Articles & Blog

Deceased Spouse Unused Exclusion

In case an election to transfer decedent’s federal estate tax exclusion to surviving spouse (DSUE; portability) was not filed after 2010, recent IRS Revenue Procedure 2017-34 allows an executor to file and elect portability until the later of January 2, 2018, or 2 years after the decedent’s date of death.

Estate and Gift Tax Limits Increase

The IRS has announced that the annual gift tax exclusion for 2018 will be $15,000 per donee, up from $14,000 per donee. Also, the estate and gift tax exemption will be $5.6 million per person for 2018, and that amount is up from $5,490,000 per person. Therefore a married couple will have a total of $11,200,000 exempt from federal estate tax or gift tax.

Creditor Claiming Trust Assets

In the trust creditor case of the Clegg Trust, 6 Fiduc. 3rd pages 69-79 (O.C. Philadelphia Co. Dec. 2015) the Trust held a life insurance policy and allowed the Trustee to pay the premiums. The trust contain provisions to limit creditors from claiming trust assets of beneficiary debtors under a spendthrift clause. To avoid loss of the federal gift tax exclusion under 2503 of the Internal Revenue Code the beneficiary had a limited right of withdrawal over certain assets and the power over certain assets after the lapse of the withdrawal period under “hanging powers”. The issue was whether a creditor of a trust beneficiary could claim trust assets. The Court cited section 7741 of Title 20 of the Pennsylvania Consolidate Statutes which limits a creditor from reaching trust assets where there is a spendthrift clause. The Court stated that spendthrift trusts are not sustained for the interest of the donee, but because the donor possessed an individual right of property in the execution of the trust; it is the intent of the donor which is important. Therefore, the creditor was not entitled to claim an interest in the trust assets under the spendthrift clause. The creditor then claimed that it had a right to make a claim of the trust assets which the beneficiary had a power to withdraw which did not lapse under section 20 Pa.C.S.A.7748. However, the Court denied the claim as the Court cited the “Power of withdrawal” definition under section 7703, which provides:

“Power of withdrawal. The unrestricted power of a beneficiary acting as a beneficiary not as a trustee, to transfer to himself or herself the entire legal and beneficial interest in all or a portion of the trust property. However, a power to withdraw the greater of the amount specified in section 2041 (b)(2), 2503(b) or 2514(e) of the Internal Revenue Code of 1986, or any lesser amount determined by reference to one or more of these provisions, may not be treated as a power of withdrawal.”

The claim of the creditor was denied.

Recent Powell Case

On May 18, 2017, the Tax Court (148 T.C. No.18) decided against the taxpayer with facts that involved a deathbed transfer. Assets were transferred from decedent’s revocable trust to a family limited partnership by her son under decedent’s power of attorney. Decedent’s son became the general partner and the decedent received all of the limited shares. Decedent’s son, under the power of attorney of decedent, then transferred all the limited shares to a Charitable Lead Annuity Trust. The decedent died 7 days thereafter. Understandably the deathbed facts were terrible for the taxpayer. The Court decided to tax the assets under section 2036 (a) (1) (decedent with her son as both general partner and the agent of her power of attorney could retain enjoyment of income), and surprisingly, under 2036 (a) (2) (decedent with her son could dissolve the partnership and also with her son, the general partner and power of attorney agent, could control distributions). The Tax Court in Powell agreed with the reasoning in the Strangi case decision that Byum fiduciary requirements did not apply in Powell.

Petition for Accounting and Surcharge

In the case of Guardo vs. Buzzuro, 7 Fiduc. Rep. 3rd page 14-19 (O.C. Monroe Co.2016), the Court was presented with a Petition to Compel an Accounting and Declaratory Relief by the Petitioner against Respondent/guardian. Respondent lived with her Aunt for 4 years from September 2010 through March 2014, and handled many of her finances. Her Aunt died in July 2014. Petitioner provided an accounting provided by the estate showing unaccounted funds and missing documents. Petitioner alleged that Respondent mismanaged decedent’s money while living with decedent for approximately 4 years. Respondent responded that she did not mismanage or convert funds and she did not know she was to keep extensive records.

The Court stated that the statute provides that the agent shall file an account whenever directed to do so by the court. 20 PS 5610. The Court stated that when money is unaccounted for in an estate the court could order the funds be repaid by the fiduciary in the form of a surcharge, and the burden to prove the wrongdoing is on the party who seeks the wrongdoing, and when sufficient discrepancy appears in the record then the burden shifts to the guardian or executor. The Court stated that a fiduciary acting under a power of attorney or as a guardian or caregiver is no different than an executor in such circumstances.

During a hearing the Responded was resolute in her position that written records were unnecessary because she handled many matters in cash and did her best to care for decedent. Even though the Respondent testified that records were not kept because she had no formal training or accounting skills, “the records are so bare that they do not meet the minimum of common skill or prudence.”

The Court stated that a surcharge against a fiduciary can only be initiated by an accounting by the fiduciary in question (which is the normal pattern), and the opposing party can file objections, and the court can then determine the amount of the surcharge, if any. And of course a party can appeal. In re Smith, 2006 Pa. Super.5; In re Estate of Bechtel, 92 A. 833 (2014); In re Novosielski, 605, Pa. 508, 992 A.2d 89 (2010).

The Court concluded that evidence was produced that warrants the filing of a formal accounting while the respondent was acting as the fiduciary, and that although the respondent may not be able to do so, the respondent should be given the opportunity to make a full accounting. Therefore, the Court granted the Petition to Compel the Accounting and deferred the request for Declaratory Relief until the accounting issue is resolved.

Forfeiture of Inheritance

The Orphan’s Court Division of the Court of Common Pleas of Monroe County, Pennsylvania was presented with a Petition for Forfeiture in Jansen Estate, 6 Fiduc. Rep., 3rd, page 375-381 (O.C. Monroe Co. 2016) .

The facts were as follows: The decedent was born on November 6, 1991, and suffered complications at birth which resulted in developmental delays and cerebral palsy. Subsequently, the decedent was declared to be an incapacitated person and the Petitioner (the mother) was appointed as the sole legal Guardian of the person and the estate. As result of complications, the Petitioner instituted a medical malpractice action which resulted in monetary settlement on behalf of the decedent. Petitioner and the father of the child separated soon after the child’s birth, and subsequently the father was incarcerated in 1993 until 1997 during which time, the father provided no care for the child from the time of his incarceration until the death of the child in 2014. The Petitioner and father were the sole heirs.

Title 20 of the Pennsylvania statutes 2106 (B) provides for forfeiture as follows .

(b) Parent’s share.–Any parent who, for one year or upwards previous to the death of the parent’s minor or dependent child, has:

(1) failed to perform the duty to support the minor or dependent child or who, for one year, has deserted the minor or dependent child; or

(2) been convicted of one of the following offenses under Title 18:

section 4303 (relating to concealing death of child);

section 4304 (relating to endangering welfare of children);

section 6312 (relating to sexual abuse of children);

or an equivalent crime under Federal law or the law of another state involving his or her child; shall have no right or interest under this chapter in the real or personal estate of the minor or dependent child. The determination under paragraph (1) shall be made by the court after considering the quality, nature and extent of the parent’s contact with the child and the physical, emotional and financial support provided to the child.

The Court concluded, after reviewing credible testimony and evidence, that the father deserted child, and/or failed to perform the duty to support the child in accordance with the above statute and therefore, the Petition for Forfeiture was granted.

Estate Tax Proposals

The estate tax proposal by Hillary Clinton, the Democratic Nominee for President, is to lower the exemption from $5,450,000 (which is subject to increases with inflation) to $3,500,000, and to increase the rate of tax from 40% to 45%.

The estate tax proposal by Donald Trump, the Republican Nominee for President, is to eliminate the estate tax.

The estate tax proposal by the Obama Administration is under proposed regulations issued on August 2, 2016, which would greatly eliminate valuation discounts regarding transfers of business entities between family members. A public hearing on these regulations is scheduled for December 1, 2016.

Gun Trusts

On May 18, 2016, our Third Circuit Court of Appeals in the case of United States of America vs. One Palmetto State Armory PA; Watson Family Gun Trust , 822 F.3d 136 (May 2016), affirmed the opinion of the District Court for the Eastern District of Pennsylvania that the Second Amendment does not protect the possession of machine guns, and a trust is not exempt from the law as it is not an entity distinct from its trustees. The Court agreed with the lower Court that 18 USC section 922 (o) is not unconstitutional with respect to a band on machine guns, and trusts are not exempt from that statute.

Crummey Notices

A Crummey notice may be a single notice that can serve as a continuing notice. Such single notice is actual and sufficient notice if it timely informs the beneficiary of when the gift occurs, the size of the gift, and that the beneficiary may make a withdrawal. For further discussion regarding actual and sufficient notice see the following: PLR 9532001; PLR 8121069; Regs. Sec.25.2503-3(b); Holland, T.C. Memo.1997-302;Turner, T. C. Memo. 2011-209; Zaritsky and Leimberg, Tax Planning With Life Insurance, 5.03; Katzenstein and Sellers, Giving Crummey Notices: Best Practices; Trusts & Estates; August 2011.

Executor’s Fees

The Peters case (Orphans Court of Montour County as previously discussed in our Blog) found in favor of the personal representatives regarding the amount of their executors fees. The case was appealed to the Superior Court and the Superior Court upheld the findings of the Orphans Court (NON- PRECEDENTIAL). The Superior Court reviewed section 3537 of the Pennsylvania probate code which provides “The court shall allow such compensation to the personal representative as shall in the circumstances be reasonable and just, and may be calculate such compensation on a graduated percentage”.

The Superior Court stated that the basis for determining if the compensation is reasonable depends upon the value of the services actually rendered, and there is no requirement in the statute that the executor “keep a time log on each hour spent” on estate matters in order to justify the fee, and compensation can be charged on a percentage basis.

The Superior Court reviewed the facts as found by the lower court of the detailed extensive work and the high quality of the work of the personal representatives and the percentage utilized. The Superior Court upheld the findings of the orphans court.