Articles & Blog

IRA Rollovers

When a decedent dies owning an IRA and the beneficiary is the surviving spouse, the surviving spouse has the option to rollover the IRA into his or her own IRA or remain as the beneficiary on the decedent’s IRA. A rollover can be done by redesignating the account in the name of the surviving spouse as owner, or the surviving spouse makes a contribution to that account which results in a deemed election, or the surviving spouse fails to take a minimum distribution which would cause a deemed election.
There are a couple of issues to review. If the surviving spouse does not need the distributions then a rollover is preferable as the surviving spouse would then be the owner. As a result the Uniform Lifetime Table would be utilized to determine the owner’s minimum distribution and this would cause the minimum distribution to be lower and therefore result in less income tax for the owner. However, if the surviving spouse remains as the beneficiary of the decedent’s IRA and it does not rollover to become the owner of the IRA, then that scenario would cause the Single Life Table to be utilized to determine the minimum distribution. This would cause a higher distribution under the minimum distribution rules and thus more income taxes.
Also, as owner after a rollover, the surviving spouse can name the beneficiary of his or her IRA upon his or her death and this could stretch out a longer life expectancy for minimum distribution purposes; otherwise if the surviving spouse was the beneficiary and not the owner the minimum distribution would continue with his or her single life expectancy which would in most cases be shorter.
Either route would not cause a creditor issue since under Pennsylvania law IRAs are exempt from creditors excepting for non-rollover contributions in excess of $15,000. 42 PA. C. S. section 8124 (B) (1) (ix) (B) and (C) ; Industrial Valley Bank and Trust Company v. Rosenfield, 37 D&C 3d 621; Marine Midland Bank v. Surfbelt Inc., 532 F. Supp.

Pennsylvania Taxation of Trusts

The federal government taxes the grantor or creator of a trust regarding the income of a “grantor trust”. This is the law under sections 671-679 of the Internal Revenue Code which provides in part that a “grantor trust” is a trust where the grantor has any of the following interests in a trust that the grantor created: a reversionary interest, a power to control, a power to revoke, certain administrative powers such as borrowing or transferring assets of equivalent value, or receive income from the trust.

Because the grantor (or creator) is taxed on trust income under federal law does not necessarily mean that such income would be taxed to a grantor under Pennsylvania income tax law. Prior to the Pennsylvania McNeil decision of May 2013 ( 67A.3rd 185 (Commw. Ct. 2013)) if the Pennsylvania resident created a trust then all of the income of the trust would be taxed to such grantor of that trust under Pennsylvania income tax law (72 P.S. 7302). However, the Commonwealth Court held in McNeil that Pennsylvania could not tax the creator of a trust on the trust income solely because the creator was a Pennsylvania resident. Rather a four-pronged approach is necessary to determine whether Pennsylvania could tax the trust. The Court relied on the United States Supreme Court decision of Complete Auto Transit vs. Brady (430 US 274 (1977)). That case established a four-prong test which provided whether states have enough nexus to have the ability to tax trusts. These four prongs are in summary: (1) if the taxpayer had a substantial connection to the state; (2) is there fair apportionment; (3) relation to the benefits being conferred by the state; and (4) nondiscrimination against interstate commerce. The Court in McNeil decided that the facts of the case do not meet the required nexus and for Pennsylvania to tax the grantor based on the mere residency of the grantor would be unconstitutional.

2015 Tax Benefits Inflation Adjustments-Estate Planning

For tax year 2015, the Internal Revenue Service announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these annual adjustments.

The tax items for tax year 2015 of greatest interest to most estate planners include the following dollar amounts -

  • Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.
  • For 2015, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.
  • The annual exclusion for gifts remains at $14,000 for 2015.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2014-61, which will be published in Internal Revenue Bulletin 2014-47 on Nov. 17, 2013. The pension limitations for 2015 were announced on Oct. 23, 2014.


The applicable exclusion or exemption from federal estate and gift taxes will be $5,430,000 for transfers in 2015 (increased from $5,340,000 for transfers in 2014), and it is portable between spouses. Therefore when the first spouse dies the surviving spouse may claim the unused amount of the exclusion of the decedent. It is necessary that the surviving spouse file a certain election contained in Form 706 to obtain this unused exclusion . As a result the surviving spouse may utilize the unused portion of the unused exclusion of the decedent during the life of the surviving spouse as gifts or upon the death of the surviving spouse against the estate tax along with the unused amount of the surviving spouse. Thus, if no credits were utilized by the decedent or the surviving spouse in 2015, the total amount of unused exclusions would be $10,860,000 for use by the surviving spouse against gifts or upon the death.
The generation-skipping tax also allows for an exemption. The Generation-skipping tax exemption is also an amount equal to the federal estate tax exemption. In 2015, the exemption will be $5,430,000 but it is not portable. So when the first spouse dies, if he or she has any unused generation-skipping tax exemption the surviving spouse cannot use such exemptions. However, the generation-skipping tax allows the estate of the decedent to elect to apply the remaining generation-skipping tax exemption to a trust to avoid the generation-skipping tax when either a taxable distribution or a taxable termination occurs which triggers a generation-skipping tax. This election is known as the Reverse Q-tip trust. It is elected on Schedule R the Federal Estate Tax Return 706.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) has its origin in the 1969 Tax Reform Act.  It was originally enacted as a minimum tax which was in addition to the regular income tax. Over the years the AMT has changed and has become a more involved concept.  The AMT, when imposed, is paid instead of regular income tax and it is no longer in addition to the regular income tax. Estates and trusts are subject to the AMT.  However, flow-through companies such as partnership and S corporations are generally not subject to the AMT since income passes through the entity to their owners together with credits and deductions.

Adjustments are necessary made when computing the AMT on Schedule I of IRS form1041 for estates and trusts. Such adjustments include but are not limited to adjustments for interest, real estate taxes, state and local taxes, depletion, net operating loss, and depreciation. There is an exemption for estates and trusts.  For 2013, the exemption is $23,500.00. The AMT exemption was subject to criticism since it had not been adjusted for inflation even though regular income tax thresholds have increased.  However, as of 2013 AMT exemptions now adjust for inflation.

The AMT has also been criticized and being totally unfair.  Some believe that the AMT serves as a de facto elimination of certain social and fiscal incentives which are extended through tax exemptions, credits, and deductions.

Estate and Trust Tax Deductions

In May of this year the US Treasury Department issued final regulations under section 67 of the IRC. These final regulations provide guidance regarding which expenses incurred by an estate or trust (non grantor trust) are subject to the 2% floor. Thus only amounts greater than 2% of adjusted gross income are deductible.

Expenses paid by an estate or trust (non grantor trust) for administration that would not have been incurred if the asset were not held by an estate or trust are deductible in full; for example, expenses such as executor fees, trustee fees, estate or trust legal fees, costs to prepare estate tax returns and fiduciary returns.

However, miscellaneous expenses incurred by an estate or trust (non grantor trust) are subject to the 2% floor if such expenses would be incurred by an individual owning the same property. Examples are expenses customarily paid by an individual owning property such as maintenance services, auto registration, and investment advisory fees. These costs if incurred by an estate or trust (non grantor trust) are subject to the 2% floor since such costs would also have been incurred by an individual owner.

Distributable Net Income

Chapter J of the Internal Revenue Code provides a mechanism to allow an estate or trust to be a taxable entity or a pass through entity, or a combination of both. Whereas a “C” corporation is a taxable entity and causes a double tax; once at the corporate level, and a second time at the shareholder level upon dividend distributions. Conversely, both an “S” corporation and a partnership are pass-through entities and report to the government who the shareholder or partner is to pay the tax. The concept or mechanism to allow the trust or estate to be a pass-through entity is the Distributable Net Income concept. Currently, it may be wise to treat the trust or estate as a taxable entity with respect to the first $12,150 of income, as it may be taxed at a lower rate than at the beneficiaries rate. Any amount of income above that amount of $12,150 immediately jumps to the 39% bracket in the trust or estate entity, and any income above that amount will also incur the 3.8% net investment income tax, and possibly higher capital gains tax rates at the trust or estate level. Therefore, when advising and /or filing an estate or trust tax return, one must thoroughly study and understand this concept and apply it accordingly.

Removal of Trustee

A well-written opinion from the Philadelphia Court of Common Pleas, Orphans Court Division was issued August 18, 2014, regarding removal of trustee (Edward Winslow Taylor, Inter vivos Trust, O.C. 3563 IV of 1939). The governing instrument provided that if the trustee resigned the settlor, if alive and able, may appoint a new trustee, and in the alternative the beneficiary may appoint the trustee.

The beneficiaries proposed to change that section of the governing instrument to allow the income beneficiaries, from time to time and without cause, to remove the corporate trustee and substitute another. The beneficiaries invoked section 7740.1 (general provisions for modification) of the Pennsylvania Estates and Fiduciaries Code (PEF) which provides that if not all the beneficiaries consent to a proposed modification of the trust that the modification may be approved by the court if the court is satisfied that if all the beneficiaries had consented the trust could be modified, and the interest of the beneficiary that did not consent will be adequately protected. The beneficiaries also cited the McKinney trust case (as discussed in our blog a couple weeks ago), but did not raise section 7766 of the PEF Code (specific provisions for removal of a trustee). The corporate trustee argued that section 7766 of the PEF Code was the proper statute to utilize as it specifically deals with the removal of trustee and provides that a beneficiary may request the court to remove the trustee under certain conditions.

The court reviewed the numerous factors that the Superior Court in the case of McKinney outlined for a court to analyze under section 7766, and concluded that the beneficiaries proposed none of those factors for review. The court further concluded that whenever a general provision in a statute is in conflict with a specific provision in a statute, then the specific statute shall prevail and be construed as an exception to the general provision (1 Pennsylvania, CSA, 1933).

The court denied the proposed modification of the beneficiaries.


On September 4 of last week, FCC Chairman Tom Wheeler expressed his concern that there is a lack of high-speed connections for most of rural America. He stated that “three quarters of American homes have no competitive choice for essential infrastructure for 21st century economics and democracy included in that is almost 20% will have no service at all.” He further stated the lack of competition “forced imposition of strict government regulations in telecommunications.” He prefers a competitive market with less regulation rather than the heavy regulation of monopolies which stifles competition. Tom Wheeler went on to say that his goal is not to criticize, but “to recognize that meaningful competition for high-speed wired broadband is lacking and Americans need more competitive choices for faster, better Internet connections, both to take advantage of today’s new services and to incentivize the development of tomorrow’s innovations”. Attorney Virginia Metallo, formerly of Clarks Summit, Pa., works on some of these matters at the FCC.

Removal of Trustee

The Superior Court of Pennsylvania decided the McKinney case regarding a removal of a corporate trustee (67 A3d 824, May 2013). The facts were that the family members moved to another state and the original corporate trustee changed six times through bank mergers. There existed the same personnel throughout the bank mergers except upon the last merger there was a change in personnel and the new individuals were “ineffective and unresponsive.”. Also, the family moved to another state and the newest merger only had a trust office in a different part of the state. Also, the proposed new corporate trustee served four other family trusts. The Court reviewed the facts in conjunction with section 7766 of the Pennsylvania Uniform Trust Code, which provides that a court may remove a trustee if it finds that it is in the best interest of the beneficiaries and not inconsistent with the material purpose of the trust, and that there is a suitable new trustee available and that there has been a substantial change of circumstances. The statute also provides that a corporate reorganization, including a merger is not itself a substantial change in circumstances. However, the Court found that the removal of the trustee was in the best interest of the beneficiaries and the removal was not inconsistent with the material purposes of the trust and there was a suitable new trustee and there existed a substantial change in circumstances as described above.