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Risk Distribution by the Personal Representative of an Estate

A risk distribution involves the personal representative of an estate distributing real or personal property without confirmation of the account by Orphans’ Court. 20 Pa.C.S. § 3532(a). The risk involves potential claims that may remain against the estate and property within it. The personal representative distributes estate property when estate debts may remain. She may have to pay the outstanding debt in this situation.

The Main Role of a Personal Representative

The personal representative gathers estate assets and then should pay off any debts that remain. If assets are transferred from the estate before debts are paid, the personal representative takes a risk that the debts and expenses of the estate may not be paid. The  personal representative faces possible liability and may have to pay these personally. In particular, the person who is serves in this fiduciary capacity cannot ignore 20 Pa.C.S. 3392, which classifies payments that the estate may have to pay. It also provides the order in which charges and claims must be paid.

The personal representative must understand these classifications and make payments on claims with the highest priority before moving to the next highest class. However, he cannot decide to distribute property and ignore the duty to pay debts and expenses of the estate.

Personal Representative & Protection from Claimants

Focusing on estates of individuals who died on or after December 16, 1992, the personal representative could be making a risk distribution despite statutory notice of the claim not being timely provided if the personal representative knows of the claim. There are ways to protect oneself from personal liability. The personal representative must make a written demand on the claimant for written notice of the claim.

The claimant must respond by the later of 60 days after the demand or one year after the first complete advertisement of the grant of letters. When the later of the dates passes, the personal representative can make a distribution without being held liable for repayment of the claimant. See 20 Pa.C.S. § 3532 (b.1).

This can seem complex, which is why the personal representative should not rush through the administration of the estate. After all, if a risk distribution is made and someone brings a legitimate claim, then the personal representative will be responsible for taking care of the debt that the estate would have paid.

Specific Protections To Use With Risk Distributions

Personal representatives must be careful and look to protect themselves from liability whenever a risk distribution is being made. This can be done through acting prudently.

There are various steps that can be taken whenever a risk distribution is being contemplated. The following paragraphs review some of the possibilities that the personal representative can use for protection from liability when avoiding the time and cost of account confirmation at an audit is an objective of the personal representative.

The Estate Settlement Agreement

Parties in interest, who would receive property from the estate either through a Will or via intestacy law, may be required to execute an “estate settlement agreement” for the personal representative. This agreement contains the pertinent facts about the decedent’s death as well as information about the grant of letters. A copy of the Will, if any, would be attached. Generally, it should have a statement that the signing parties agree with the distributions made and any yet to be made.

Additionally, the personal representative should provide with a copy of an informal account, which does not have to be filed, with the agreement. There would be language in the agreement that the parties approve of the account. The personal representative needs to include all of these statements and obtain the necessary signatures before making any risk distribution.

Other Tools: Receipt & Release ; Refunding Agreement

The personal representative also would be wise to obtain a receipt, release, and refunding agreement from anyone who is receiving a risk distribution. Basically, these are used to acknowledge the receipt of any assets while releasing the personal representative of liability for any acts or omissions during the estate’s administration and asset distribution. An important and vital clause for the personal representative to include involves the recipients agreeing to return any funds or property if legitimate claims are found to exist after these distributions.

When the personal representative seeks receipts, releases, and refunding agreements as a form of insurance before making any risk distribution, she or he can look to incorporate them into the estate settlement agreement or may have them executed as separate (although related) documents. Also, receipts, releases, and refunding agreements can be filed with the clerk at Orphans’ Court, although this does not indicate approval of these documents by the Court. 20 Pa.C.S. § 3532(c). Also, copies of these filings and the estate settlement agreement should be retained by the personal representative, the estate’s attorney, and each recipient.

“Satisfaction of Award” Should Not Be Overlooked

In addition to getting a release for each risk distribution that is made, the personal representative should obtain a “satisfaction of award” from anyone who is to receive a risk distribution. This directs the clerk of the Orphans’ Court to mark as “satisfied” any award subsequent to the distribution.

An Example of Why These Documents Really Do Matter

All of these documents are important for the personal representative. For example, a receipt and release amounts to an indemnity contract between the personal representative and the individual receiving the risk distribution. This permits the personal representative to file a petition against anyone who refuses to provide indemnification, since 20 Pa.C.S. § 3532(c) provides the Orphans’ Court with continuing jurisdiction regarding these documents.

In this situation, if no payment is forthcoming within 20 days from notice of the initial petition, then the personal representative is permitted to file a Petition for Enforcement of the Order to Pay with the Court. A personal representative may not want to have to take what may seem to be a heavy-handed approach. However, being that a risk distribution is involved, a person acting in this capacity who ignores these precautions can lose his or her own funds while others, who should be responsible for the debt after accepting the distributions, are untouched by the risk that became reality.


The personal representative must remember that any protection that is available must be used when dealing with potential risk distributions. Handling an estate is difficult, and anyone who is willing to take this responsibility should look to be shielded from liability not tied to intentional wrongdoing.


A paper street does not exist, but many can be found particularly on older subdivision plans. This could be a road or alley for which the developer set aside property that never was used for this purpose. It is an unopened street that shows up in recorded plans but, in reality, ends up being used as part of a yard or a wooded area next to your property. Since it does not appear in your deed, the question of actual ownership cannot be ignored because this affects what you can do with this property and who buys or sells it, for example.

The problem of the paper street is one that municipalities, townships, boroughs, and similar governmental bodies have come to recognize during the last 50 years or more, which is why paper streets tend to be found only in older subdivision plans. Most municipalities, for instance, have enacted ordinances regarding the creation of subdivisions that generally prevent the creation of paper streets, but this does not affect ones that already exist.


After you check the plan recorded for your subdivision at the Recorder of Deeds or similar county office, you can figure out if you live next to a street that is you never saw before. This was not the intent of the developer, who expected that the street or alley would be used. The paper street started out on paper but was supposed to become a real street. So, one might wonder what went wrong during this process.

The developers simply planned too much – the system of streets in the subdivision included more streets than were needed. You drive on some of the streets every day, and you watch weeds grow on others. The way that is developed usually involved the recording of the subdivision, in which the planned streets were dedicated to the municipality or borough, which would have to accept formally or informally the street as its own.

As set forth in Section 1961 of Title 36 in the Pennsylvania Statutes and enacted in 1889, municipalities and other governing bodies have 21 years to accept the land for the dedicated street after the plan has been recorded. See 36 P.S. §1961. When this is not formally accepted and is not used by the public for the 21-year period, which basically is a statute of limitations, then the local governing body is deemed to have abandoned the property, and a reversion occurs.


One might expect that abandonment returns ownership to the original developer. However, the problem with this is that many developers did not remain in the community so, if they owned the reverted interest, they might not be around to be held accountable for the upkeep of the property that becomes a paper street. As spelled out in Rahn v. Hess, 378 Pa. 264, 269-270 (1954), the purchaser who acquires the property from the developer owns the reversionary interest unless the developer specifically retained that interest.

As a result, trees and other conditions on the paper street become the responsibility of the abutting property owners in the subdivision. With reversion occurring automatically, the abutting owners may not realize that they have this responsibility. In Pennsylvania, property owners whose lots abut a paper street generally own the street to its center line, even though there is no official record of this. Again, this is a principle confirmed in Rahn v. Hess, 378 Pa. 264, 270 (1954).


Local governments can vacate paper streets before the 21-year period ends – they don’t have to accept the dedicated property and can make this official by adopting an ordinance, for example, in which the street is not accepted and any interest in the land is vacated. The only time that a municipality or borough can’t do this is when the paper street contains utility lines, for example, that it has to maintain and repair. On the other hand, the property owner cannot build a structure on the paper street that obstructs access to municipal water and sewer lines. Meanwhile, the abutting owners remain responsible for the property’s upkeep.

After abandonment, a municipality cannot decide to use the land without getting approval from the abutting owners. This is another indication of who really owns the property, but there still is nothing recorded, which limits possible uses by the actual owner.


Another limitation on the abutting owners is that all owners of lots within the subdivision have an easement that allows them to use the paper street as a right of way. Usually, this is of no consequence because the street never was laid out so there is no reason to use it when traveling by vehicle or foot through the subdivision. Additionally, as explained in Rahn v. Hess, 378 Pa. 264, 271 (1954), the Pennsylvania Supreme Court stated that this is a private contractual right that does not go away after a period of time.

Abutting owners who want complete ownership of their part of a paper street would have to get all other lot owners on the subdivision to sign waivers in which they give up their rights of way over the property. As explained in Estojak v. Mazsa, 522 Pa. 353 (1989), there are times that courts in Pennsylvania have recognized a doctrine similar to adverse possession has been recognized as a means of extinguishing easements when access to the right-of-way is blocked for 21 years, but attempts to get private agreements or to obtain court orders are time consuming and expensive. This has a role in title that an abutting owner may try to record, as will be discussed below.


How would you take action to turn your reversionary interest into a recorded interest? Even if more than 21 years have passed since the original dedication was made, leaving the paper street abandoned by the local government, you would be wise to contact the local body in charge of zoning and related matters in order to find out if there will be any problems with moving toward having a deed drafted and recorded.

In these situations, there often is not much opposition, but you want to cooperate and attempt to gain cooperation in return. It could help to get an official declaration that the government has abandoned any interest in the property – this really isn’t required when the Statute of Limitations has expired and no interest involving utilities remains, though.

Then, you should approach all owners with property abutting the part of the street that you are claiming. Their consents are helpful, especially if the municipality suggests that you need to present a petition to vacate as the starting point. After taking the necessary actions here, you should be in position to move forward with the final steps.

Perhaps, the strongest factor motivating the owner of at least part of a paper street to obtain title that is recorded in the appropriate government office is to have the ability to do something with the property. While municipalities and townships that have abandoned these streets do not have a role in determining ownership rights in paper streets, the owner may need a permit to improve or repair a driveway that extends onto what was a paper street, for example. Having record title makes this easier to accomplish.


It should be noted that an unopened street created before May 9, 1889 is not subject to 36 P.S. §1961 and would be handled differently than what is being discussed here, which deals with subdivisions laid out after that date. Papers streets subject to §1961 are more commonly encountered, and the statute makes a somewhat complex issue somewhat more understandable. Under §1961, municipalities have to accept and open the dedicated street within 21 years of its creation as part of the recorded subdivision.

Once the governmental body acknowledges that sufficient time has passed for it so that, by the operation of this statute, it has abandoned any potential interest in the property, then an abutting owner can consider the remaining actions required for a deed to be recorded since ownership reverts to the abutting owners, generally to the center line of the street, under Pennsylvania law.

While title goes to the owner, there is no record of this, which is the purpose of the deed. You could ask the municipality to pass an ordinance officially abandoning the property, but this would not be the first choice – after all, doing this is bound to be noticed by other lot owners in the subdivision, making the easement issue more obvious. The preferable way does not extinguish the private easements but does not call undue attention to them, either.


The owners of the abutting properties can work out an agreement to handle the issue. The important step involves having the property surveyed according to the new property line, which can be at the center of the unopened street or a different line to which the parties consent. Zeglin v. Gahagen, 812 A.2d 558 (Pa. 2002), provides a good overview of the Doctrine of Consentable Lines, which has some similarities to adverse possession, although they are not identical.


The survey provides a legal description that is used in a new deed. Because the property added to the old deed actually is part of the original lot, the drafter of the new deed may list the owner as the grantor and grantee, with the end result that the property of an abutting owner is combined into one parcel in a deed that then is recorded.

Due to the nature of this deed, you need to make sure that specific language is included. First, at the end of the legal description (also known as the recital), the deed would contain wording explaining how ownership reverted after 21 years based of 36 P.S. §1961 by operation of law and providing a corrected legal description of the property that uses the statute as the basis.

After the survey establishes the boundaries for your property that includes what was formerly the paper street, you would have a new deed that is drafted so that the title to all of the property owned by you can be recorded. This would give you formal title that would be found in a title search. The type of deed is important; with the other owners in the subdivision possessing a right of way over what has been a paper street, you only convey whatever interest you possess in the land that you are conveying to yourself at this point. The entire interest in the property cannot be transferred due to the easements.


Unless you have taken whatever action is necessary to extinguish the easements, this outcome is the best that you can obtain. You end up with the property interest that you purchased in the subdivision originally as well as the property interest that reverted to you when the governmental body abandoned the property comprising the paper street, generally when the 21-year Statute of Limitations expires after the subdivision developer originally dedicated this land for a specific purpose to the governing body, such as a municipality or township, which did not accept and use the property as intended.

The Annuity: A Flexible Financial Tool

An annuity is a flexible financial tool that can be tailored to meet your needs and, possibly, have a role in your estate plan. The ability to deliver a stream of income makes annuities popular retirement planning tools. However, due to the variety of types and the multiple structures that can be used, the right match for a person’s needs can be created for other reasons as well.

What is an Annuity?

A basic definition of this financial tool is a good place to start when considering its use in financial planning. In the Internal Revenue Service’s Publication 575 (“Pension and Annuity Income”), an annuity is defined as a contract for a series of payments to be made at regular intervals over a period of more than one full year. You can choose to have the payments be either fixed so that you receive a definite amount each time or they can be variable, fluctuating based on investment performance or other factors. These payments could be immediate (the income payments are not delayed after the annuity is created) or deferred (payments are subject to an “accumulation” phase before the “payout” phase provides the income stream).

Also, you can buy the contract on your own, but these often are offered through a person’s em­ployer. The latter are considered “qualified annuities” because they are components of tax-advantaged retirement plans. The first type of contract creates a “nonqualified” annuity as it is privately obtained from insurance companies or financial institutions, in general. There are differences in tax treatment between these two types, and the reasons for obtaining one that is nonqualified is not necessarily related to concerns regarding retirement income. The focus here will be on the nonqualified annuity purchased by an individual.

Who Are the Key “Players” in its Creation?

Some basic definitions of the main “players” when an annuity is created is a good starting point because they are important in determining the way that this tool will be set up. The annuity owner, the annuitant, and the beneficiary are the three categories essential to consider when planning.

The annuity owner purchases the contract that creates this investment. She creates the terms for the annuity with the insurance company or financial institution that issues it. Key decisions include choice of the definition of the “annuitant,” the designation of beneficiaries, and the determination of who would have the right to sell the contract.

While the annuity owner is the purchaser of the annuity, this person may not be the annuitant, who is the individual over whose life expectancy income is paid. Owners commonly name themselves as the annuitants, but there are considerations that can lead to different choices. For example, the annuity owner might want someone younger as the annuitant since the longer life expectancy leads to smaller payments that are paid over a longer period, which extends the tax liability and reduces the taxable income on a yearly basis.

Many annuities are set up with only one annuitant (a “single life” annuity), but others may have a second annuitant, who is to receive payments at regular intervals after the first annuitant’s death. These “joint and survivor” annuities often involve spouses, but this is not always true. Since the second annuitant can be considered a beneficiary, the joint and survivor annuity will considered in more detail later.

Although the periodic payments are calculated based on the annuitant’s life expectancy, the annuity owner must remember that actuarial tables do not dictate an individual’s lifespan. If the annuitant dies sooner than would be predicted, this would leave some of the assets remaining to be distributed. The annuity contract needs to include provisions for who receives what would remain in this circumstance. Beneficiaries are important for this reason.

The beneficiary is the third key “player” when the annuity is being created. Two points to bear in mind are that there can be multiple beneficiaries and that organizations can be beneficiaries. In addition, although an owner can name himself as the annuitant, he cannot be a beneficiary of his own annuity.

Unless the contract requires the naming of an irrevocable beneficiary, the owner usually can change beneficiaries. Furthermore, the owner may be wise to have multiple beneficiaries because, if there are remaining investments after an annuitant’s death, the owner probably would want to be sure that someone is alive to receive these assets.

Some Considerations regarding Beneficiaries

With no beneficiary, an annuity can go through probate or estate administration, but the assets that it still holds may be surrendered to the insurance company or financial institution that issued the contract. Therefore, even without multiple primary beneficiaries, the annuity owner should consider possible contingent beneficiaries, who receive the primary beneficiaries’ payments when the annuitant outlives these beneficiaries.

When multiple beneficiaries are included, the annuity contract can provide for the death benefits to be divided into equal shares or by specified percentages among the beneficiaries. The owner could decide to go in a different direction when choosing a beneficiary, as well. Beneficiaries do not have to be individuals, but the contract owner should consider the legal implications here.

Entities are subject to different requirements as the beneficiaries of annuities. A possible choice for the annuity owner is to assign any remaining payments to a trust. However, after the trust receives this amount, it has five years to pay out these funds. This means that spreading out the taxation based on life expectancy is not possible, while this option does exist when payments are transferred to an individual as the beneficiary.

Choices that Depend on Why You Want an Annuity

While the “players” now have been defined, this does not answer what an annuity is good for. With its flexibility as a contract between the owner and an insurance company or financial institution, there could be a number of reasons that annuities may be appealing. However, we will look at common categories (and choices) that are considered when it is being set up.

One choice is between an immediate annuity and a deferred annuity. A person could decide on a deferred annuity in which taxation is deferred. This is a benefit when retirement planning and may be a good choice if you have made the maximum contribution to a 401(K) plan or an IRA. It would not be subject to any IRS contribution limits and can create a guaranteed stream of income payments during retirement. There would be taxation at ordinary income rates at that time, and there could be annual charges from the financial institution or insurer that issued the contract. They also are likely to be subject to a 10-percent penalty from the IRS for withdrawals prior to the age of 59½.

The choice of deferred payments can be paired with either variable or fixed income payments. A deferred variable annuity is one in which the issuer of the policy places your assets in riskier investments. People with longer time horizons are better candidates for this type of annuity because they have the ability to weather market fluctuations that tend to occur during shorter investment periods. Payments from this annuity type depend on the success of the investments made with the assets that were traded to establish it.

A more conservative investor who is looking to set up guaranteed payments for a number of years after she retires probably would lean toward a deferred fixed annuity. Typical of all fixed annuities, this is not subject to market risk but instead makes regular periodic payments of specified amounts to the annuitant. It could produce earnings that compound on a tax-deferred basis, although withdrawals prior to 59½ years of age might incur the IRS’s 10-percent penalty.

Choosing an immediate annuity results is smaller periodic payments. It may appeal to someone who is or soon will be retired because the wait for the payment stream to begin is not an issue here. The tradeoff involves the acceptance of a smaller amount of guaranteed income for life or, at least, a set period of time (if a “fixed-period” annuity is chosen). Generally speaking, the owner should have a large lump sum of money to trade for a cash flow that extends into the future when creating an immediate annuity. However, there is an example below in which this asset “rule” does not hold.

This often is paired with a fixed income stream. However, the owner may be able to set up cost-of-living adjustments for the income stream over the annuity’s timeframe by paying an extra cost for this benefit.

Annuities May Help Even People of Modest Means

While an annuity can provide a stable source of financial support during retirement for many individuals, it is flexible enough to be adapted to individual circumstances. This can involve tailoring the annuity based on such variables as age, income, and net worth. Also, the amount available to invest will dictate the options that are realistic – even a modest investment might be used to create a workable annuity. Remember that reasons beyond increasing retirement income can be met through this financial instrument, and they should be examined to determine if such an investment might be desirable depending on a given situation.

For instance, one possibility that may be overlooked concerns Medical Assistance. The individual on Medical Assistance would have a relatively low income. This person might look at a single-premium immediate annuity since one often can be obtained even when there are rather limited assets available. To be used to supplement income in this situation, the annuity has to be irrevocable, actuarially sound, and – importantly – payable to the Medical Assistance agency that would be designated in Pennsylvania as the beneficiary after the recipient’s death.

Single-premium immediate annuities also could be useful for retirees who are over the age of 59½ but not yet 70½. If an individual wants to delay the payment of Social Security benefits as well as any tax-deferred distributions for as long as possible, then he or she might consider this type of annuity to provide a stream of income to realize this goal.

Increasing Usefulness by Purchasing Riders and Other Options

As has been noted previously, an annuity is a flexible tool. This flexibility can be increased when the owner purchases various riders or other options. For instance, a person might want to have a rider that provides for accelerated payouts in the event of a diagnosis of a terminal illness.

Riders and options often are added on behalf of beneficiaries. The decision to create a deferred or immediate annuity can influence this choice. With deferred annuities, beneficiaries receive the total amount contributed to the account if the annuitant dies during the accumulation phase and receive the amount remaining in this account after payments that were made to the deceased annuitant have been subtracted during the payout phase.

However, with many immediate annuities, such as a lifetime immediate income annuity, the issuing company keeps any money that remains at the annuitant’s death. The owner might purchase a refund option or a rider for a term certain regarding the annuitant’s life so that beneficiaries can get whatever remains if the annuitant dies when the option or rider would be effective.

A standard death benefit rider may be desirable when it is needed to designate beneficiaries for the annuity if the remaining funds after an annuitant’s death would be forfeited to the issuing company. This is the most basic rider of this type. Other death benefit riders can be used to affect the amount received by beneficiaries, as well. Examples include “return of premium” riders (this equals greater of the market value of the contract and the sum of all contributions minus fees and withdrawals) and “stepped-up” death benefit riders (beneficiaries receive the highest amount using the values of the contract on the anniversaries of the purchase date, with fees and withdrawals subtracted). The basic rule to remember is that a rider which increases the amount going to beneficiaries also will increase the annuity owner’s cost to add it.

A Look at Death Benefit Payout Options

Death benefit payout options involve how the benefit will be paid to beneficiaries instead of how much can be paid. Three options commonly exist for beneficiaries who are not spouses of the annuity owner. The lump-sum distribution transfers the designated funds in a single payment. A “non-qualified stretch” payout provides beneficiaries with minimum payments stretched out over their life expectancies. Finally, the five-year rule payout option allows beneficiaries to make withdrawals during a five-year period or receive the entire amount in the fifth year.

A surviving spouse who is a named beneficiary has an additional option here. The spouse could continue the annuity contract as the new owner and – if the deceased spouse was the annuitant – step into that role, taking over the stream of payments, which delays immediate tax consequences that other beneficiaries face. This is known as “spousal continuation.”

The Joint and Survivor Annuity

This leads again to consideration of “joint and survivor” annuities. It is important to remember that the beneficiary does not have to be a spouse. However, non-spouse beneficiaries again have less flexibility than a surviving spouse would have.

With a joint and survivor annuity not involving a spouse, the beneficiary has the right to receive a payment stream instead of a lump sum of what assets remain upon the death of the annuity owner. This beneficiary lacks the ability to change any terms of the annuity contract, though. As a result, any access to the annuity’s funds continue to be controlled by deceased owner’s contract.

When the surviving spouse is named as beneficiary of a joint and survivor annuity, she can transfer the contract into her name and assume all rights from the initial agreement. Based on the terms of the original contract, the spouse may have the ability to accept all remaining payments and any death benefits, as well as the right to choose beneficiaries (if the predeceasing spouse could have done so).

An Overview of the Topic of Taxation

Taxation of nonqualified annuities is complicated so what follows merely provides information to raise awareness of things to review. While employer-sponsored programs and commonly recognized retirement programs make payments that are not taxed, nonqualified annuities provide payments that are taxable income in Pennsylvania, as well as for federal income tax purposes. To the extent that the distributions that are taxable for federal income tax purposes, they also are taxable as interest income in Pennsylvania.

Nonqualified annuities must use what is termed the “general rule” for federal taxation. Under this rule, payments can consist of a tax-free part of an annuity payment that is based on the ratio of the cost of the annuity contract to the total expected return, which is the total amount that the annuitant expects to receive. The expected return is calculated from IRS life expectancy (actuarial) tables. You can look at IRS Publication 939 for more details regarding this rule.

Beneficiaries also face income taxation. They owe income tax on the difference between the principal paid into the annuity and its value at the annuitant’s death (minus the principal that was paid to fund the annuity initially). If a beneficiary receives this amount as a lump sum, then income tax is due immediately on this amount. If the payments are arranged to be spread out over time, then the taxation will be spread out as well.

When a single premium was paid for an annuity with named beneficiaries, then the annuity represents a return on an investment, which is subject to inheritance tax in Pennsylvania. It would be listed on Schedule G (Inter-Vivos Transfers and Miscellaneous Non-Probate Property) of an inheritance tax return. Notably, the $3,000 exclusion for transfers within one year of death that is mentioned in the instructions to this schedule would not apply in this situation.

When an annuity fund creates the future interests that are reported on Schedule K of the inheritance tax return, the value of the fund creating these interests is reported as part of the estate assets on whichever schedule from Schedule A through G of the tax return is appropriate. As always, you probably want to consult a tax expert about up-to-date information on the various ways that annuities can face taxation, of course.

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With the extensive varieties of annuities that are available and the ability to customize these contracts by working with annuity experts who have a solid understanding of how to tailor this financial tool to meet a client’s needs, an annuity can be fashioned for someone who possesses only modest assets to apply for this purpose. If the size of any death benefits also is a concern, the contract owner also needs a well-crafted annuity that provides for a better future for a beneficiary for whom financial protection after the owner’s death is a goal. Remember that there are numerous possibilities that can be discussed in order to make the right choice for your specific circumstances.

Estate Inventory: Why It Matters and Tips on Its Preparation

Preparing and filing an estate inventory is an essential duty for the estate’s personal representative (the executor if there is a Will or the administrator if there is no Will). This is set forth in Section 3301 of the Probate, Estates and Fiduciaries Code in the Pennsylvania Consolidated Statutes. How this is done and why it is important need to be understood.

Estate Inventory Collects & Values the Decedent’s Property

Basically, the personal representative, who is in charge of the estate, must file a list of all real and personal property in the estate that is located in Pennsylvania. The property that is included is any property that the decedent owned solely or as a tenant in common. Property owned jointly with survivorship rights as well as property with named beneficiaries and “payable-on-death” accounts do not have to be listed in the estate inventory, although they could be included in a memorandum section in the interest of completeness.

Valuation of these assets is an important task of the personal representative. If you have this responsibility, you need to remember that all property in the estate inventory is valued as of the date of death. How this can be done for different types of assets will be reviewed in more detail, later. The date by which this document must be filed with the Register of Wills can differ based on circumstances, but it usually would be filed no later than the date that the estate’s inheritance tax return is due.

Why is the Estate Inventory Important?

Before looking at approaches to the preparation of the estate inventory, we should address why it is important. Of course, as mentioned earlier, Pennsylvania law names this task as a duty that a personal representative must fulfill so you have to do this because Pennsylvania tells you that you must. However, there are reasons that this duty exists.

One reason is that the estate inventory tells everyone with an interest in the estate all of the assets under the personal representative’s control. You have assumed personal responsibility for the listed assets and can be held liable for mishandling them. Their valuation also is used to determine the filing fee for the opening of the estate, which matters to the Commonwealth. This is why you can underestimate the estate’s value at the beginning when you do not know everything in the estate. When the estate inventory is filed, all assets will be included at their date-of-death values so the filing fee that was unpaid originally can be calculated at this point.

There are other reasons that make the estate inventory important for the personal representative. It can be useful when preparing the inheritance tax return because it includes assets and related information about those assets that will appear on various schedules of the return.

In addition, property listed in the estate inventory gives you the starting point for the estate accounting. This accounting should be provided at least on an informal basis if the estate is closed with a family settlement agreement. However, for an estate that closes after an estate audit at court, the accounting must be formally submitted to the court and interested parties for review. By having an accurate starting point, you are more likely to survive an audit unscathed.

Have a Plan to Locate & List Assets for the Estate Inventory

When you have a duty to complete, you need a good plan for handling this responsibility. As noted above, the estate inventory lists all real and personal property of the decedent at date-of-death values. There are numerous steps involved as you prepare the finished document.

The personal representative needs to find all the personal items, money and similar assets (such as bank accounts, stocks, and money-market funds), and real estate owned without any survivorship rights by the decedent. After identifying this property, you then have to value it. Generally, you can value the items without an appraisal. However, expensive personal property (which could include jewelry and art collections) and real estate (when located in Pennsylvania) will require a professional appraisal.

Detailed descriptions are important, especially with more valuable property. Real estate should be described well enough to be identified by someone looking at the estate inventory. Therefore, you should include its full address.

The type of property may lead to some less-than-obvious considerations. For example, financial accounts may involve a right to interest or dividends that are owed but not yet paid. These rights – if they exist at death – are estate property and must be listed in the estate inventory. A personal representative can work with the financial institutions to obtain theses values. Also, you could find previously unknown assets being held by Pennsylvania’s Bureau of Unclaimed Property.

When you begin to prepare the estate inventory, you probably would be wise to start with a more comprehensive list of property that then is grouped into categories, such as “household furnishings” or “wearing apparel,” before you file the document. Although it may not be filed, the more comprehensive list is useful for the personal representative tracking what becomes of the estate’s property.

Listings in an Estate Inventory: Categories v. Items

Household items and furnishings often are the most common estate items. Because they tend to have relatively small values, you could consider grouping them into categories. As an example, you probably would not produce a list of furniture that includes “sofa, $100; chair, $5”; and so forth. Instead, you would list “household furnishings,” encompassing items similar enough to be placed in a group. This is even more appropriate with small goods of minimal values falling within specific groups, such as “100 hardcover books,” “150 paperback books,” and “kitchen appliances.”

Remember that the items placed in a category with a blanket value are common items with nominal individual values. When the value of personal property is higher (e.g., something worth $3000), you would itemize it in the estate inventory. This would be true of jewelry. You might have a single category for costume jewelry, but you would itemize more expensive jewelry with their individual values and descriptions (stone type, carat weight, etc.).

Financial assets were mentioned earlier when looking at estate property that might be overlooked, such as accrued interest or dividends. All of the decedent’s financial assets are part of the estate inventory, though. You would include cash in the deceased person’s possession and bank accounts (with date-of-death balances). Also look for uncashed checks, balances of loans made to others, Certificates of Deposit, and similar financial assets. With financial accounts, you should include individual account types and numbers in the estate inventory.

Investments must be documented and valued. Among these are 401(k) accounts, IRAs, pensions and retirement savings, stocks, bonds, mutual funds, and annuities. Additionally, a personal representative must identify and list impending court awards that the estate will receive. Life insurance without a beneficiary also is in the estate, although it is not subject to inheritance tax.

Some Valuation Sources for the Estate Inventory

If the decedent owned motor vehicles, boats, or any other vehicles, the personal representative generally can use sources such as the Kelley Blue Book (https://www.kbb.com/) for a reasonable valuation. When listing these, you should include the make, model, and year for these vehicles.

The personal representative is responsible for locating any safe deposit boxes. Once located, they can be accessed by following the process detailed in Pennsylvania. Once you have permission, you need to include the number for the safe deposit box, where it is located, and the contents within the box.

Finding assets and then valuing them can be difficult at times. Financial assets may be difficult to identify at times, but the personal representative should review any personal income tax returns for the last 3 to 5 years for clues. Financial assets are not as difficult to value as they might be to find because there are public sources for such property as stocks and bonds. You would have to do some research to obtain the date-of-death values, but the information is not difficult to access. For other financial assets, you might have financial statements to use, or you could requests valuations from the financial institutions when necessary.

Valuation of Common Personal Items in an Estate Inventory

Personal property for which the title does not have to be transferred to the estate can seem to be difficult to value. Furniture, appliances, and clothing are notable examples. However, a personal representative seeking assistance with valuation for the estate inventory can find guides.

Establishing how much silverware, clothing, and small kitchen appliances are worth can be accomplished by using sources that provide estimates. For instance, you could use the Valuation Guide for Goodwill Donors, a similar source, for a starting point.

When an item is more valuable, you might want to turn to other sources that can establish a fair market value to include in the estate inventory. If the property is routinely sold in the marketplace, you could look at several ways to determine the value of single items or collections in this “middle” tier of possessions. One place to start often is eBay ( http://www.ebay.com ). If you are a registered user, you can type in the item that you are researching, and eBay searches for it. The search results are displayed for completed auctions, and you would look at the prices listed in green, which show sales. If the details of the estate item are similar to the details of the sold item, then you have a reference point when completing the estate inventory.

The Estate Inventory – The Effort Will Pay Off in the End

When you have uncovered all real and personal property that can be found and have chosen a reasonable method to obtain the date-of-death valuations, you then can prepare the official estate inventory to be filed with the local Register of Wills. Because it has various uses, the personal representative of an estate must take this task seriously. It is not easy, but it will make other aspects of handling an estate easier and more successful.

Workers Compensation Offset & Social Security Disability

If you receive Workers Compensation when you also qualify for Social Security Disability (SSD) in Pennsylvania, your SSD award may be subject to Workers Compensation offset. Basically, your SSD could be reduced as a result.

A few points should be noted at the start. First, Supplemental Security Income (SSI) and Social Security retirement benefits are not subject to an offset generally. For example, SSI is affected in the usual manner: Workers Compensation is considered unearned income so, after the first $20 is this income is deducted, the rest reduces SSI dollar for dollar.

Second, Pennsylvania applies the Workers Compensation offset in the same way that all but approximately 14 other states do. These other states reduce the Workers Compensation award that is paid to someone receiving SSD. This only is possible if a state’s Worker Compensation law required this type of reduction under its law prior to February 18, 1981. For the purpose of this article, we will review the majority approach, specifically as Pennsylvania applies it. Also, since this is an introduction to the concept of offset, it will focus on a disabled individual without discussing this concept’s application when dependents also receive payments due to the disabled worker’s earnings record. Section 504 of the Social Security Handbook can be reviewed for its look at family benefits and additional details about concepts introduced here.

Workers Compensation Offset for a Disabled Individual

The standard rule is the total received in Workers Compensation and SSD cannot be more than 80 percent of the amount that you earned when fully employed. This amount officially is known as the “applicable limit.” To ensure that this is the maximum amount received, the Social Security Administration reduces your SSD income by the amount lowers the sum of these two payments by the necessary amount so that the maximum percentage is not exceeded. The reduction in your Social Security Disability is what is called the Workers Compensation offset.

The idea may not sound complicated, but the limit of 80 percent of your previous income level has to be defined and calculated. At this point, the idea is not as straightforward as the general rule might make it seem. The Social Security Administration calculates the maximum amount of combined benefits permitted by federal law so that it can reduce the SSD paid in a given month to keep this amount from exceeding the maximum. The impact of the Workers Compensation offset actually impacts people who earned less income because their benefits will be closer to the income that they earned while higher earners have a larger gap between earnings and the sum of the benefits that they possibly can receive.

Average Current Earnings & Workers Compensation Offset

When it comes to calculating the income that is used to determine if there will be a Workers Compensation offset, the SSA actually uses three methods of calculation to find your pre-injury income (which is called your “average current earnings”), which is the starting point in this process. Your “average current earnings” will be the highest income level produced by three methods of calculation.

The first calculation by Social Security is the average monthly wage – the “unindexed Primary Insurance Amount” – on which your Social Security Disability benefit is based. Then, there is the “high 5” calculation, which is the five consecutive years that add up to your earnings for this length of time; average monthly earnings are determined based on this amount. Finally, the average monthly earnings for either the calendar year in which you became disabled or any of the five calendar years prior to that is calculated – this result is known as the “high one.” Whichever of the three calculated amounts of average current earnings is highest will be used for the next step in finding the Workers Compensation offset. The “high one” tends to result in the highest value and ends up being the amount used.

Determining the Workers Compensation Offset

Next, the SSA uses its determination of your average current earnings and calculates 80 percent of it to set the combined dollar limit for your monthly SSD award plus your Workers Compensation amount. The Social Security Disability income will be reduced by the necessary amount to keep the total amount of benefits that you receive from exceeding the maximum. Potentially, your SSD could continue to be subject to the Workers Compensation offset until you reach full retirement age, at which point the SSA replaces your SSD with Social Security retirement benefits.

Monthly benefits are not the only category that can be affected under the federal law. Often, people receiving Workers Compensation will trade monthly payments for a lump sum. If this occurs, you would not avoid facing the Workers Compensation offset, but, since your regular SSD payments are received on a monthly basis, the Social Security Administration must alter the way that it handles the calculation of the average current earnings.

Adjustments Required for Payment of a Lump Sum

The general principle involves dividing this lump sum by the amount of Workers Compensation that you were getting each month. The possible reduction of SSD benefits focuses on the monthly amount that was being received by viewing its receipt as continuing for the number of months that is the result of this formula. To attempt to minimize the impact of the offset when a lump-sum settlement has been reached, a person might agree an amount replacing a lower Workers Compensation amount that would have been received monthly until the individual would reach Social Security’s retirement age (e.g., age 65 currently) so that the average current earnings that could trigger the offset are reduced.

An additional consideration is that the SSA may exclude medical and legal benefits that are part of the lump sum. If these amounts are subtracted out of the settlement, the reduced Workers Compensation settlement will yield fewer months for the offset potentially to be in effect after this total is divided by monthly amount currently being paid. However, you need to realize that the Social Security Administration may want to see the documentation of such a settlement before its acceptance.

In practice, the Workers Compensation offset has numerous potential pitfalls, and you have to be aware of these when you receive Social Security Disability benefits. If you take a chance without being sure that you have the implications explained to you by someone whom you trust, you may cost yourself some income to which you would have been entitled if you had understood the concepts that apply as well as how they apply to your situation.

Estate Property Transfers Without an Estate

Pennsylvania provides a number of ways that estate property of a deceased individual can be distributed. Usually, this involves opening an estate. When this step is taken, the personal representative for the decedent receives Letters Testamentary as the executor named in a Will or gets Letters of Administration as the administrator when no Will naming an available executor is found. Pennsylvania law dictates who can be chosen as the administrator. Meanwhile, assets with a named beneficiary or a co-owner with a right of survivorship are transferred outside the estate.

There are other ways to distribute estate property without going through the usual steps to transfer estate property. When an estate has a total value of less than $50,000 in real and personal property, the personal representative can settle it by petition. This is possible one year after an estate is opened and the first complete advertisement of the grant of letters.

On the other hand, small estates consisting of no more than a gross value of $50,000 in personal property can be settled by a petition to the court. This does not require an estate to be opened. In this situation, you would not deal with any real estate owned by the deceased in this petition. The procedure also does not count payments to family and funeral directors under Section 3101 of the Probate, Estates and Fiduciaries (PEF) Code, which is the focus of the remainder of this article.

Payments to Family & Funeral Directors under Section 3101

Distributions under Section 3101 deal with the transfer of ownership of estate property without requiring any action involving an estate or the court. This property generally is monetary and can come from a variety of sources. As set out in the PEF Code, there are a number of ways for specific persons to obtain payments. The total value must be below a maximum amount, as well. The distribution would not involve the court system since you would not need to get a short certificate to transfer ownership. In addition, there is no need to present a petition when this provision applies. A brief review of what can be obtained without opening an estate follows.

The employer of a person who resided in Pennsylvania at the time of death can pay wages, salary, or employee benefits up to $5,000 to the person’s spouse, any of her children, her mother or father, or any brother or sister of the individual. The distribution preference in this and the other categories follows the order in which they are listed. Therefore, a surviving spouse is preferred over anyone else listed here. The person receiving payment of this estate property can be held accountable if the distribution was improper, although the employer is released from liability.

Banks, savings and loan associations, credit unions, and other savings organizations also are permitted to release funds of an estate after the death of a depositor, a member, or a certificate holder. The amount cannot exceed $10,000. Also, a receipt for the funeral bill or an affidavit of a licensed funeral director acknowledging satisfactory payment plans have been made has to be presented. The order of preference is the same as in the prior paragraph: a spouse, any child, the mother or father, or any sibling of the decedent.

A patient’s care account also can be accessed when the deceased was a qualified recipient of Medical Assistance and a patient in a facility that held such an account for the individual. The payment first would be released to a licensed funeral director for burial expenses of $10,000 or less. The facility can pay what remains, again, to a spouse, any child, a parent, or any sibling. The total amount paid from the account cannot be more than $10,000, though.

A life insurance policy that does not name a living beneficiary (primary or contingent), for example, results in property payable to the estate. Unlike most estate property, these life insurance proceeds are not subject to inheritance tax. They can be paid to the same list of relatives, in the same order, as listed in previous paragraphs. The insurer’s payment cannot exceed $11,000. There is a 60-day period following the death before the payment can be made. In addition, payment cannot be made if there has been written contact from an estate’s personal representative before the funds are released. The adult requesting the payment must submit an affidavit specifying the relationship to the decedent.

Finally, under Section 3101, estate property of a Pennsylvania resident held by the Bureau of Unclaimed Property can be released by Pennsylvania’s Treasurer. Certain conditions have to be met. One condition is that the person making the claim must be one of the following: the surviving spouse, a child of the deceased, one of the individual’s parent, or a sibling. In addition, the unclaimed funds or abandoned property must be no more than $11,000 in value. Finally, there cannot be a personal representative for the decedent or – if there is one – this person must have been appointed at least five years ago. The claimant submits the required documentation to the Treasurer, who determines if the claimant is entitled under the statute to claim the property.

Transfer of Title to a Vehicle

One additional category for transferring estate property without opening an estate or petitioning the court merits mention. Transfers of title to motor vehicles from a decedent can be accomplished without having opening an estate. The Vehicle Code permits title to be transferred from a deceased owner to certain relatives.

For example, when there is no Will, a surviving spouse could assign the title to another person. As long as this person submits the proper documents to the Department of Transportation, she becomes the new owner. In addition to an acceptable proof of death (usually, a death certificate), you need Form MV-39 (“Notification of Assignment/Correction of Vehicle Title upon Death of Owner”) and Form MV-4ST (“Vehicle Sales and Use Tax/Application for Registration”). Although you must submit a sales tax form, no sales tax is assessed. However, you may have to pay inheritance tax.

Other relatives may be involved in this assignment of title, as well. For instance, if the decedent had children over 18 years old and a surviving spouse, all would have to sign the MV-39 form transferring title to whomever they choose. Rather than review all possible fact patterns in which relatives can assign title, the Department of Transportation has a fact sheet on its website that detailing possible transfers after the owner’s death.

The categories of estate property that have been reviewed are examples of transfers of property without letters testamentary or letters of administration being issued. Other possibilities meeting this criterion, such as a small estate petition, involve the entire estate or, at least, all of the personal property of the decedent. They also action through the court. The categories of estate property discussed here do not require action involving the court. I will leave you with one word of caution to keep in mind, though. Since property was transferred from an estate, you still must check on the possibility that you have to pay inheritance tax.

Elder Law and Estate Planning

Elder law and estate planning are not two terms for the same area of law. However, they are related. Estate planning is an important part of the work that an elder law attorney does. At the same time, the attorney generally takes a broader, more holistic approach in an elder law practice.

To paraphrase the National Elder Law Foundation’s definition of elder law, this area of practice involves counseling and representing of older persons and their representatives in matters regarding the legal aspects of health-care and long-term care (LTC) planning. Additionally, the attorney educates clients about and helps them to obtain public benefits. The definition includes discussing the possible need for surrogate decision-making while addressing the issue of legal capacity. The attorney and client also need to talk about the conservation and, ultimately, disposition and administration of estates. After the consideration of tax consequences, the attorney looks at how to implement the client’s decisions about these estate issues.

As the diversity within the definition suggests, the elder law attorney needs good resources in numerous non-legal fields. This may include access to medical professionals, financial advisors, and social workers, for example. The legal goals often cannot be achieved without first addressing non-legal issues. The lawyer needs to deal with them successfully for the overall result to be positive. Often, topics include resolving family conflicts, understanding a client’s illness, and adapting to any consequences of those health problems.

Elder law is a challenging legal area. To help the client, an attorney must focus on aging, disability, and incapacity, as well as the difficulties that a person faces with each problem. Then, the attorney has to assist the client in creating a plan to deal with all of these. They need to work together to plan for health-care issues. Meanwhile, they have to look at long-term care since the client may require this at some point. The attorney must review obstacles to LTC financing and look for ways around these. In addition, barriers to essential assistance and services will exist. To overcome these, the attorney works with the client and family members to find solutions. Due to all of the issues that an individual may face, this practice area involves a powerful need for comprehensive estate planning.

In general, the elderly have a greater sense of urgency to prepare documents that are necessary due to serious illness or death (as with a Last Will and Testament). At the same time, attorneys in elder law often have clients who have special needs caused by disabling diseases. This makes sense because the issues often are similar. Both need to deal with possible incapacity in the relatively future while many younger people in good health may not view these matters as important at the moment. At this point, I will look at the elder law issues that have been raised from the perspective of individuals with special needs since they have to plan for the same types of problems regardless of age.


Special Needs Planning and Multiple Sclerosis


The National Academy of Elder Law Attorneys (NAELA) teamed up with the National Multiple Sclerosis Society and the Stetson University College of Law to prepare a video series for people with MS. This disease tends to strike people between the ages of 20 and 50. In addition, women get MS at a much higher rate than men do. Its progression is not predictable. However, MS often becomes disabling over time because it attacks a person’s central nervous system. This results in the flow of information within the brain, and between the brain and body, being disrupted.

Since the disease’s progression is unpredictable, the individual diagnosed with MS and family members need to look at the complex legal and other issues that may arise. To do this, they should seek the assistance of an attorney with experience in elder law and special needs law.

These videos focus on planning for possible incapacity and accessing LTC benefits. As a result, they can help not only people with special needs, such as those caused by MS, but also the elderly. In addition, anyone interested in an introduction to various estate planning documents can find benefit.


The Video Series on MS – Looking at Legal Issues & Plans


The five videos in this series are:

  • How Elder & Special Needs Law Attorneys Can Help People Diagnosed with MS (Presented by Craig C. Reaves, CELA, Fellow, CAP)
  • Legal and Care Planning for Younger People with MS (Presented by Robert Brogan, CELA, CAP)
  • Coordinating Attendant Care and Available Resources (Presented by Stephen Dale, Esq., LLM)
  • Family Law and Divorce: When a Partner Has MS (Presented by Patricia E. Kefalas Dudek, Esq., CAP, Fellow)
  • Property and Health Care Decision-Making Agents: An Overview (Presented by Mary Alice Jackson, Esq., Fellow)


I have placed two of the videos dealing with the types of issues that I mentioned earlier below. They also discuss a number of legal documents that are useful when these issues arise. The presenters review various kinds of trusts and the purposes they serve. Additionally, they talk about medical and financial powers of attorney, which can benefit everyone. A person with MS understands some of these benefits more than the average person. For example, powers of attorney can make a guardianship, which strips a person of at least some civil rights, unnecessary. While a debilitating disease may make the possibility of a guardianship seem more real, anyone can be in an accident that results in incapacity and the need for a substitute decision-maker. Powers of attorney fill the void here.

These two videos also look at other tools for planning for events that can occur during anyone’s life at some point.  This includes what commonly is called a Living Will in Pennsylvania. A Living Will permits you to make end-of-life choices while you still are able express your preferences.

This video provides an overview of Property and Health Care Decision-Making Agents:

I also included the video about Legal and Care Planning for Younger People with MS:



NAELA: A Useful Resource for Elder Law & Special Needs Law


All of the videos in this series can be viewed on the NAELA website. In addition, you can find a lot of other useful elder law materials by visiting this website at www.NAELA.org.

This video series highlights some of the benefits provided by attorneys experienced in elder law and special needs law. As the population in Pennsylvania and elsewhere ages, people increasingly will need attorneys who are well versed in elder law and special needs law. An attorney who can help you handle the often overlapping legal, medical, and financial decisions as you plan for an uncertain future can be very helpful. The National Academy of Elder Law Attorneys is a good source for this legal assistance. Remember that estate planning is a major part of elder law so NAELA attorneys can be good resources in this area. They also can provide information about long-term care options and how to access these services. Considering what you may need and want whenever you might become incapacitated is important. Having a documented plan in place to deal with this possibility is essential.


An insolvent estate has debts in excess of decedent’s assets. This means that not every debt can be paid in full. Pennsylvania law determines the order that debts are paid and, ultimately, the amount. Surviving spouses and children often worry about their responsibilities for debts that the estate cannot pay. Generally, this is not a problem. This is a brief overview of what usually happens and why.

Usually, a decedent’s creditors only can reach assets in the decedent’s estate. A number of assets are exempt from claims of creditors or are not part of the estate. Therefore, creditors cannot pursue these. Examples include a life-insurance policy owned by the decedent naming a beneficiary other than the decedent or the estate. In addition, property owned with someone else having the right of survivorship is not part of the estate. These usually are removed from the estate when determining its solvency.

Responsibilities of the Personal Representative

The estate’s personal representative – the executor when a Will is being probated or the administrator when there was no Will – determines if an insolvent estate is involved. This is done before paying debts or making distributions. An insolvent estate adds difficulty to the personal representative’s job. Since one of the first responsibilities being the payment of the deceased individual’s debts, the personal representative review all claims against the estate. Next, the order in which the creditors will be paid is determined. Gathering the estate’s assets to use  to make the payments is another crucial task.

The personal representative quickly learns if the estate is insolvent. If it is insolvent, this individual should not make distributions to heirs or beneficiaries. Doing so can lead to liability for debts that otherwise could have been paid.

Section 3392 – Classification of Debts & Priority of Payment

With an insolvent estate in Pennsylvania, you have to look to the law for guidance regarding payment of debts. Section 3392 of Title 20 of Pennsylvania’s Consolidated Statutes sets out classifications of various types of debts and the order in which these are paid.

While there are 7 categories listed in Section 3392 (“Classification and order of payment”), there is an additional one given preference over these. These are claims that the federal government may have for taxes owed to it. Generally, the phrase, “subject to any preference given by law,” gives top priority to federal tax debts subject to liens. As the personal representative of an estate, you must look for these before paying other debts. Otherwise, you could be responsible for paying the debts that have priority due to the mistake of paying debts of lower priority instead.

Section 3392 is important when there is an insolvent estate, but it applies to all estates. This is especially important since an estate that looks solvent may be viewed differently after all claims against the estate have surfaced. You cannot pay claims of a lower classification before all claims of higher classifications are paid in full. Also, with an insolvent estate, when you reach the classification at which there are not sufficient assets to pay all claims, you would make partial payment for each claim using the same proportion throughout that class. Any classes below this would have to go unpaid.

As for the classes themselves, the first category to be paid involves the costs of administration of the estate. This includes filing and related fees (such as advertising the estate). Other administrative costs that Pennsylvania gives top priority include legal fees and the personal representative’s compensation. Second in the list is the family exemption, which is cash or property with a value of up to $3,500 that can be claimed by a surviving spouse or children and parents of the decedent who resided in the decedent’s household.

After this, priority is given to funeral and burial costs as well as the cost of medicine used by the deceased person during the final 6 months of life. Medical, nursing, and hospital services during this period also are in this category, along with money for services provided by any employees of the decedent during these 6 months. The final part of this category are services provided by Medical Assistance in the last 6 months of life.

The fourth priority for payment is the cost of a grave marker. Then, priority is given to any rent owed for the decedent’s residence during the 6 months immediately prior to death.

Listing 5.1 (actually the sixth priority) involves claims made by Pennsylvania and its political subdivisions. Finally, there is a catchall category of all other debts and claims, which would include such items as credit-card debts solely in the decedent’s name. If there are sufficient assets in the estate, the personal representative should work to pay all of the above debts as soon as possible. Then, the assets that remain can be distributed to heirs or beneficiaries (depending on whether there is a valid Will).

Possible Liability of Third Parties for the Estate’s Debts

However, when an insolvent estate may exist, not all claims and debts can be paid from its assets. This can raise a question that is important to various parties interested in the estate: can someone other than the decedent be held responsible for debts that cannot be paid by the estate? The answer is a qualified “yes.”

Again, remember that executors and administrators can be responsible for debts in some circumstances. To avoid this, they cannot distribute assets from an insolvent estate since they face personal liability for the debts that cannot be paid as a result. A distribution from an apparently solvent estate is an “at-risk” distribution because there can be claims that become known after the distribution. An executor runs the risk of being responsible for paying any amount of a claim that the money received by the beneficiary could have paid. With “at-risk” distributions, a personal representative generally wants to be protected by an “indemnification agreement.” This means the recipient agrees to reimburse the estate if this is needed to pay its debts.

When faced with an insolvent estate, the personal representative often seeks the court’s protection before acting. In this situation, you should not consider paying debts of the insolvent estate unless you obtain court approval of a petition under Section 3392. This will prevent you from being held responsible for paying the debts personally.

There also are some situations when others can be held accountable for debts in the name of the deceased person. While creditors may have more incentive to pursue third parties in an insolvent estate, the debts may be enforceable under any circumstance. You always will be liable for a debt on which your name appears as a co-signer or guarantor. Charges that you made on a decedent’s credit card can leave you with responsibility for that debt.

As for spouses or children, liability usually follows a similar course. In other words, surviving spouses and children generally are not responsible for debts solely of the deceased spouse or parent. However, when both spouses sign a note for a loan, for example, the estate and the surviving spouse are liable for the debt, even if only one spouse received its benefits. Also, if a surviving spouse or child signed a contract as a guarantor when the decedent needed medical care, liability for any unpaid debt likely remains. An important point that runs throughout all of this is that creditors want to be paid and potentially will look at all possible sources when a decedent leaves an insolvent estate.

Debt Forgiveness and Income Tax

Debt forgiveness, which is the cancellation of a debt that you owe to someone, often can lead the IRS to see an increase in your income tax bill. However, there is no simple rule to be applied to every situation. For example, if you are in bankruptcy, the IRS is unlikely to see income that can be taxed after debt forgiveness. On the other hand, when a commercial lender cancels your obligation to repay a debt, you may find yourself with income equal to the amount of debt forgiven. In this situation, you do not have any money in hand, but you can expect a tax bill on the amount of money that the lender decided could not be collected from you. Your former lender usually should send you an IRS Form 1099-C (“Cancellation of Debt”) to let you know that the debt that you no longer owe triggered an increase in income taxes at the time of debt forgiveness. Remember that the IRS also gets a copy of the 1099-C and is unlikely to forget the incomes taxes that you now owe.

You may wonder why you receive debt forgiveness income when you cannot repay a loan. One point that will be discussed later is that the IRS does not see income when a debt is cancelled so the explanation here is general. The idea behind debt forgiveness resulting in income begins with the fact that the funds you originally borrowed were not income since those funds represented money loaned to you that had to repay to the lender. When a debt is forgiven, you no longer have to have any obligation to pay back whatever amount of the loan remains unpaid – essentially, your wealth has increased now that you have money that you can keep.

As long as none of the exclusions or exceptions (which will be mentioned below) regarding debt forgiveness income applies, the formula for calculating income simply involves subtracting the fair market value of the property from the debt owed at the time that the lender took a specific action, such as foreclosure or repossession. Also, you may receive a capital gain due to foreclosure, for example; this is not debt forgiveness income but usually occurs when the property’s fair market value is greater than its adjusted basis (approximately your original purchase price plus the costs from major improvements). An amount could be excluded due to the length of time that this was your personal residence during the last five years – I won’t go into the details here because the focus is on debt forgiveness for the moment.

There are several exceptions when debt forgiveness does not lead to taxable income. The examples provide general rules about various exceptions, which could be subject to exceptions themselves – consulting with someone who handles these matters about your specific situation always is advisable.

In general, a debt that is cancelled through a gift, a bequest or devise, or an inheritance is not considered income. Certain student loans also provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as the result of this type of provision, the cancellation of this debt isn’t included in your gross income. To qualify for this treatment, the loan must have been made by entities in one of three categories: 1) the federal government, a state or local government, or an instrumentality, agency, or subdivision of one of those governments; 2) a tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, having employees defined as public employees under state law; or 3) an educational institution (an organization that has a regular faculty and curriculum as well as regularly enrolled students who attended educational activities at that place). Other criteria have to be met for these loans not to be income if they are cancelled. One major reason for debt forgiveness here is to encourage students to serve in occupations or areas with unmet needs in which the services provided are for, or under the direction of, a governmental unit or a tax-exempt Section 501(c)(3) organization.

There also is an exception for deductible debts. Most individuals use the cash method of accounting so income is seen when the money is received while expenses are counted when money is paid for goods or services. Therefore, when a debt was supposed to be paid but the obligation to do so was forgiven, you would not realize income at that time if payment of the debt would have been a deductible expense for you.

The Home Affordable Modification Program (HAMP) also has some exceptions to debt forgiveness income. Reduction of your principal mortgage balance generally is not income when Pay-for-Performance Success Payments and PRA investor incentive payments are involved. Meanwhile, when the principal balance is reduced due to Principal Reduction Alternative under the same program, you should expect that you have taxable debt forgiveness income. Any exception to possible debt forgiveness income can become complicated; again, seeking a professional’s assistance is the best way to protect yourself from making costly mistakes in this area.

After any possible exceptions are reviewed, you then look at the exclusions. For individuals, some of the most common situations that are excluded from consideration as income from the cancellation of a debt would be the following. The most common one probably involves bankruptcy – if a debt is discharged in a bankruptcy case, then it cannot be counted as income from debt forgiveness. Insolvency, which involves a situation when your assets have a fair market value that is less than the amount of all of your debts, also would exclude you from having debt forgiveness income. However, this is not easily determined so you would be wise to have a tax professional examine your financial position to determine if you are insolvent.

Another category of exclusion that is complicated and would require the help of a tax professional usually deals with certain farm debts. The IRS also has noted that non-recourse loans are not subject to debt forgiveness. These loans permit a lender to repossess the property that you financed with the unpaid debt or, if this does not apply, the property that you used as collateral in the event that you defaulted on the loan. There is no personal liability for the default on a non-recourse loan, which is why you do not gain taxable income from the debt’s cancellation. On the other hand, this type of loan still could result in a capital gain when the property is sold.

Exceptions should be applied before you apply the exclusions because their effects on “tax attributes” of yours are different. Unlike exceptions to tax forgiveness income, exclusions require you to reduce tax attributes, which include certain credits and losses as well as the basis of assets. Remember that, while income due to debt forgiveness can seem to be a relatively simple concept, there are many twists to this concept of which you must be aware, and the only way to approach this is to consult with a tax professional about all of the implications that ultimately will impact your tax bill.

There is one final word of caution when the possibility of income from debt forgiveness exists. Whether or not a Form 1099-C was received does not determine income tax implications. The IRS requires these forms only under certain circumstances. When a creditor cancels a debt of less than $600, you may not get a Form 1099-C. However, you must look at the possibility that you received income that is taxable due to debt forgiveness despite the absence of the 1099-C because the IRS would look for income in this situation and will not be do forgiving if you neglected to pay tax that you owed.

A Self-Funded Special Needs Trust, an Exception for Medicaid (MA) & SSI Eligibility

In 1993, Congress passed a law (often called OBRA ’93) that allows some disabled individuals to be the beneficiaries of what is known as “self-funded” Special Needs Trust (SNT) under the Social Security Act. This is set out in Title 42 of Section 1396p(d)(4(A) of the U.S. Code. Since the law can be somewhat confusing, the Social Security Administration (SSA) developed a review process with 8 steps when its staff evaluates a trust under this law.

In terms of terminology, we are looking at self-funded Special Needs Trusts. Another type of trust is called a “supplemental needs” trust. This developed from cases, not specific legislation. While OBRA ’93 permitted assets of disabled individuals to be used in certain types of trusts, a supplemental needs trust has created by a third party with the assets of the third party. However, we only look at self-funded SNTs here.

In reviewing the steps used by the SSA, these also provide a practical way to quickly determine if a person who might meet SSA’s definition of disability could be the beneficiary of a self-funded SNT. If it survives this quick test, then you still must pay attention to the remaining details for SNTs. After all, a person with the trust generally can’t benefit if leads to ineligibility for government benefits based on need, such as Supplemental Security Income (SSI) and Medicaid (generally known as Medical Assistance, or MA, in Pennsylvania).

The first step looks at the age of the disabled individual. A Special Needs Trust that holds the assets of a disabled person must be created before the person reaches 65. The trust can continue after the individual’s 65th birthday, but it must exist as a self-funded SNT before that date.

Next, the SSA focuses on the source of the trust’s assets. There must be assets in the Special Needs Trust that a person meeting the SSI definition for disability, which generally involves a medical impairment that prevents the person from engaging in full-time employment for a period expected to last at least 12 consecutive months. If not (on either count), a self-funded SNT cannot exist.

The third requirement of the SSA is that the person meeting the definition of “disabled” is the trust’s only beneficiary. This does not mean that the trustee can’t make direct payments to third parties if these do not pay for anything defined as food or shelter by the SSA. However, the trust can’t give benefits to third parties during the disabled person’s life. Also, the trust can’t be terminated during the individual’s life (unless the trust’s property – often called the corpus or principal – could be paid only to the states or creditors for goods or services that were provided by them to the disabled person.

In addition, Social Security reviews how the trust was created in the fourth step of its evaluation. Specifically, only the following can place the person’s assets into the trust: a parent, grandparent, a legal guardian, or a court. The disabled individual cannot place assets into the self-funded Special Needs Trust. However, parents and grandparents may be allowed use a small amount of their money to start the trust, after which the disabled person (or a person with legal authority, such as via a Power of Attorney, to exercise control over the disabled person’s assets) may transfer property into the trust. As for a court, it must issue an order creating the trust; anything less (like merely stating approval of the trust) is insufficient. Basically, action by an appropriate party must be taken to start  the SNT. The reason that the agent under a Power of Attorney isn’t an appropriate party is that the disabled person gave the agent permission to act  here and has control over the existence of the relationship.

The fifth step in establishing the self-funded Special Needs Trust is that the document must require reimbursement from the trust after the disabled beneficiary’s death to all states that made Medicaid payments for the individual. No other debts can be paid until all of these amounts have been repaid. This is why these trusts are called payback trusts, with the repayment not limited to Medicaid received during a specific timeframe in the trust document.

If the criteria in the first five steps are not met, this still could be a “pooled” trust, which was created in the same legislation (OBRA ’93). This bears some similarity to a bank account controlled by the bank. However, the strengths and weaknesses of this type of trust account merit more detailed explanation than can be given in a paragraph. What is probably most notable is that the disabled person can work with a nonprofit organization to set up the pooled trust account. For now, it should be noted that the SSA goes to the eighth step when a pooled trust might be involved.

As noted in the first step, assets of the disabled person must be in the trust before the person’s 65th birthday. The sixth step looks at additions to the Special Needs Trust after the person has reached 65. In general, the regular SSI and MA rules apply so, after the month of the addition, it will count as a resource. In the month that it was placed in the trust, it might be considered income or a resource, depending how it became part of the trust. Annuity and support payments can be exceptions to the rule if there was a right to receive payments prior to age 65, with the rights to payments assigned irrevocably to the SNT before that age.

There is no issue regarding increases in the principal of the self-funded Special Needs Trust due to assets of the disabled individual placed in the trust before turning 65. Interest, dividends, and any other earnings from that part of the trust are not considered additions.

This leads to Step 7, which focuses on assets in the trust before the individual reached 65. If someone has legal authority to revoke or terminate the trust and any of its funds are then available for food or shelter needs, the principal is considered a resource for SSI eligibility. Also, when a person can use the principal for support and/or maintenance, it again is a resource. Finally, when the disabled beneficiary has an interest that can be sold, this person has a resource. The SSA provides the example of an individual who has the right to monthly payments. Unless a spendthrift provision is in the trust, the right to these payments could be sold for a lump sum that also would count as a resource.

Step 8 does not involve the self-funded Special Needs Trust because it looks at assets placed in trust after 65. It looks at whether these assets qualify as a pooled trust. Since this is a different exception to SSI and MA rules from OBRA ’93, it won’t be examined here. However, it is important to remember that this other exception is available if an SNT is no longer a possibility.