Timothy J. Duckworth was recently accredited to practice before the Department of Veterans Affairs. In addition to the broad range of estate planning and elder law services that Tim performs, he is now able to assist clients in the preparation, presentation, and prosecution of claims for Veterans Administration benefits from the initial application through appeals to the Board of Veterans Appeals.
You should be aware of a recent scam being sent to businesses registered with the Pennsylvania Department of State (“Department of State”) and with the departments of other jurisdictions.
In this scam, companies identified as Pennsylvania Corporate Compliance Company and Corporate Records Service are sending solicitations under the headings Annual Meeting Disclosure Statement and 2014 – Annual Records Solicitation Form. The solicitations request that you complete an information form, remit a $125 filing fee, and respond by a specified date. Sample Solicitation.
Although the solicitations appear to be official, none of the information requested has to be filed with the Department of State and the solicitations should be disregarded. The Department of State is alerting all businesses to this deceptive solicitation to prevent businesses from completing the form and sending payment to the address listed.
Please be aware that any official notices sent to businesses by the Department of State will contain the letterhead and/or contact information for the Pennsylvania Bureau of Corporations and Charitable Organizations.
Please do not hesitate to contact us with any questions or concerns regarding this scam or any other solicitations you may receive.
CLAIMS AGAINST ENTIRETIES PROPERTY
A recent case of first impression in Pennsylvania was recently addressed by the Pennsylvania Superior Court in the case of Rajaratnam v. Rajaratnam, 2013 WL 6164324 (Pa.Super. Nov. 25, 2013). Husband signed a guarantee in favor of a bank for a business debt in 2005. Husband and wife both signed a guarantee in favor of the same bank for the same business debt in 2007. The bank confessed judgment against husband under his 2005 guaranty in 2009. The bank sued wife under the 2007 guaranty and obtained a judgment in 2012. The bank then tried to use these judgments to execute on certain real property owned by husband and wife as tenants by the entireties.
The Superior Court held that the bank could not execute on the entireties property because the bank did not hold a joint claim against the husband and wife, even though the separate judgments were claims for the same underlying indebtedness.
Thus, when executing on entireties property, joint judgments against husband and wife are required. Separate judgments, even if the claims underlying them are for the same indebtedness, cannot be consolidated in Pennsylvania or used to execute on entireties property.
IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Is there an implied covenant of good faith and fair dealing in Pennsylvania? The issue has been the subject of conflicting case law in Pennsylvania, and even the Pennsylvania Supreme Court has acknowledged a considerable amount of confusion as to whether such an implied covenant arises in every contract under Pennsylvania law.
The United States District Court for the Western District of Pennsylvania recently joined those courts answering the question affirmatively, holding that “an implied covenant of good faith and fair dealing is incorporated into every Pennsylvania contract”. Hersh v. CitiMortgage, 2013 WL 6858443 (W.D.Pa. Dec.30, 2013). The court noted that a claim for breach of this implied covenant could only be raised as a standalone breach of contract claim, and could not be raised together with a claim for breach of an express contract provision (because the implied covenant is “subsumed” within the breach of contract claim).
Harold J. Funt, Esquire has recently become a member of the Bethlehem Rotary Club. He looks forward to participating in community service projects and events.
As 2014 begins it is a good time to look back at some of the important federal tax developments in 2013 and their impact on the new year and beyond. Some of these developments were anticipated while others were surprises, but for the most part the developments allow for tax planning opportunities.
Tax legislation. 2014 began in a very different budgetary and fiscal climate in Washington when compared to the same time last year. At the end of 2012, lawmakers were in tough negotiations over the fiscal cliff. The result was the American Taxpayer Relief Act of 2012 (ATRA), which finally passed Congress on January 1, 2013. The new law extended permanently the Bush-era tax cuts for lower and moderate income taxpayers, including reduced income tax brackets, marriage penalty relief, some education incentives, and much more. ATRA also increased taxes on higher income individuals by restoring the 39.6 percent tax bracket and revising other provisions. These and other changes made by ATRA are reflected on 2013 tax returns to be filed in 2014.
Extenders. Although ATRA resolved uncertainty about the Bush-era tax cuts, it did not make permanent many other temporary incentives. After 2013, a host of temporary incentives, known as tax extenders, expired. In some cases, for example transit benefits, taxpayers feel the effects immediately. In other cases, the impact of the expiration of these incentives will not be felt until taxpayers file 2014 tax returns in 2015. This time lag gives Congress time to extend the expired incentives, including the state and local sales tax deduction, research tax credit, higher education tuition deduction, and many more, should it be so inclined.
Tax reform. Action on the extenders could be linked to tax reform. During 2013, the leaders of the House and Senate tax writing committees undertook a nationwide campaign to drum up support for tax reform. The lawmakers visited a number of cities and highlighted proposals to simplify the Tax Code. Late in 2013, the Senate Finance Committee (SFC) released legislative language proposing changes in depreciation, the international tax rules and tax administration. However, it is unclear if the Senate, or the House, will give these proposals serious consideration in 2014 since the chief proponent of tax reform, SFC Chair Max Baucus, D-Montana, has announced his retirement from Congress.
Affordable Care Act. The Affordable Care Act (otherwise known as ObamaCare) continued to generate new rules, regulations and controversies in 2013. The Obama administration surprised many observers with a one-year delay in the so-called employer mandate. However, the individual mandate, which generally requires individuals to carry minimum essential health coverage or pay a penalty unless exempt, took effect as scheduled on January 1, 2014. Some individuals whose existing policies were cancelled because they did not meet new standards under the Affordable Care Act may be eligible for a hardship exemption to the penalty. The Affordable Care Act’s Marketplaces experienced a rocky opening but as of early 2014, the White House reported that enrollment numbers were climbing.
New Medicare taxes. The Affordable Care Act is much more than Marketplaces and health insurance delivery and reform. The Affordable Care Act also created the Net Investment Income Tax (NIIT), which some individuals may be surprised to find they owe when they file their 2013 tax returns. The IRS has issued final and proposed regulations that provide guidance on the general application of the NIIT and the computation of net investment income (NII). This tax, which became effective January 1, 2013, generally affects individuals, estates and trusts with income above certain threshold amounts. The NIIT does not apply to nonresident aliens. This tax is subject to estimated tax rules and is reported on Form 1040 for individuals and Form 1041 for estates and trusts. It is not required to be withheld from wages.
The 3.8 Percent NII Tax
Individuals. For tax years beginning after December 31, 2012, the NIITon individuals equals 3.8 percent of the lesser of:
1. net investment income for the tax year, or
2. the excess, if any, of
i. the individual’s modified adjusted gross income (MAGI) for the tax year, over
ii. the threshold amount.
For purposes of the NIIT computation, MAGI is defined as adjusted gross income before the foreign earned income exclusion. The threshold amount is equal to $250,000 in the case of a taxpayer filing a joint return or a surviving spouse; $125,000 in the case of a married taxpayer filing a separate return; and $200,000 in any other case. Although you may have heard that the NIIT only impacts higher-income individuals, this is not completely accurate. Married couples with two incomes need to be aware of the NIIT. These amounts are not indexed for inflation. Consequently, the number of affected taxpayers is expected to increase over time.
Trusts and Estates. Trusts and estates are subject to the NIIT on the lesser of (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins ($11,950 for 2013 and $12,150 for 2014). Unlike the individual threshold amounts, the threshold amount used for estates and trusts is adjusted for inflation because the threshold is tied to the highest tax bracket. Nevertheless, the amount is far less than the lowest threshold amount for individuals ($125,000 for married filing separately). Therefore, trusts and estates should consider distributing investment income, especially if one or more beneficiaries would not otherwise be subject to NIIT because of their threshold amount.
The NIIT does not apply to certain tax-exempt trusts and grantor trusts. Special NII computational rules apply for electing small business trusts and charitable remainder trusts.
Net Investment Income (NII) defined. The final regulations provide guidance on the calculation of NII subject to the 3.8 percent tax. In general, NII is the sum of:
1. gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business;
2. other gross income derived from any trade or business that is a passive activity with respect to the taxpayer, or the trade or business of trading in financial instruments or commodities; and
3. net gain attributable to the disposition of property, other than property held in a trade or business.
Less
1. deductions properly allocable to such gross income or net gain.
The three categories of NII cast a wide net over many types of income, including income from interest, dividends, and royalties, along with income from a passive trade or business and income attributable to an investment of working capital. As with all taxes, there are exceptions to various types of income. Every individual’s potential liability for the NIIT is unique and no one formula or strategy exists to plan for the NII.
The 2012 proposed regulations raised many questions about the NIIT, especially on how it would apply to certain types of income. Many taxpayers and tax professionals asked the IRS to list in the final regulations income items that would be excluded from the calculation of NII. However, the final regulations do not include such a list.
The IRS did attempt to answers questions about certain types of income. The final regulations explain that in certain circumstances rental of a single property may require regular and continuous involvement for NII purposes but under criteria not as rigid as under the 2012 proposed rules. The final regulations, however, do not give a bright-line test to determine when a rental activity would fall within the reach of the NIIT. The IRS also rejected suggestions that the rental income of a real estate professional should be excluded from NII, but the IRS did create a safe harbor for real estate professionals. The final regulations also describe portfolio income, income from annuities, self-charged interest, and more. Many of these changes are taxpayer friendly, particularly when measured against the 2012 proposed regulations.
NIIT may reach working capital. The 2012 proposed regulations referred to working capital as capital that may not be necessary for the immediate conduct of a trade or business. Working capital is generally invested in short-term income producing assets. As with other topics, the IRS declined to give a comprehensive definition of working capital in the final regulations, explaining that it would be too complex.
Generally, deductions from passive trade or business activities, to the extent they exceed income from all passive activities (exclusive of portfolio income), may not be deducted against other income. If a taxpayer’s original grouping was inappropriate (or there are other circumstances), the taxpayer must regroup the activities. The final regulations discuss regrouping in light of the NIIT and provide special rules for regrouping, including a valuable one-time election to regroup for NIIT purposes that will also apply for passive activity loss purposes.
When Congress created the NIIT, it specifically made an exception for certain types of retirement income. This exclusion applies to qualified retirement plans and annuity plans, tax-sheltered annuities, traditional and Roth IRAs, and deferred compensation plans under Code Sec. 457(b) plans. The final regulations clarify this important exclusion.
At the same time the IRS issued the final NII regulations, it also issued new proposed regulations on the calculation of NII regarding certain types of property. These proposed regulations were intended to clarify earlier proposed regulations. In particular, the IRS gave guidance on the sale or other transfers of pass-through interests and provided an optional simplified method to determine the amount of NIIT that would be due.
The NIIT as briefly described above is potentially very far reaching. Strategic planning to minimize NIIT liability is essential. Until the final regulations were published, many areas were unclear. Some areas are still in need of clarification as the IRS explained in the proposed regulations. The IRS also left open the door to issuing more NII guidance in the future.
Health FSAs. The IRS announced in late 2013 a decidedly pro-taxpayer change to a popular health care benefit. At the plan sponsor’s option, employees participating in health flexible spending arrangements (health FSAs) will be allowed to carry over, instead of forfeiting, up to $500 of unused amounts remaining at year-end. Plan sponsors now have the choice of either allowing employees a carryover of up to $500 or giving employees a grace period of up to 2 ½ months. However, plan sponsors cannot offer both.
Same-sex marriage and domestic partners. The IRS recently issued much-anticipated guidance on same-sex marriages and federal taxes following the Supreme Court’s June 26, 2013 decision in United States v. E.S. Windsor, 570 U.S. 12 (2013), which struck down Section 3 of the Defense of Marriage Act (DOMA). For federal tax purposes, the IRS announced a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize same-sex marriage even if the couple resides in a jurisdiction that does not recognize same-sex marriage. The IRS guidance answers many questions and also opens many tax planning opportunities previously unavailable to married same-sex couples. The IRS also reminded domestic partners and individuals in civil unions that they are not married for federal tax purposes. The IRS is expected to issue more guidance for individuals as the 2014 filing season approaches and for employers and retirement plans. Our office will keep you posted on developments.
Same-sex marriage
Section 3 of DOMA defined marriage as only a legal union between one man and one woman as husband and wife. Because of Section 3 of DOMA, the federal government, including the IRS, refused to recognize same-sex couples as married. Same-sex couples could not file their federal income tax returns as married filing jointly (or separately), and could not claim certain tax benefits based on joint filing status, along with other limitations.
Windsor involved one of these tax benefits, the federal estate tax marital deduction which is one of the primary deductions for the estate of a married decedent. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. In Windsor, the IRS did not recognize the same-sex couple’s marriage (they had been married in Canada). As a result, the surviving spouse could not claim the estate tax marital deduction. The estate paid over $300,000 in estate taxes and the surviving spouse filed a refund claim. The dispute made its way to the Supreme Court.
The Supreme Court held Section 3 of DOMA was unconstitutional. Writing for the five-justice majority, Justice Anthony Kennedy explained that “DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law…” Immediately after the Supreme Court handed down its decision, President Obama directed all federal agencies, including the IRS, to implement the ruling.
Place of celebration of marriage
After the Supreme Court’s decision in Windsor, the IRS effectively had two choices: it could take a place of domicile approach or a place of celebration approach to same-sex marriage. The IRS chose a place of celebration approach. This means, in a nutshell, that the IRS is recognizing same-sex marriages nationwide regardless of where the same-sex couple resides (in a jurisdiction that recognizes same-sex marriage or in a jurisdiction that does not). However, the IRS ruling does not apply to domestic partners, civil unions and other formal relationships recognized under state law.
For example, Aiden and Jacob marry in Vermont, a state that recognizes same-sex marriage, on August 28, 2010. Aiden and Jacob reside in Vermont until early 2013. Jacob accepts a job in Florida, a state that currently does not recognize same-sex marriage, and they relocate to Florida in March, 2013. Under the place of celebration approach, the IRS recognizes Aiden and Jacob as a married couple for federal tax purposes even though they reside in a state that does not recognize their marriage.
Filing original and amended returns
For many married same-sex couples, the first question that comes to mind is when to file their federal income tax returns as married filing jointly (or married filing separately). Legally married same-sex couples generally must file their 2013 tax returns (and all subsequent years) using married filing jointly or married filing separately filing status.
For prior years, the rules are more complicated. For 2012 and all prior years, same-sex spouses who file an original tax return on or after September 16, 2013 generally must file using a married filing separately or jointly filing status. For 2012, same-sex spouses who filed their tax return before September 16, 2013, may choose (but are not required) to amend their returns to file using married filing separately or jointly filing status. For 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status if the period of limitations for amending the return has not expired.
Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. The limitations period on open tax years may be extended by agreement or through a protective refund claim. Some same-sex married couples may have filed protective claims with the IRS using married filing jointly status to keep open the statute of limitations on earlier years.
Keep in mind that the benefits of filing a joint return may not always be greater than filing separately as unmarried individuals. This is known as the marriage penalty and is a factor for many opposite-sex married couples and same-sex married couples.
Health insurance and benefits
Because of Section 3 of DOMA, employers that allowed an employee to add his or her same-sex spouse to their health plan needed to impute income to the employee for federal income tax purposes equal to the fair market value of health coverage provided to the same-sex spouse. If the same-sex spouse qualified as a dependent, this rule did not apply. DOMA also precluded same-sex couples from enjoying the same benefits of cafeteria plans, including flexible heath spending accounts, health savings accounts and health reimbursement arrangements available to opposite-sex married couples. In its guidance, the IRS explained that if an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee may file an amended return (for open tax years) reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse.
For example, ABC Co. sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by ABC Co. Sophie, who is an employee of ABC Co., was married to Mia at all times during 2012. Sophie elected coverage for Mia through the group health plan beginning January 1, 2012. The value of the employer-funded portion of Mia’s health coverage was $250 per month. Sophie’s Form W-2 for 2012 included $3,000 ($250 per month × 12 months) of income reflecting the value of employer-funded health coverage provided to Mia. Sophie may file an amended return for 2012 excluding the value of Mia’s employer-funded health coverage ($3,000) from gross income.
The IRS also explained that employers may claim a refund for Social Security and Medicare taxes paid on the benefits if the period for filing a refund claim is open. The IRS intends to issue more guidance for employers. However, claims for refunds of over-withheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on an amended return if the limitations period is open.
Retirement plans
The Windsor decision significantly impacts retirement plans. The IRS explained in its guidance that a qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans. The plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. More guidance about plan amendments and the application of Windsor to the period before September 16, 2013, is expected from the IRS.
As an example, if Plan A is a qualified defined benefit plan that is maintained by ABC Co., and ABC Co. operates only in a state that does not recognize same-sex marriages, then Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
Patchwork of laws
The Supreme Court did not strike down Section 2 of DOMA, which permits states to refuse to recognize same-sex marriages recognized in other states. The result is a patchwork of laws on same-sex marriage across the United States. As of December 19, 2013, the following states recognize same-sex marriage: California, Connecticut, Delaware, Hawaii, Illinois (effective June 1, 2014), Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Rhode Island, Vermont and Washington. The District of Columbia also recognizes same-sex marriage. A number of legal challenges are also underway in several states, including Pennsylvania, Utah and Virginia.
Repair regulations. In September, the IRS issued final regulations on the treatment of amounts paid to acquire, produce, or improve tangible property. The complex regulations reach nearly every type of taxpayer. Their complexity should not be a barrier to taking advantage of some of the taxpayer-friendly provisions. For example, the final regulations include a de minimis safe harbor, a safe harbor for small taxpayers to assist them in applying the general rules for improvements to buildings, and more.
Foreign compliance activities. In 2014, foreign financial institutions will have new reporting obligations under the Foreign Account Tax Compliance Act (FATCA). FATCA, its supporters argue, will significantly boost taxpayer compliance. Its detractors counter that the law is too complex and sweeps in its reach taxpayers who have no intention to purposefully evade U.S. taxation. Along with FATCA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency. This trend is likely to continue in 2014.
Mileage rates. The optional business standard mileage rate drops slightly for 2014 to 56 cents-per-mile (compared to 56.5 cents-per-mile for 2013). The IRS attributed the reduction to generally lower vehicle maintenance costs, including the price of fuel. For 2014, the depreciation component of the business standard mileage rate is 22 cents-per mile. This represents a one-cent decrease from the depreciation component for the 2013 business standard mileage rate. Similarly, the optional standard mileage rate for qualified medical and moving expenses will also decrease from 24 cents-per-mile for 2013 to 23.5 cents-per-mile for 2014. However, the 14 cents-per-mile rate for charitable miles driven is set by statute and is unchanged for 2014.
Estate Taxation. ATRA also addressed federal estate tax matters. For persons dying after December 31, 2012, the maximum estate tax rate is 40 percent with a $5,000,000 exclusion (inflation adjusted to $5,250,000 for 2013, and $5,340,000 for 2014). ATRA also makes permanent “portability” between spouses. Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion (the deceased spousal unused exclusion amount (DSUE)) to the surviving spouse’s own transfers during life and at death. Effectively, portability allows both spouses to transfer a combined estate of double the usual $5 million exclusion (plus the inflation adjustment) estate-tax free ($10,500,000 for 2013 and $10,680,000 for 2014). Additionally, ATRA makes permanent a number of other estate tax provisions, which were scheduled to expire after 2012, such as provisions affecting qualified conservation easements, qualified family-owned business interests (QFOBIs), the installment payment of estate tax for closely-held businesses for purposes of the estate tax, and repeal of the five percent surtax on estates larger than $10 million.
CONTACT US
MFDD tax, estate planning and elder law attorneys are available to answer questions you might have regarding income and estate tax matters. Contact us using the form at the right, or call 610.882.9800.
Divorce is one of the most stressful experiences you may ever be forced to endure. We will use this space to discuss divorce-related issues in addition to marital property; issues like child custody, child support, and alimony which confront virtually all of our clients. We will discuss how MFDD’s family law attorneys utilize our experience and knowledge to help guide you through these legal minefields.
You owe it to yourself and, in many cases, your children who are dependent upon you, to obtain the best results possible in equitable distribution of marital property and in all other divorce-related issues.
MFDD’s experienced family law attorneys know what property is marital property and how our Lehigh Valley area courts are likely to equitably distribute such property between the spouses. Armed with this knowledge, MFDD’s clients are very often able to achieve excellent equitable property division results through settlement without having to go through lengthy, expensive, and nerve-wracking court hearings and trials.
A divorcing spouse needs to understand that all assets acquired during the marriage – with very few and specific exceptions – are considered under Pennsylvania Law to be marital property which the spouses equitably divide.
It rarely matters how the asset is titled. For example, through employment during the marriage, one spouse may have a 401(k) titled in his or her name alone. However, since this asset was earned during the marriage, it is considered marital property to be equitably distributed to both spouses. Marital property includes all types of assets:
Retirement accounts such as 401(k)s, pensions and IRAs are types of deferred compensation that are considered marital property if they are earned or accumulated during the marriage. MFDD’s family law attorneys have experience in obtaining marital values for all kinds of retirement accounts and in helping our clients receive these benefits – without suffering immediate income tax loses – through the use of QDROs (qualified domestic relations orders) sanctioned by the Internal Revenue Code.
Bank accounts, including checking, savings, money market and CDs (certificates of deposit), are generally considered marital property if earned or acquired during the marriage. We assist our clients in gathering all the necessary financial statements to make sure these assets are fully valued for equitable distribution. This assistance is particularly essential to those spouses who have not concerned themselves with managing these financial assets during marriage.
Investment accounts, typically consisting of stocks, bonds, and/or mutual funds, are also marital property in most instances if earned or acquired during marriage. We are able to assist in obtaining the information and documentation necessary to provide our clients with the full and fair value of these accounts in equitable distribution.
Marital homes, vacation homes, rental properties, and investments in other real estate owned by either or both spouses during marriage are generally marital property subject to equitable distribution. MFDD’s family law attorneys assist our clients to obtain fair market appraisals of this real estate to ensure the best possible financial outcomes in equitable distribution.
If one or both spouses own or have an ownership interest in a business, the value of the business or the ownership interest in the business is marital property subject to equitable distribution. MFDD’s family law attorneys are experienced in obtaining business valuations to ensure our clients receive full value for this marital asset in equitable distribution.
Do not hesitate to call to meet and consult with a knowledgeable, experienced MFDD family law attorney before you make even one uninformed decision. Contact us using the form at the right, or call 610.882.9800.
On September 8, 2013, runners from MFDD participated in their 3rd Lehigh Valley Health Network Via Marathon Relay.
A water station sponsor in the marathon, MFDD entered two teams in the Relay for the first time this year, with 10 runners juggling the 26.2 mile course, running 3.6 mile to 6.2 mile legs from Allentown to Easton. It was a wonderful day for running; slightly overcast and not terribly hot. We look forward to running again next year and are always happy to support Via and the community!
Briefly stated, the Pennsylvania intestacy statutes set forth the persons to whom your property will pass and the division of your estate among those persons. The distribution scheme set forth in the statute is inflexible and may not be in accord with your wishes. Additionally, any amounts passing to your children will require a cumbersome and costly legal guardianship if the children are minors at the time of your death.
In general, it is quite simple. Your “intestate estate” is made up of all property that is not disposed of by will or otherwise. Certain property, due to its nature or form of ownership, will not be included in your intestate estate and will be transferred outside of the intestacy statutory scheme.
For example, any property you own as a “joint tenant” or as a “tenant by the entireties” – including real estate, bank accounts, and savings bonds – will pass automatically at your death to the remaining joint owner(s).
Additionally, contractual arrangements with a designated beneficiary – such as life insurance proceeds or retirement accounts – will also pass outside of the intestacy statutes. Any remaining property will then pass to the persons and in the amounts provided for by law. If you are survived by a spouse, the share he or she will receive varies depending on who else survives you. The results are summarized as follows:
No Children or Parents Survive. In this scenario, your surviving spouse will receive the entire intestate estate.
Children Survive. If you are survived by children (all of whom are also the children of your spouse), then your spouse will receive the first $30,000, plus one-half (1/2) of the balance. Alternatively, if one or more of your surviving children are not the issue of your spouse, then your spouse will receive just one-half (1/2) of the intestate estate. For example, if you die with a $100,000 intestate estate and all surviving children are issue of your spouse, he or she will receive $65,000 (i.e., the first $30,000, plus ½ of the remaining $70,000). If, however, one or more of your children are not the issue of your spouse, he or she will receive only $50,000 (i.e., one-half of the intestate estate). Your children will receive the remainder.
One or Both Parents Survive. If you are survived by one or both of your parents, but no issue, then your spouse will receive the first $30,000, plus one-half (1/2) of the balance of the intestate estate. For example, if you die with a $100,000 intestate estate, your spouse will receive $65,000 (i.e., $30,000, plus ½ of the remaining $70,000). Your parent(s) will receive the remaining $35,000.
Because the above scheme is inflexible, it is essential that you prepare a will if you desire for your estate to pass in a manner different then that set forth above. However, even if Pennsylvania’s distribution scheme accurately reflects your wishes, other problems may arise if you die before preparing a will.
For example, if you are survived by minor children but not a spouse, a judge will decide with whom your children will live and who will be responsible for managing their property. The judge will also choose the person who will administer your estate. By preparing a will, you, rather than a judge, will make these important decisions, saving your heirs from expensive (and preventable) litigation.
Additionally, the problems of dying without a will are aggravated if, for example, a married couple with children owns a family business with 50% owned by each spouse as separate property. If one spouse dies without a will, his/her ownership interest may pass to the surviving spouse and minor children, and a legal guardianship would be required to manage the portion of the business interest that passes to the children. The surviving spouse would have the guardianship for the minor children as a “partner” in the family business.
This is a highly undesirable result; in accordance with the requirements of a guardianship, the guardian may be required to post a bond and file detailed periodic accountings with the court, needlessly increasing costs.
Finally, if you die without a will, any property passing to your adult children will be distributed outright and free of any restrictions. This can be especially problematic if any of your children are in debt at the time of your death. Funds that otherwise would be used for their benefit will now be subject to the claims of their creditors. This situation could easily be avoided with simple prospective planning.
The attorneys at Mosebach, Funt, Dayton & Duckworth can help you understand how your estate would be distributed if you die without a will and explain the reasons a will might benefit you and your family. We can provide the peace of mind that comes from knowing your estate plan is in place and your property will be distributed according to your wishes. If you have any questions, please contact MFDD today.
Kristie L. Beitler, Esquire, who concentrates her practice in the areas of divorce, general family law, adoption and civil litigation, was recently named a partner/shareholder at the Lehigh Valley law firm of Mosebach, Funt, Dayton & Duckworth, P.C. which maintains offices in Bethlehem and Allentown.
Attorney Beitler practices primarily in the areas of divorce, custody, child and spousal support, alimony, adoption and civil litigation law in the Lehigh Valley and has been associated with MFDD for over seven (7) years. In addition to divorce, adoption and civil litigation, MFDD provides services in other areas of civil law including estate planning, corporate law, elder law, taxation, and real estate.
With a maximum rate of 15%, the inheritance tax was especially burdensome on family-owned businesses. Often, the surviving family members were forced to liquidate essential business resources to create enough cash to pay the tax bill. As a result, many of these businesses shut down.
Effective immediately, however, Pennsylvania’s inheritance tax no longer applies to family-owned small business interests.
Act 52 of 2013, signed into law by Governor Corbett on July 9, 2013, provides that a transfer of a qualified family-owned business interest to one or more qualified transferees is exempt from inheritance tax, if that interest: (i) continues to be owned by a qualified transferee for a minimum of 7 years after the decedent’s date of death; and (ii) is reported on a timely filed inheritance tax return.
According to the Act, a “qualified family-owned business interest” means either:
An interest as a proprietorship in a trade or business carried on as a proprietorship, if the proprietorship has fewer than 50 full-time equivalent employees as of the decedent’s death, the proprietorship has a net book value of assets totaling less than $5 million as of the decedent’s death, and has been in existence for 5 years prior to the decedent’s death; or
An interest in an entity carrying on a trade or business, if:
The Act specifies that a “qualified transferee” is a decedent’s: (i) husband or wife; (ii) lineal descendants; (iii) siblings and the sibling’s lineal descendants; and (iv) ancestors and the ancestor’s siblings.
Losing the Exemption:
If a qualified business interest that was exempt from inheritance tax under this provision is no longer owned by a qualified transferee at any time within 7 years after the decedent’s death, inheritance tax, plus interest, will be due at that time.
For each of the 7 years following the decedent’s death, the owners of business interests exempted by this provision must certify to the PA Department of Revenue that the interest continues to be owned by a qualified transferee.
The owners also have a duty to notify the Department within 30 days of any transaction or occurrence that would disqualify the business interest from the exemption.
The Department of Revenue will create forms for these purposes, and a failure to file the appropriate certification or notification form will result in a loss of the exemption.
This legislation offers welcome relief to Pennsylvania business owners and should go a long way toward keeping these enterprises in business for generations.
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