Articles & Blog

Pennsylvania recent case on realty transfer tax.

On March 29, 2011, in the case of Miller vs. Commonwealth of Pennsylvania, the Commonwealth Court of Pennsylvania agreed with the Order of the three-judge panel which provided that the trust in question was a “will substitute” under the Realty Transfer Tax Act, 72 PS section 8101-C3. Therefore the transfer was properly excluded from taxation.

In this case the trust was an irrevocable trust and provided that upon the death of the Settlors the property is automatically transferred to the beneficiaries, and the Settlors could exchange and otherwise dispose of the property and may live in and enjoy the residence in question.

Section 1102–C.3(8.1) of the Realty Transfer Tax Act provides an exclusion for “A transfer for no or nominal actual consideration to a trustee of a living trust from the settlor of the living trust…”.  The Act further provides the definition of a “living trust” as “Any trust, other than a business trust, intended as a will substitute by the settlor which becomes effective during the lifetime of the settlor, but from which trust distributions cannot be made to any beneficiary other than the settlor prior to the death of the settlor.” The Commonwealth argued that the trust is not a “will substitute” because it was not a revocable trust but rather an irrevocable trust.

The three-judge panel reviewed the definition of “will substitute” in the Restatement (Third ) of Property which basically provides that the property transfers to the beneficiaries upon the death of the donors while preserving lifetime rights to the donors. The panel found that trust was a “will substitute” and that there was no transfer tax regardless that the trust was irrevocable. The Commonwealth Court agreed with the Order of the three-judge panel.

However, it is important to note that if the irrevocable trust did not allowed the Settlors to reside in and enjoy the property and have control on the sale or exchange of the property, the results would have been different and realty transfer tax would be imposed. It is also important to note that this issue of realty transfer tax is different than the law regarding death tax as such a transfer to an irrevocable trust would not be excluded from inheritance tax or federal estate tax because the settlors have the right to enjoy the property.

Leave a Reply