, if           property for an amount that is close to the
the individual died on January 15, 1999, the              date of death value, little or no gain from the
deceased's income tax return for the calendar             sale may be recognized for income tax
year of 1998 would be due on April 15, 1999.              purposes. When property is passed directly
The individual's death in the 1999 tax year               to heirs, the heirs' basis in the property is the
generally will require a final income tax return          value of the property as reported by the
to be filed by April 15, 2000, to report income           estate. Personal representatives should be
received from January 1 to January 15, 1999.              certain that heirs have the relevant
A surviving spouse can elect to join in these             information about property they receive.
returns and file joint returns for the prior and                  For state and federal income tax
final tax years, if the spouse has not                    purposes, an estate becomes a separate and
remarried during the current tax year. In                 independent taxpayer at the time of the
deciding to elect to file joint returns for the           individual's death. In the year of death, the
prior and final tax years, the surviving spouse           estate has an opportunity to select as its
has important factors to weigh in reaching the            federal income tax year-- either a calendar
decision. Close coordination with an income               year or an acceptable fiscal year (which ends
tax advisor is important because, depending               any time on or before the last day of the
upon the circumstances, the surviving spouse              month before the month in which the
may or may not be entitled to the refund, if              decedent died). The separate income tax
any.                                                      status of an estate continues until final
         The estate of a decedent also faces              settlement of the estate. This period cannot
income tax liability. Income earned by the                be unduly prolonged, but the time required to
estate      (from    investments,    sales,     or        settle an estate varies significantly with the
exchanges) or income earned by the                        complexity of the estate and the nature of the
decedent but received by the estate, can be               assets.
subject to income tax. Income in the hands                        In selecting the tax year of an estate,
of the beneficiary can be subject to tax if               the personal representative has an important
distributed by the estate during the tax year.            opportunity to tax plan for the receipt of
In effect, income is subject to tax only once.            income, distribution of the income to the
         Property that has appreciated in value           beneficiaries, and final termination of the
and that passes through an estate also                    estate. In the final tax year of an estate,
enjoys other tax advantages that do not apply             certain unused income tax deductions,
to gifts of property made during lifetime. For            commonly called excess deductions, can be
example, when appreciated property is given               passed out to the beneficiaries for use on
away during the owner’s lifetime, the owner               their personal tax returns. Timing the receipt
also gives the recipient the owner's basis in             of income, distributions to the beneficiaries,
the property.       If the recipient sells the            and payment of deductible expenses is an
property, the owner's basis is used to calcu-             important part of the estate settlement
late gain from the sale of the property. There

process. Close coordination with an income              items varies over time. For most purposes,
tax advisor is likewise important.                      including Pennsylvania inheritance tax, the
        For state personal income tax                   value of property as of the date of death is
purposes, similar issues arise in the filing of         used. In some situations, a tax statute may
state income tax returns for the decedent's             allow for an alternative valuation.      The
final year or years. The state income tax               personal representative should calculate
status of a decedent's estate will follow the           these values and then select the value that is
tax year selected for the federal fiduciary             most beneficial to the estate.
income tax return.
                                                                              The general rule for
                      Property in the estate             Fair                 determining       property
  Valuing             must be valued and                 Market               value is to consider its
  Property            protected. Certain types           Value                fair market value on the
  In General          of property are in                                      valuation date.       Fair
                      general easily valued;                                  market value is the price
                      others may require                that a willing and able seller of property would
appraisal by someone with special knowledge             accept from a willing and able buyer,
and experience about assets such as jewelry,            assuming that neither party is forced into the
antiques,     and    land.     The    personal          transaction and that both parties are similarly
representative should be certain that the               knowledgeable about the property. If the item
property is adequately insured against                  is generally sold on a public market, the
damage or loss. Value of the assets should              current market price is included in the
guide the decision about the amount of                  calculation. All types of forced sales, such as
insurance needed. The actual policy should              sheriff's sales, are excluded from the concept
be reviewed for important terms and                     of fair market value.
conditions of coverage.                                          Fair market value also can be based
        In calculating value, a number of               on a recent sale or purchase of the property
points must be known before applying                    by the deceased. If there has not been a
valuation rules. First, the property to be              recent sale, then a review of the sale of
valued must be clearly identified.             A        comparable property would help to estimate
description such as the "family farm" or                fair market value. However, the differences
"family antiques" may not be sufficient to              between these properties must be borne in
identify all items or pieces of property.               mind.
Ambiguous descriptions may result in                             Another method of valuing property is
incomplete calculations when assets are                 to have it appraised. The usefulness of the
finally totaled. Second, the owner of the               appraisal value depends on the qualifications
property and fractional ownership must be               and experience of the persons doing the
accurately identified to ensure a proper                appraisal. A statement that the property
calculation. In trying to decide who owns               value is a certain amount without an
property, all documents or receipts that list a         explanation of the methods and factors used
buyer or owner are reviewed for relevant                in determining that amount might not be
information. These documents may include                acceptable.
cattle registration certificates, purchase
receipts, checking accounts, installment sales                              There are many different
contracts, tax returns, certificates of title to
                                                         Value of           kinds of property and
registered vehicles, and other documents of              Types of           value is often difficult to
that kind. Third, any and all records should             Property           determine. The following
be obtained to help establish ownership and                                 paragraphs         describe
acquisition costs.                                                          common         items     of
                                                        property and the valuation rules that apply.
                      The next consideration                    Real property. Comparable sales
 Date of              is the date of valuation.         and appraisals are frequently used in valuing
 Valuation            The value of some                 real estate. Some characteristics of land that

affect its value are size and shape, natural               the land or a member of his or her family
resources, location, accessibility to roads and            must have materially participated in the
utilities, deed restrictions on use or transfer,           operation of the farm or other trade or
and current lease arrangements. Zoning and                 business for at least five of the last eight
property potential are also factors. Property              years before the deceased owner's death,
is valued at its highest and best use, and                 retirement, or disability. Material participation
zoning may determine what uses are possible                is a term with special meaning under this
within the community’s comprehensive                       provision. In deciding if material participation
development plan.                                          exists, factors such as the deceased's active
          If property has been held for rental             involvement in the business by providing
income, capitalization of such income may                  labor, management, and capital are
provide a value figure.                  However,          considered.     The deceased’s tax returns
capitalization may not be useful if the tenant             showing self-employment income from the
is a related party who obtained a favorable                business are also considered. To be eligible
lease.                                                     for this treatment, the land that is specially
          Offers to purchase property on the               valued must pass to or be acquired from the
market may serve as an opinion of its current              estate by a qualified heir, as that term is
value. If an offer is rejected (i.e., the seller is        defined in the tax provision. As a condition of
unwilling to accept the offer), it is reasonable           the use of this provision, the qualified heir and
to view the value of that property as higher               all others who have an interest in the land
than the rejected offer.                                   must agree to continue to own and use the
          Current development of natural                   land in the qualified use or face a recapture of
resource deposits on the property, such as                 the tax benefits gained by use of this
coal, oil, or gas also affects its value.                  provision. Under the federal provisions, the
          Special-use valuation of farm and                recapture period runs for a period of ten
business real property. Under special-use                  years after the deceased's death (or after the
valuation provisions, anyone facing federal                qualified heir has taken over the business that
estate or Pennsylvania inheritance taxes and               makes the land eligible for this provision).
qualifying for the provision may elect to value            Another factor that one must consider when
agricultural or other business real estate at its          valuing property under 2032A is that the
value in its particular use rather than at its fair        beneficiary’s basis in the property will be
market value. This valuation, known as a                   limited to the value given to the property
2032A valuation, can substantially reduce the              under 2032A.
value of real estate assets from their fair                        This description covers only a few of
market value to their value as used in                     the requirements, and those who consider
agriculture or another business. But the                   use of the tax provision are well advised to
election is subject to a maximum reduction,                carefully review all of the requirements for its
currently $760,000 in the case of federal                  use and the conditions imposed to avoid the
estate taxes. Each of these tax laws has its               recapture of the tax benefit.
own requirements and conditions for special                        Under the state Clean and Green
use valuation.                                             provision, land that is used for agricultural
          For example, under federal estate tax            purposes, as an agricultural reserve, or as a
provisions, the valuation technique is limited             forest reserve may qualify for special
to land used for a purpose that qualifies either           valuation. In addition, land that is devoted to
as a farm for farming purposes or in some                  an agricultural use must have been in such
other trade or business.           The valuation           use for three years preceding the owner's
technique requires that the land devoted to                death, and be not less than ten contiguous
farming or other trade or business comprise                acres in area, or have an anticipated yearly
at least 25 percent of the entire estate value.            gross income of $2,000 derived from
The value of the land and personal property                agricultural use. If land is devoted to use as
combined and used in the farm or other                     an agricultural reserve or a forest reserve, the
business must exceed 50 percent of the                     tract must be not less than ten contiguous
entire estate value. The deceased owner of                 acres in area. If any of the land valued under

this provision is applied to a use other than            2057 election and file a recapture agreement;
the three uses listed above, within seven                (3) the adjusted value of the qualified family-
years of the death of the decedent, the owner            owned business interest must exceed 50% of
of the land at that time is liable to repay the          the decedent’s adjusted gross estate; and (4)
amount of the inheritance taxes saved by use             the decedent or members of the decedent’s
of this provision. This brief summary of the             family must have materially participated in the
requirements       indicates       that    these         operation of the business in an aggregate of
requirements are substantially different from            at least five years of the eight-year period
those of the federal provision. Many estates             ending on the decedent’s death.
may be able to take advantage of this valua-                     Three important concepts in this set of
tion provision; and those who consider it                qualifications are the “includible gifts of
should carefully review all of the requirements          interests”, the “decedent’s adjusted gross
and the conditions imposed in order to avoid             estate”, and the “adjusted value of the
the recapture of the tax benefit.                        qualified family owned business”.
        Section 2057.        A new tax law                       Qualified family owned trade or
provision introduced in the 1997 Taxpayer’               business interests can be carried on as sole
Relief Act and later amended by technical                proprietorships or as other entities. In regard
corrections found in the Internal Revenue                to other entities, the decedent, or a member
Service Restructuring and Reform Act offers              of his or her family must own (1) at least 50%
some additional federal estate tax relief for            of the entity or (2) at least 30% of an entity in
owners of family owned enterprises.                      which members of two families own 70%; or
        The     new     provision,    which    is        (3) at least 30% of an entity in which
structurally similar to the special valuation            members of three families own 90%. For
approach under section 2032A, allows a                   corporations, the family must own the
federal estate tax deduction for “qualified              required percentage of the total combined
family owned business interests”.            The         voting power of all classes of stock entitled to
amount of the deduction is coordinated with              vote and the required percentage of the total
the amount that is passed tax free under the             value of shares of all classes.              For
unified credit against federal and estate gift           partnerships, ownership is determined by the
tax and is capped at $675,000.               The         percentage of capital interests of the
maximum family owned business deduction                  partnership.
allowed under section 2057 is $675,000, and                      Certain interests can not be qualified
if the deduction applies, then the maximum               as family-owned business interests, such as
exclusion of property under the unified credit           (1) interests in a business whose principal
is $625,000. If the deduction allowed under              place of business is outside the United
section 2057 is less than $675,000, or the               States; (2) interests in a business whose
deduction does not apply at all, the amount of           stock was readily tradable on an established
the applicable exclusion under the unified               securities market or secondary market within
credit will be increased to the maximum                  three years of the decedent’s date of death;
amount which would apply without regard to               (3) the portion of the interest that is
2057. The addition of the family owned                   attributable to cash and/or marketable
business exclusion is important for it will aid          securities in excess of the reasonable
family businesses by allowing an additional              expected day-to-day working capital needs of
amount of business property to pass free of              the business or certain passive assets; and
federal estate taxes at the death of the                 (4) an interest in a business if more than 35%
business owner. This will enable the next                of the adjusted ordinary gross income of the
generation family business owner to acquire              business for the year of the decedent’s death
the business interest in a more intact form              was personal holding company income as
and at a lower transfer tax cost.                        defined by section 543 of the Internal
        To be eligible for the exclusion, an             Revenue Code.
estate must meet four requirements: (1) The                      As is the case of the special valuation
decedent must be a United States citizen at              opportunity under section 2032A, the estate
death; (2) The estate executor must make a               tax benefit of using the exclusion is

recaptured if within 10 years after the                           Corporate stock. Corporate stock
decedent’s death and before the qualified                 can be valued according to the amount it
heir’s death: (1) the material participation              would generate if sold. Stock sold on any of
requirements are not met with respect to                  the stock exchanges is valued at the average
interests acquired from the decedent; (2) the             of the high and low selling prices on the date
qualified heir disposes of a portion of the               in question. If no sales were made on that
qualified family-owned business interest, and             day, stock is valued at the average price on
other than to a member of the qualified heir’s            the nearest sale days before and after that
family or a qualified conservation contribution;          date.
(3) the qualified heir loses U.S. citizenship or                  For stock sold on the over-the-counter
no longer is a U.S. resident; or (4) the                  market with a bid and asking price, the
principal place of business ceases to be                  average between these prices on the
located in the United States. The adjusted                valuation date can be used. If no prices were
tax difference attributable to a qualified                quoted for that day, the stock is valued at the
family-owned       business     deduction       is        average price on the nearest sale days before
recaptured as the personal responsibility of              and after the valuation date.
the qualified heir to the extent of the heir’s                    Other methods may be needed for
interest in the qualified family-owned                    stock of a closely held corporation that has
business if the recapture occurs within six               not had recent sales. Stock can be valued
years following the decedent’s death. The                 according to the company's net worth (assets
percentage recaptured thereafter is annually              minus liabilities) or its history of earnings and
reduced in 20% increments, until 20% is                   dividend payments.           In a closely held
recaptured in the tenth year. Interest on the             business, an existing buy-sell agreement may
recaptured amount is also due at the rate set             specify the amount to be paid for the stock of
for underpayment of taxes for the period                  an owner who withdraws from the business.
beginning on the date the estate tax liability            Other factors to be considered are the nature
was due under this chapter and ending on the              of the business, its history, the economic fu-
date such additional estate tax is due. One               ture of the business, values set in the
difference between 2032A and 2057 is that                 corporation's own books and records,
basis in property is not reduced when taking              goodwill as carried on the corporation's
the 2057 deduction.                                       books, voting authority of stock, and the
        Land subject to a qualified                       power of the voting authority to control
conservation easement. Section 2031 of                    corporate decisions.
the Internal Revenue Code allows a valuation                      The concept of goodwill involves a
deduction for land that is subject to a qualified         comparison of one business's performance to
conservation easement. This deduction can                 that of other businesses of the same type in
be up to 40% of the value of the land. In                 the same area. A business's greater success
order to be eligible for this treatment land              may be used to determine its goodwill when
must be (1) located within 25 miles of a                  compared to other businesses.
metropolitan area, (2) located within 25 miles                    Partnerships             and          sole
of a national park or wilderness area that is             proprietorships. Ownership of partnerships
under significant development pressure, or                and sole proprietorships is represented not by
(3) located within 10 miles of an Urban                   shares of stock but by an ownership interest
National Forest. Furthermore, the land must               in the value of the business itself. In a
have been owned by the decedent or a                      partnership, the value of the business is
member of the decedent’s family for 3 years               shared     among        the    partners;   in    a
before the decedent’s death. A number of                  proprietorship, this value is held by the
other requirements exist before this deduction            individual owner. In both cases, some of the
can be taken. The requirements are quite                  same concepts may be used to assess value
complex, and one should consult a                         when the business has not been sold re-
professional before attempting to take this               cently. Concepts such as the net worth of the
deduction.                                                business and capitalization of earning
                                                          capacity can be very helpful in calculating

value.      Buy-sell agreements or other               the deceased's death and the estate
provisions in a partnership agreement may              administration. In the case of an estate
enable the partners to calculate the amount            distributed under the intestate law, the per-
due a withdrawing partner.                             sonal representative may have to do some
        Machinery,         equipment,       and        investigation to identify the surviving family
livestock. Value of machinery, equipment,              members who will receive property under the
and livestock is determined by reviewing               distribution schedule. For decedent’s dying
market value figures for recent sales of               on or after January 1, 1999, the personal
similar items, especially livestock. People in         representative must determine a current
the business of selling these types of property        address and send the form of notice that is
can provide market value information for the           listed in Rule 5.7 of the Orphan’s Court Rules.
estate.                                                This required notice is to include information
        Life insurance. For federal estate tax         regarding the date and place of decedent’s
purposes, the proceeds paid by a life                  death; whether the decedent died with or
insurance company are the valuation amount.            without a will; the name and address of the
Insurance proceeds are not taxable under               personal representative; and how the person
state inheritance tax law, and value is not a          may obtain a copy of the will. (A change in
consideration. For federal estate tax returns,         the law exists for decedent’s dying before
a form 712 should be obtained from the in-             January 1, 1999, and after January 1, 1999.
surance company. This form describes the               In the case of decedent’s dying before
value of the policy that is reported.                  January 1, 1999, the personal representative
        Tangible personal property. The fair           is required to send a copy of the will and a
market value of general personal property              description of the beneficiary’s interest in the
may be difficult to establish since value drops        estate along with the notice. This information
immediately after sale.          If the estate         is not required if the decedent dies on or after
settlement and valuation occur soon after the          January 1, 1999.) Within ten days of sending
purchase or sale of the property, the sale             this notice to each heir, the personal
price may be a factor in valuation. This price,        representative certifies having sent the notice
however, should not be viewed as the only              by filing a document with the local register of
proof of value.                                        wills. Heirs may respond to this notice by
        General personal property. General             requesting information about the amount they
personal property includes such common                 will receive from the estate, although it may
items as furniture, clothing, household                be too early to determine that amount ac-
appliances, and tools. For gift tax purposes,          curately.    Communication      between the
it may be worthwhile to ask the recipient to           personal representative and the heirs should
place a value on the item. When payment of             be continuous throughout the estate
estate or inheritance taxes is involved, items         administration.
may be sold at an auction and the value of
the property is the proceeds of the sale                                       If a person who is a
(before paying the auctioneer's commission).                                   Pennsylvania resident
                                                        Of Small               dies owning personal
        Antiques,      collectibles,    special
                                                        Estates on             property having a value
property. If the property includes recognized
antiques or collectibles valued at over $3,000,
                                                        Petition               of not more than
a qualified appraiser is needed to establish                                   $25,000 the orphans'
the fair market value of these items. The                                      court division of the
appraisal of the expert must be filed with the         county where the person resided may act on
return.                                                a petition to distribute this property to heirs
                                                       designated by the court. This procedure is
                    Within three months after          available to settle estates of low value and is
  Notification      letters testamentary or            not restricted by the fact that the decedent
  Of Heirs          letters of administration          owned real estate, regardless of its value.
                    are granted, the executor                  In this simplified and less formal
                    must notify the heirs of           process, any heir or other person who has an

interest in the distribution of the decedent's          date by making a written request to the
personal property may file the petition. The            personal representative. If such a request is
orphans' court division will determine what             made, the inventory is due within three
notice is to be given to other interested               months of the representative's appointment or
parties, and then act on the petition to direct         thirty days after the request, whichever is
distribution of the property to the parties             later. The orphans' court division may direct
entitled thereto in a decree of distribution.           the filing of an inventory at any time.
This action can be initiated and acted upon
regardless of whether the decedent's will has                                Every      representative
been filed for probate or a personal                      Initial            must keep in mind the
representative has been appointed.                        Payment of         obligation to pay any
        Within one year after the court's                 Inheritance        applicable     inheritance
decree of distribution has been made, any                 Tax                and estate taxes. Under
other party who has an interest in the                                       Pennsylvania inheritance
distribution of decedent’s personal property                                 tax law, the tax payment
may file a petition to revoke the decree of                                  becomes delinquent if
distribution on grounds that it ordered an              not paid within nine months after the death of
improper distribution. If the court finds the           the deceased.       A 5-percent discount is
decree of distribution was improper, it may             available for amounts paid toward the
revoke the decree and direct distribution of            inheritance tax within three months of the
the property as it determines to be just and            death. In deciding whether to take advantage
equitable. This may require a person to                 of the discount on the inheritance tax, the
return property or make restitution of                  personal representative should consider the
improperly received funds.                              income earned on the tax payment and then
        When planning an estate settlement,             compare that amount to the tax savings
one should not confuse the provisions in this           generated by the early payment.            This
section of the Probate Code with the                    comparison should be made to ensure the
provisions of section 3531. Section 3531 can            maximum benefit to the estate. Overpayment
apply when the value of all real and personal           of inheritance should be avoided, because no
property is less than $25,000, but note that            discount is available for an excess
3531 requires the appointment of a personal             prepayment.
representative and the submission of the will
for probate. One advantage of section 3531                                         During administration
is that the expense of a formal account is                Administration           of an estate, the
avoided.                                                  Of Assets                representative     has
                                                                                   the      right     and
                   Every representative must                                       obligation to take
 Filing the        file an inventory of real and                                   possession of real
 Inventory         personal property owned by           and personal property of the deceased,
                   the     deceased.         The        except for real estate occupied at the
                   inventory also includes a            deceased’s death by an heir who had the
memorandum list of real estate owned by the             consent of the deceased. The representative
decedent,      but      located    outside    of        has power to collect rent and income from the
Pennsylvania. This list may include the value           assets until sold or distributed and to make all
of such property, but the amounts will not be           reasonable expenditures needed to preserve
included in the inventory total or as real              and maintain the property. In addition, the
estate in a later accounting of estate assets.          representative has the right to maintain any
        This inventory must be filed no later           action with respect to the property (i.e. bring a
than the date of filing the estate account              lawsuit).
(described later) or the due date of the                        The representative has a fiduciary
inheritance tax return, whichever is earlier.           duty to the estate and is held to the highest
Any party with an interest in the estate may            degree of faith. The representative is under a
request the filing of an inventory at an earlier        duty to act with the same degree of judgment,

skill, care, and diligence that a reasonable or          sonal representative has a wide range of
prudent person would exercise in his own                 powers to deal with the estate property and a
affairs.                                                 high degree of responsibility to keep the
         If the deceased owned a business at             funds safe while still earning a reasonable
death, a will may give the representative                income on the funds. The representative is
authority to operate the business during the             expected to perform as a person of ordinary
period of estate administration.           If the        prudence, acting in good faith in dealing with
deceased dies without a will or did not give             his or her own property.
such authority in a will, the personal                            A personal representative must file a
representative must petition the court for such          status report with the register of wills. The
authority to operate the business or face                first such report is due no later than two years
personal responsibility for any loss that                after the deceased's death. If the
results from the operation of the business               administration continues beyond that date,
without such authority.                                  similar reports are filed annually thereafter.
         A personal representative generally is          Each report must show the date that the
obligated to liquidate estate assets not                 personal      representative     believes    the
specifically given to a beneficiary and to               administration will be completed.
promptly distribute the proceeds to the heirs                     The personal representative must also
when estate administration is completed. A               file a report of completed administration with
property owner can give an executor the                  the Register of Wills when the administration
authority to distribute property to heirs rather         is finished. This report must show that the
than sell it, specifically describing the                administration of the estate is completed;
executor's authority as including the right to           whether a formal account was filed with the
retain property and distribute it "in kind."             Orphan’s Court; whether a complete account
         Unless restricted by a will, the                was informally stated to all parties in interest;
personal representative has authority to sell            whether final distribution has been completed;
personal property as well as real property that          and whether approvals of the account,
has not been specifically given to someone in            receipts, joinders and releases have been
the will. If the person who is specifically given        filed with the Clerk of the Orphan’s Court.
real property joins in the sale, the personal                     Administration of an estate may be
representative may sell this property as well.           delayed by contests over the validity of a will,
If the personal representative was required to           disputes with creditors as to the amount owed
give a bond, as explained above, the                     by the estate, disputes with debtors as to the
representative must obtain a court order that            amount owed to the estate, poor market
determines the need for additional security.             conditions for the sale of estate assets, and
         A personal representative considers             litigation involving the estate as a party
the sale of assets when cash is needed to                arising from an incident or injury. Delays
pay debts, expenses, or gifts provided in the            involving litigation can be substantial but
will or under the intestate law. The sale of an          unavoidable. For each estate administration,
asset may also be considered when the asset              different circumstances can increase or
is losing value in its present form. Converting          reduce the amount of time required. Few
the asset to cash puts it in a form that can be          people, if any, benefit by delay in the
invested to grow in value.                               conclusion of the administration; courts
         In many situations, distribution is             promote a prompt settlement in as many
postponed until administration is completed,             situations as possible. Questions about what
and the personal representative must invest              seems to be an exceptionally long delay
estate funds to make the assets productive.              should be resolved with the personal
Unless otherwise directed by the court or the            representative or attorney.
will, the representative should generally invest
in government bonds, interest bearing bank                                      Preparation of the state
deposits,      and    accounts      in    savings          Preparation          inheritance tax return
associations insured by the Federal Savings                Of the               involves      gathering
and Loan Insurance Corporation. The per-                   Pennsylvania         information about the
                                                    20     Tax Return
estate assets, the beneficiaries, and                        Beneficiaries
supporting statements about the value of                Schedule K -
estate assets and the deductible expenses of                 life estate, annuity, term certain
the estate's administration. Included in the            Schedule L -
list of deductions is the family exemption.                  future interest compromise
This exemption is a payment of $3,500 that is           Schedule M -
allowed only from probate assets of the                      spousal poverty credit
estate to the spouse of a deceased person,              Schedule N -
or, if there is no surviving spouse, to eligible             election under Sec. 9113(A) (Spousal
children of the deceased, or, if there are no                Distributions)
children, then to the parent or parents of the
deceased provided they are members of the                       If the estate does not have any assets
same household as the deceased. If claimed,             falling into some of these categories, the
the exemption will be listed on the tax                 schedule need not be submitted for those
schedule      with   the    claimant's   name,          categories.
relationship to the deceased, and address at                    In calculating tax due, total gross
the time of the deceased's death. Also listed           assets are calculated and from that figure,
will be funeral expenses, administrative costs,         costs, expenses, debts, mortgages, and liens
miscellaneous expenses, and other payments              are deducted to determine net value of the
from the estate.                                        estate. From this amount, any charitable
         The Pennsylvania inheritance tax               bequests are deducted to determine the net
return consists of these schedules:                     value subject to tax. The estate determines
                                                        the portion of the net value subject to tax at
Identifying information, recapitulation, and            the 0, 4.5 and 12 percent rates; the
tax calculation                                         remainder of the net value is subject to tax at
Schedule A -                                            the 15 percent rate. Each of these figures is
       real estate                                      then multiplied by the respective tax rate and
Schedule B -                                            totaled to yield principal tax due. From this,
       stocks and bonds                                 total prior tax payments plus allowed
Schedule C -                                            discounts are deducted to determine the
       closely-held corporate stock and                 balance due to the register of wills, which is
       partnerships interest                            paid when the return is filed. An estate that
Schedule C-1 -                                          includes among its assets a small business
       closely-held corporate stock                     interest may elect to pay the inheritance tax
       information                                      applicable to this interest in installments, as
Schedule C-2 -                                          provided in the inheritance tax law.
       partnership information report                           Various documents are needed when
Schedule D -                                            preparing the schedules of the Pennsylvania
       mortgages and notes receivable                   inheritance tax return. Copies of documents
Schedule E -                                            submitted with the return generally include
       cash and miscellaneous personal                  bank statements, appraisal reports, stock
       property                                         value statements, and a statement of
Schedule F -                                            remaining balance due. If information of this
       jointly-owned property                           type is not attached, the Department of Rev-
Schedule G -                                            enue may request it, and the appraisement of
       inter-vivos transfers and                        the return (explained below) will be delayed.
       miscellaneous non-probate property                       After the return is filed, the
Schedule H -                                            Department of Revenue reviews it and issues
       funeral expenses, administrative costs           a notice of appraisement that is its own
Schedule I -                                            valuation of estate assets, allowable
       debts of deceased, mortgages, and                deductions, and inheritance tax due. If the
       liens                                            figures agree with those submitted by the
Schedule J -                                            estate and the tax is paid, the estate has met

its    obligation     to  pay    Pennsylvania's          •    Taxes on property that passes under a
inheritance tax. If the figures do not agree,                 trust created during the deceased's
the differences should be identified and                      lifetime and that is not part of the residue
resolved between the estate and the                           of the trust are paid out of the residue of
Department of Revenue as soon as possible                     the trust.
in order to minimize additional expense.                 •    In other cases, the liability for the
         Objections to the appraisement may                   payment of inheritance tax rests upon the
be filed. A taxpayer or any party in interest                 person who receives the property.
who is not satisfied with the appraisement,
allowance or disallowance of a deduction,                    A willful failure to file a return results in
assessment of tax, or any other matter                   liability for the personal representative, or the
relating to the inheritance tax, may object. An          person receiving the property if such person
objection is initiated by taking any of the              is obligated to pay the inheritance tax. In
following actions within sixty days of receipt of        addition, a penalty of 25 percent of the tax
the notice to which objection is made:                   ultimately due or $1,000, whichever is less,
• Filing a written protest with the                      may be charged. Interest on the delinquent
     Department of Revenue Board of                      tax amount will be charged from the day after
     Appeals. The protest should specify all             the tax becomes delinquent and will be
     objections.                                         calculated at the fluctuating rate provided in
• Notifying the register of wills in writing that        state law.
     the objecting party elects to have the
     issue decided at the audit of the personal                                  The federal estate tax
     representative (explained below).                                           is different in many
                                                             Of Federal
• Filing an appeal to the orphans' court                                         respects from the state
     division to have the objection determined               Estate Tax          inheritance tax, but it is
     at the audit of the account of the personal             Returns             a tax which many
     representative, or at a time fixed by the                                   estates do not face. If
     court.                                                                      an estate does not
                                                         include property equal to or greater than the
                            A deceased's will            amount equivalent to the unified credit
    Payment of              may      specify   a         available to the estate, the personal
    Pennsylvania            source     for   the         representative of the estate need not file a
    Inheritance             payment of taxes,            federal estate tax return. An estate that
    Taxes                   but in the absence           qualifies for the entire unified credit need not
                            of such instructions         file a federal estate tax return unless the
                            the following rules          gross estate exceeds $675,000 (For 2000).
                            apply:                       An earlier discussion highlighted the rules for
•    Taxes for specific bequests and devises             calculating the gross estate in a given
     in a will are paid from property that               situation. These rules may differ from those
     passes under the residuary clause of the            applied in a Pennsylvania inheritance tax
     will. This clause provides for the transfer         situation. It is likely that the amount of
     of all property not specifically given to           property subject to inheritance tax will differ
     someone.                                            from the amount of property that is included
•    Taxes on transfers for a limited time, such         in the decedent's federal gross estate.
     as life estates or transfers for a specific                 When a return must be filed, specific
     number of years, are paid out of the                information is gathered and presented on the
     assets that form the life estate.                   various schedules of the return.
•    Taxes on property that specifically passes                  The federal estate tax return, form
     to a trust and is not part of the residuary         706, consists of these schedules:
     clause of the will are paid from the
     property that passes under the residuary            Identifying  information            and       tax
     clause.                                             computation.

Elections by executor and general                               In addition to these forms, it is
information.                                            necessary to file a certified copy of the will, an
Recapitulation.                                         original death certificate, evidence of payment
Schedule A –                                            of state death taxes, and copies of any trust
       real estate                                      agreements and power of appointment
Schedule A-1 –                                          documents.       To assist in processing the
       Section 2032A valuation                          return, the estate should attach copies of
Schedule B –                                            documents for appraisal of property, life
       stocks and bonds                                 insurance statements, and statements to
Schedule C –                                            support the contribution of a surviving joint
       mortgages, notes, and cash                       tenant. The nature of the decedent's property
Schedule D –                                            will determine the need for additional
       insurance on the decedent's life                 information.
Schedule E –                                                    In calculating the federal estate tax
       jointly owned property                           due, a value for the total gross estate is
Schedule F –                                            calculated. From that amount, the allowable
       other miscellaneous property                     deductions are subtracted to yield taxable
Schedule G –                                            estate. Adjusted taxable gifts made by the
       transfers during life                            deceased after December 31, 1976, are
                                                        added to the total gross estate. To this
Schedule H –
                                                        combined figure, the tax rate schedule is
       powers of appointment
                                                        applied to calculate a tentative tax. Total gift
Schedule I –
                                                        taxes payable on gifts by the deceased after
                                                        December 31, 1976, are added to yield gross
Schedule J –
                                                        estate tax due. To this amount, the allowable
       funeral and administration expenses
                                                        unified credit, credit for state death taxes, and
Schedule K –
                                                        other credits are applied to determine the
       debts of the decedent
                                                        balance due on the federal estate tax.
Schedule L –                                                    The federal estate tax is due nine
       net losses during administration and             months after the date of the decedent's death
       expenses incurred in administering               unless an extension is granted or the estate
       property not subject to claims                   elects to pay the tax in installments as
Schedule M –                                            provided in the Internal Revenue Code. This
       bequests to surviving spouse                     installment payment option is available to
Schedule O –                                            estates that include among their assets an
       charitable, public, and similar gifts and        interest in a closely held business and that
       bequests                                         meet the requirements of the code. The
Schedule P –                                            return is filed with the district director of the
       credit for foreign death taxes                   Internal Revenue Service or the Internal
Schedule Q –                                            Revenue Service Center for the state where
       credit for tax on prior transfers                the decedent was domiciled at the time of
Schedule R –                                            death.
       generation skipping transfer tax                         Upon receipt, the return will be
Schedule R-1 –                                          reviewed by the IRS. If additional information
       generation skipping transfer tax                 is needed to complete its review, the IRS may
       payment voucher                                  schedule a further examination of the return.
Schedule T –                                            This examination could be conducted in an
       qualified     family-owned       business        IRS district office or in the office of the
       interest deduction                               taxpayer or his or her representative.
Schedule U –                                            Occasionally, an examination may be con-
       qualified     conservation      easement         ducted by correspondence when it is
       exclusion                                        necessary to verify a particular item. The
                                                        result of this examination could be either to

accept the return as filed or to determine that           extension of the time to pay, interest on the
tax liability was understated or overstated. If           amount of the tax will continue to accumulate.
tax liability is found to be understated, this                    If the taxpayer does not pay the tax
results in a deficiency (extra tax) that must be          shown to be due on the return and cannot
paid by the taxpayer. If tax liability is found to        show reasonable cause to grant an
be overstated, the overpayment of taxes is                extension, a penalty will be charged. This
refunded.                                                 penalty is equal to one-half percent of the tax
         In the next step, the taxpayer and               due plus an additional one-half percent for
examiner either reach an agreement as to the              each month or fraction over one month that
return and tax due or proceed to resolve the              the tax is not paid. But the penalty will not
disagreement. If the parties cannot agree                 exceed a total of 25 percent added to the
after the examination, a detailed procedure is            amount of tax required to be shown on the
initiated that involves various administrative            return.
reviews and opportunities for both parties to                     If the taxpayer fails to file a required
review the facts and determine the application            return by the due date, a penalty of 5 percent
of the tax laws to these facts. Specific                  of the tax due plus an additional 5 percent for
questions about this procedure should be                  each month or fraction over one month that
directed to attorneys or other professionals              the return is not filed is added, but the penalty
who are familiar with it.                                 will not exceed 25 percent of the tax due. If
         If the values claimed on an estate tax           the failure to file was due to a reasonable
return are less than the correct value, a                 cause, the penalty will not apply.
special penalty for undervaluation may be
applicable.                                                                     A deceased's will may
         The initial penalty is 20 percent of an              Payment           direct the apportionment
underpayment of tax that is attributable to a                 Of Federal        of federal estate tax
substantial estate or gift tax understatement.                Estate            among the beneficiaries
The initial penalty will not apply if the                     Taxes             of the estate. In the
underpayment          attributable      to     the                              absence        of        such
understatement is less than $5,000.              A                              instructions, the following
substantial estate or gift tax valuation                                        rules apply:
understatement occurs when the value of the               •    On specific bequests and devises in a will,
property claimed on the estate or gift tax                     the tax is paid from the property that
return is 50 percent or less of the amount                     passes under the residuary clause of the
determined to be correct.          If the under-               will.
statement of valuation is 25 percent or less of           •    On property that passes under a trust
the correct value of the property, the                         created during a decedent’s lifetime and
understatement is considered a gross                           that is not part of the residue of the trust,
valuation misstatement and the penalty is                      tax is paid out of the residue of the trust.
doubled to 40 percent of the underpayment.                •    No federal estate tax is apportioned to
         If an underpayment is the result of                   property that passes to a beneficiary and
fraud, a penalty equal to 75% of the                           qualifies as a charitable or marital
underpayment is added to the tax.                              deduction, including a spouse's elective
         The     personal     representative is                share that qualifies for the marital
responsible for the payment of the federal                     deduction.
estate tax. This payment is made when the                 •    The unified credit, the credit for tax on
return is filed. An extension of time to file the              prior transfers, and the credit for gift taxes
return does not extend the time for payment.                   paid by the deceased on gifts made by
A separate request for an extension of time to                 the deceased before January 1, 1977,
pay the estate tax must be filed and will be                   benefit all parties who pay federal estate
granted only if the taxpayer can show                          taxes. If a party pays one-fourth of the
reasonable cause to grant the request.                         tax, one-fourth of the credits will be
During the time that the estate is granted an                  applied to that person's tax.

•    Additional estate tax due when a qualified           be filed before the scheduled date for the
     heir disposes of qualified real property             court audit. Examples of objections include
     that has been specially valued is                    those made by creditors whose claims will not
     apportioned against the qualified heir.              be paid or heirs who feel they are entitled to
•    Any     interest   and    penalties     are          more than the proposed distribution. Other
     apportioned in the same manner as the                objections may relate to the personal
     principal amount of the federal estate tax,          representative's fee, if any, or to inheritance
     unless a court finds it would be                     tax      questions      concerning      allowable
     inequitable to do so.                                deductions or tax calculations that can be
                                                          decided at the audit. Other objections look to
                          After all tax issues            the propriety of making a particular disburse-
    Preparation           have been resolved,             ment. At the audit, the court reviews the
    Of Account,           and when necessary,             accounting and offers those who object the
    Schedule of           property has been               opportunity to raise their complaints. After all
    Distribution,         sold, the personal              complaints      are resolved,       usually by
    Audit                 representative is ready         scheduling a separate hearing, the court
                          to prepare the estate           orders the personal representative to make
                          account. This account           distribution as the court directs.
                          is     a       complete                  An important aspect of court ordered
statement of receipts and disbursements                   distribution is protection given to the personal
affecting the estate’s assets. Each item of               representative. Without the protection of this
property is listed at its value as of the date the        order, the personal representative risks being
personal representative received it. If the               personally liable for any distribution later
property was sold during the administration,              found to be improper.
the account will show the sale and the net                         A second aspect of the court ordered
proceeds after expenses are deducted. Any                 distribution affects the rights of creditors.
interest earned by the estate will be itemized.           Having been given notice of the proceedings
Payments        made       by    the     personal         and an opportunity to participate in these
representative are itemized by date, and                  proceedings, creditors not appearing at the
listed with the name of the person who                    hearing will lose their right to collect debts
received the payment and the purpose for                  from the estate. The notice given to creditors
which the payment was made.                               when the estate is opened and the notice
        The personal representative files a               given with the filing of the account are
complete account with the register of wills of            important actions.
the county where the will is filed and sends                       In some situations, the estate does
notice of the filing to every unpaid claimant             not have sufficient assets to pay its debts and
that has given written notice to the personal             its beneficiaries in the full amount specified in
representative. This notice is also sent to               the will. In such cases, either the will or a
every other person known to the personal                  state statute will set forth a priority order for
representative to have a claim or an interest             payment of the beneficiaries.
in the estate as either creditor, beneficiary,                     If the assets of the estate are
heir, or next of kin. The notice states the               insufficient to pay all claims against the
date, time, and place for auditing the account            estate, the estate is insolvent. The personal
by the local orphans' court division. It will             representative must determine whether any of
state the last day to file objections to the              the claims have a priority such as payments
account.                                                  due to the federal government. After these
        The schedule of proposed distribution             claims are paid, another priority list applies for
is the personal representative's proposal for             all other claims against the estate. In paying
distributing all funds or other property                  claims, the personal representative goes
remaining in his or her hands. This property              through the list and pays each level in full with
could consist of the original estate as stated            available funds, until the funds are used.
above. Objections to such distributions must

                        An alternative method              initiate action on the claim. For example, if a
 Family                 of accomplishing the               person has a claim against another person
 Settlement             account and distribution           and the statue of limitations requires action
 Agreement              is to do so by a family            on that claim before January 1, 1998, the
                        agreement. Under a                 other persons' death on December 1, 1997,
                        family agreement, the              will give the claimant until November 30,
personal representative prepares a statement               1998, to act on the claim and still satisfy the
of all financial transactions in which the rep-            statute of limitations.
resentative was involved. The information                           Therefore, a creditor who does not
provided in this form can be less than or                  sign a family settlement agreement must
equal in detail to the account filed with and              submit his or her claim to the personal
audited by the court.           A more detailed            representative of the deceased's estate within
disclosure and report will provide the personal            the statute of limitations period or the claim
representative with more protection than a                 will be barred. Because notice is given at the
sketchy or incomplete disclosure.                          time an estate is opened, most claims will be
         A proposed schedule of asset                      submitted promptly. Occasionally a creditor
distribution is prepared. Each heir to the                 is unaware of the death and takes no action
estate, each claimant who has notified the                 to collect on a debt. When the creditor finally
estate, and any other party in interest who is             acts, the timing of that action is crucial in
known to the representative is then asked to               determining the estate's responsibility to pay
agree with the accounting and proposed                     the claim.          Many family settlement
distribution. If all of these people can agree             agreements address this possibility by
on the information, the agreement is executed              describing a way to handle such cases and
by all parties, and a copy of it is filed with the         pay such claims.
clerk of the orphans' court division for future
reference. If the parties cannot agree on                                          When distribution of
these matters, the formal procedure is
                                                            Receipt                estate assets is made,
followed.                                                   And Release            the      representative
         In a situation in which a formal court                                    frequently asks the
audit is not held, the rights of creditors who                                     creditor or beneficiary
are not party to the agreement may become                  to execute a receipt for the payment or
an issue. The time at which the claimant                   transfer of property and a release of liability.
raises the issue of a debt becomes a crucial               The personal representative has a special
factor.                                                    legal obligation to the heirs and creditors of
         Generally, when a creditor has a                  the estate. Such receipts and releases are
judgment lien on a person’s property and the               the personal representative’s way of providing
owner of the property dies, the lien is not                a record of his or her efforts to satisfy this
affected by the owner’s death. The lien                    obligation. The record will be useful to the
continues for the balance of its recorded life             representative if a future question arises
of five years or for at least one year after the           concerning distribution of the estate.
owner's death, whichever period is longer. At                                     At this point, the end of
the end of this period, the judgment lien can                The                  estate administration is
be revived as any other judgment lien may be                 Final                nearing. The personal
revived for an additional period of time.                                         representative       may
         If a person has a claim against
                                                             Steps                want to be certain that
someone who dies before the claimant takes                                        all estate checks have
action on the claim, the claimant has the                                         been paid by the local
balance of time assigned by the original                                          bank, that all bank
statute of limitations to initiate suit against the        accounts have been closed, that all bonds
deceased's estate. If the original statute of              have been cancelled, and that all outstanding
limitations expires within one year after the              matters have been resolved. Copies of
deceased's death, the claimant is given at                 various estate documents, such as the
least one year after the deceased's death to               inventory, accounting, or proposed schedule

of distribution, can be provided to the heirs for
their personal records. The papers filed in
the office of the register of wills and the office
of the clerk of the orphan's court are public
records available for review during normal
courthouse hours.


         Settlement of an estate can require a
fairly long period of time. However, there is no
standard or stipulated period of time for
completion of the process of estate
administration.       Each estate must be
considered individually. Some factors affect-
ing estate settlement are the need to sell
property, the tax situation, and the resolution
of disputes among the estate and its
creditors, its debtors, and other responsible
         The estate settlement process is very
detailed, and the personal representative has
many obligations. Often the personal
representative selects an attorney to advise
and represent the representative and to
handle legal matters.         While hiring an
attorney can remove much of the burden from
the      representative's    shoulders,     final
responsibility for these actions and potential
liability rests with the representative.
Therefore, a representative should work
closely with legal counsel and participate in all
matters affecting the estate. This close work-
ing relationship will benefit both the estate
and the personal representative.


A.   If a spouse survives the decedent, the share of the surviving spouse depends on the
     following circumstances.
     1. If no children, grandchildren, (etc.) or parents of the deceased survive, then the surviving
         spouse receives the entire estate.
     2. If there is a surviving child or children of the deceased and the surviving spouse; a
         surviving grandchild or grandchildren of the deceased and the surviving spouse; or a
         surviving parent or parents of the deceased; then the surviving spouse receives the first
         $30,000 of the estate plus one-half of the remaining estate balance.
     3. If one or more surviving children or grandchildren are not children or grandchildren of the
         deceased and the surviving spouse, then the surviving spouse receives one-half of the
         entire estate.

B.   If children and/or grandchildren of the decedent survive, then whatever share is not
     distributed to the surviving spouse (i.e., one-half of the remaining estate balance, as
     described above), or one-half of the entire estate as described above, is distributed to
     the children and grandchildren of the deceased.
     1. If all children of the deceased survive, per capita distribution is made among the children
         (equal amount to each child).
     2. If some children of the deceased died before their parent, but were survived by children of
         their own (i.e., grandchildren of the decedent), these grandchildren will take the share that
         their parent would have taken had the parent been living. The grandchildren will take an
         equal share of this amount.

C.   If no children or grandchildren survive, then to the parent(s) of the deceased.
     1. If both survive, they take as tenants by the entireties.
     2. If only one survives, to that person individually.

D.   If no parents of the deceased survive, then to the deceased’s brothers, sisters,
     nephews, nieces, grandnephews, or grandnieces.
     1. If all brothers or sisters survive, per capita distribution is made to them.
     2. If some of the brothers or sisters die before the deceased but are survived by children
         (nephews, nieces of the deceased) or grandchildren (grandnephews, grandnieces of the
         deceased), then the share which would have passed to the deceased's brother or sister
         will pass to their children or grandchildren and be divided equally among them.

E.   If no brothers, sisters, nephews, nieces, grandnephews, or grandnieces of the
     deceased survive, then to the deceased’s grandparents.
     1. If one or both of the maternal and paternal grandparents of the deceased survive, one-half
         of the estate is distributed to each grandparent(s).
     2. If one of either the maternal or paternal grandparents survive and neither of the other
         grandparents nor any of their children or grandchildren survive (aunts, uncles, and cousins
         of the deceased), the entire estate is distributed to the surviving grandparent. If an aunt,
         uncle, or cousin of the deceased from the other side of the family survives, then one-half
         of the estate will be distributed to such aunts, uncles, and cousins and distributed equally
         among the surviving aunts and uncles and the children of any deceased aunts or uncles
         who survive the decedent.

F.   If no grandparents of the deceased survive, then to uncles, aunts, and cousins of the

     1. If all aunts and uncles of the deceased survive, per capita distribution is made to each of
     2. If one or more has died before the deceased and is survived by children (cousins of the
        deceased), the cousins will share equally in the share their deceased parent would have
     3. If all aunts and uncles of the deceased die before the deceased, but are survived by their
        (cousins of the deceased), the estate will be divided among the cousins per capita.

G.   If no cousins of the deceased survive, but one or more cousin has a child or children
     who survives the deceased and no other relatives with a closer relationship survive the
     deceased, the estate will be divided among the children of the cousins per capita.

H.   If no children of cousins survive the deceased, the entire estate passes to the
     Commonwealth of Pennsylvania.

Note: In order to be entitled to receive the share that the intestate law designates, each
beneficiary, including a surviving spouse, must survive the decedent by at least five days.
This requirement will not be applied, however, if the result of applying it would be to have
the property pass to the Commonwealth as described in paragraph H, above.


Action - As used in the term "maintain an action," action refers to a lawsuit brought in court. It is a
formal complaint against someone that a court is asked to decide.

Capitalization - A method of calculating the value of an item by referring to the income it generates
over a period of time. For example, if a rental property generates $10,000 a year in income and
investors generally invest their funds to get a 10 percent return, $10,000 of income is generated by
property that is worth $100,000. As a method of determining value, capitalization is only one
method among several.

Closely held business - A business that has few owners, whether it is a proprietorship (one
owner), a partnership (two or more partners), or a corporation (one or more shareholders). Many
closely held businesses are owned by members of the same family, and ownership can be limited
to only such people.

Devise, bequeath - These two words are commonly used in a will to express the intention to
transfer property to someone after the owner's death. Devise is the act of giving real property and
bequeath is the act of giving personal property to someone after the owner's death. A devise is the
real property received by the beneficiary. A bequest is the personal property received by the

Distribution in kind - A transfer of property in its present form or, as is. If an estate that owns a
building gives the building to the heirs, the building is distributed in kind to the heirs. If the estate
sells the building and distributes cash to the heirs, this is not a distribution in kind.

Estate administration process - The steps taken by the personal representative of an estate to
fulfill the terms of a will or the intestate law by distributing estate property to the proper party(ies)
and to fulfill other requirements by paying the required estate or inheritance tax.

Guardian - A person or institution that acts on behalf of a person who is unable to act because of
sickness, injury age, or disease. The guardian is responsible to the person for any action that the
guardian takes.

Levels of distribution - The intestate law determines the heirs of a person who dies without a valid
will and the amount of property that the heirs will receive. Under the Pennsylvania intestate law,
this order is established for distributing property: spouse, children, grandchildren, parents, brothers,
sisters, nephews, nieces, grandnephews, grandnieces, grandparents, uncles, aunts, cousins, and
children of cousins. The law determines at which point full distribution of estate property is made.

Probate Process – The court process that determines the validity of a will. This term often is used
to include all matters and proceedings involved with settlement of an estate.

Residuary estate – The portion of estate property that remains after specific devises or bequests
have been made in a will and debts and expenses have been paid by the estate.

Spouse’s right to elect against the will – The right granted to a surviving spouse to elect to take
a statutory share of the deceased spouse’s estate rather than the share provided for the surviving
spouse in the deceased’s will. This right can be waived or forfeited by the surviving spouse.

If you would like a copy of the publication that includes annotated references to state and
federal laws, please contact John C. Becker: 207-C Armsby Building, The Pennsylvania
State University, University Park, PA 16802, e-mail:

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