At first glance it might seem that Transfer On Death (TOD) Accounts (which may also be referred to as Payable On Death (POD) Accounts) should be the answer to an estate planner’s dreams. The idea is that the owner holds the account during lifetime but designates one or more beneficiaries to receive the balance to his/her beneficiary/ies at death. What could be simpler than that? It might work that way or almost so for out of state estates but in Pennsylvania there looms another major issue – the Pennsylvania Inheritance Tax. TOD/POD accounts are still taxable for Pennsylvania Inheritance Tax purposes. Who is going to pay? How does the beneficiary or executor know how much? Can the individual or the estate take deductions? Are there forms to be completed? Will the Pennsylvania Inheritance Tax Bureau send notices? And so on.
As I frequently explain, other states may have an estate tax that kicks in for substantial estates over a given number of millions of dollars. They might exempt children or grandchildren or only tax over a given amount. The Pennsylvania inheritance tax is different. It applies to inheritances basically from dollar one unless the named asset, such as life insurance, is excluded or unless a beneficiary, such as your spouse, is “taxed” at zero percent.
Jointly held regular bank accounts may result in notices being received from the Pennsylvania Department of Revenue indicating that tax may be owed on 50% of regular accounts but what happens when millions of dollars are held in TOD investment accounts? You might have placed all of your investments with an investment adviser out of state who never heard of the Pennsylvania Inheritance Tax and would not realize its relevance for TOD beneficiaries. The account is still taxable on death if you, the owner, are a Pennsylvania resident at that time. The US is very state specific when it comes to administering estates. Rules for other states may have little or no known relevance to a Pennsylvania estate.
So, if you are a Pennsylvania executor or an estates attorney handling Pennsylvania estates how should you handle estates that need to declare TOD assets and how should the tax bill be paid? The Executor is responsible for filing the final Pennsylvania Inheritance Tax Return and declaring assets including TOD assets and for assuring that taxes have been paid before closing the estate. Strictly speaking, if the Executor pays the Inheritance Tax from assets of the estate then he/she has the right to request/demand repayment of the proportionate tax payment to come back into the estate for distribution. There are other strategies that can be anticipated to pay the tax after death but before distribution if realized in advance.
Full Disclosure Can Be Done When Planning the Estate
During the planning phase while parents are still living it can be immensely helpful to disclose all assets that can be inherited. One asset or type of asset could change the plan. Usually I am dealing with adult children inheriting an estate from their last to survive parent. Since their surviving parent had inherited at zero percent Pennsylvania Inheritance Tax some of the issues that arise on the death of a second to die parent may not become apparent. Often I hear that the executor’s spouse handled her/his parents’ estates previously and difficulties experienced. Sometimes questions arise based on that. There are answers and I would like to suggest some to make it easier in the future.
Full Disclosure. When I or another attorney requests information regarding assets and titling it is not normally to be prying into difficult or complex situations. It is to get a better indepth understanding of issues that could be raised at a later date. It is to help you and your beneficiaries know what there is, how it is or should be titled, how or whether it would be taxed and so on. It is to anticipate and handle issues in advance where possible.
Update, Update. It is not necessary to take out your Wills and Powers of Attorney every year but if there are new beneficiaries, or new kinds of assets, or if you have lost your Will or power of attorney or if executors have moved or died or the law has changed such as with digital assets it can be time to review.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.
