Tag Archives: Probate & Estate Administration

Risk Distribution by the Personal Representative of an Estate

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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.

Estate Inventory: Why It Matters and Tips on Its Preparation

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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.

Estate Property Transfers Without an Estate

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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.

Life Insurance with No Beneficiary

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There are a number of reasons why a person might purchase a life insurance policy on herself. Often, the death benefit is to be used to pay for funeral expenses and other bills that the person still owed when she died. Another person should be named as the beneficiary if the policy purchased for this purpose. This person would be given responsibility for making these payments. However, life does not always go as planned.

When there is a named beneficiary, a life insurance policy is payable without having to go through the administration of an estate. When the company that issued it receives the necessary documentation, the money would be paid to this beneficiary, and, if used as planned, everything goes smoothly. Of course, the best laid plans of a deceased individual may go astray if events prior to her death do not follow the expected plan.

Often, the policy’s beneficiary is a child of the owner of the policy. This generally would mean the odds that the intended person will receive the proceeds. As long as the beneficiary uses the proceeds as the deceased parent requested, the plan will be a success. Then again, the odds may be in favor of this happening, but life does not promise, let alone guarantee, that something won’t go against the odds.

An elderly parent generally will outlive an adult child. When the adult child is the named beneficiary of the older parent’s life insurance policy, there could be a major problem if the child ends up dying first. Other variables of life may wreak havoc on what was expected. This example is based on a situation that occurred and is not all that rare. The other parent already had died. There were two adult sons, although only one was a beneficiary on the policy. He also had three children. When he died before his mother, her straightforward idea began to get complex and unworkable.

The Importance of Contingent Beneficiaries

After the son died, the policy’s contingent beneficiaries would be the crucial parties if the plan is to be implemented. A contingent beneficiary replaces a beneficiary who is unable to perform in this capacity. Sometimes, there is no contingent beneficiary, which will lead to potentially unintended consequences. The first problem is that the benefits remain to be paid. If no one was named to receive them under the new circumstances, the death benefits are paid by default to the decedent’s estate.

Since no Will existed, after the estate was opened and the policy was found by the estate’s personal representative who did then does what the insurer requires to prove that the named beneficiary could receive the death benefits while he (the other son) had the right to collect the asset on the estate’s behalf, the money ultimately would be paid to the parent’s estate. Being that she lived and died in Pennsylvania, the death benefits now must pass according to the intestacy laws of Pennsylvania – this result diverged considerably from what was intended.

Because the proceeds passed through the estate, any distribution and use would be delayed and may not follow the original plan that had seemed so carefully constructed. This could have been avoided, in part, by naming a contingent beneficiary in case the first beneficiary could not receive the death benefits. This was not done when the policy was purchased, and the mother did not update her beneficiaries after the son chosen to get them had died. Either way would have avoided payment to the estate. Also, if either path was taken, the likelihood that the policy’s benefits would be used as planned would have been better than the intestate distribution could promise since the parent had not discussed how the proceeds were to be used with anyone other than the original beneficiary.

Taxation always is concern and often is a reason that people pursue so-called nonprobate methods to distribute property. Life insurance proceeds that are paid to the beneficiary named in the policy have not been subject to Pennsylvania inheritance tax. However, after December 13, 1982, even when a policy’s proceeds are paid to the estate instead of a beneficiary, no inheritance tax is assessed. 72 P.S. § 9111(d). With this not being an issue, the question of what happens to the insurance proceeds that now were part of the estate is the main one in need of an answer.

The life insurance benefits now are another asset of the mother’s estate. The beneficiary designation is of no consequence because the one brother who was named already is dead. Since the mother had no Will at her death, Pennsylvania’s intestacy laws will determine what happens to the benefits after the insurance company has paid them to her estate.

Who Inherits if There is No Beneficiary?

The law is found in Title 20 of the Pennsylvania Consolidated Statutes in Chapter 21, “Intestate Succession.” Sections 2103 and 2104 provide the answers. The first section applies to an estate, such as this one, in which there is no surviving spouse. It provides the order in which property will pass based on the relationship to the person who has died. The mother’s issue are at the top of the list in intestacy so all the insurance proceeds will be distributed to those who meet the definition of issue. The surviving son qualifies here, but you have to look at the next section (“Rules of succession”) to determine his son as well as the shares for anyone else.

“Issue” includes siblings and, when applicable, their descendants. This is applicable in the current case. The brothers would have been in the same degree of consanguinity because they directly descended from the same ancestor – their mother. However, with only one son surviving, the number of equal shares is defined at this level of survivorship since he is the closest surviving relative. Since there were two sons, this means that there will be two equal shares. The surviving son will receive half of the benefits from the life insurance policy now. It is worth noting that this section contains a survivorship clause – anyone who would inherit under Pennsylvania’s laws of intestate succession must outlive the decedent by five days. He did, so this becomes a meaningless footnote here.

There still is the second one-half share of the insurance proceeds to be distributed. The statute dictates that this share passes by representation to the three children of the deceased brother, which gives each an equal share of one third of what their father would have received under the laws of intestacy. In the end, by not naming a contingent beneficiary in the life insurance policy, the mother altered her intended plan to a considerable extent. Instead of one person receiving all of the proceeds from the policy, her estate will distribute half of the benefits to her surviving son and a one-sixth share to each of the surviving children of the deceased son, who was supposed to receive all of the proceeds when the life insurance policy was purchased by the mother.

This situation provides a good lesson regarding any estate planning. When circumstances change, your plan may not represent your intentions. If the resulting change to your estate plan is significant, then you need to revise that plan as soon as you can because you’ll never know when it had to be implemented.

INSOLVENT ESTATE AND ITS CREDITORS

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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.

Medicaid Estate Recovery – Questions

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I looked at the basics of Medicaid Estate Recovery in Pennsylvania previously in the first part of this series, but there are other matters that may come into play and should be kept in mind whenever the possibility of estate recovery exists. One involves an objective of estate planning (namely, to transfer wealth to those of one’s own choosing), which estate recovery can hinder. Another issue concerns the need to protect a claim subject to estate recovery, including who can be held responsible for not doing so. A third topic of potential interest is the ability of the Department of Public Welfare (DPW) to postpone or waive its claim and the implications of these paths.

When someone may become subject to Medicaid Estate Recovery, how does this impact estate planning?

For anyone who was at least 55 years old and was on Medical Assistance (as Medicaid is called in Pennsylvania) after August 15, 1994, estate recovery is possible if the individual received nursing facility services, home and community based services, and related hospital and prescription drug services, as was noted in the previous post. This means that any estate planning must be handled prior to that point in time in order to avoid possible Medicaid Estate Recovery.

You need to focus on assets that DPW targets – in general, these are assets that are part of the “probate estate.” If something does not have to go through the process of estate administration in order for a beneficiary to become the new owner, then it should be free from estate recovery. A life insurance policy that names a beneficiary is an example. For a house to avoid estate administration and also to avoid estate recovery, you must plan carefully. If you are over 55 and receiving Medical Assistance (MA), you have options as long as you do not receive it for the three types of services mentioned above. You would need a deed that makes the property jointly owned by you and your beneficiary with rights of survivorship or that transfers the property entirely to the other individual.

(As an aside, if you would die within one year of this transfer, the entire value of the house would be subject to inheritance tax. In fact, if you transfer things that you own to an individual that have a total value exceeding $3000 during the year of your death, then Pennsylvania’s inheritance tax will apply.)

If probate property that is subject to Medicaid Estate Recovery is transferred, can anyone be held liable and forced to pay DPW’s claim?

The decedent’s personal representative – the estate’s executor or administrator (when there is no Will) — has a duty to make sure that DPW’s claim is paid after creditors whose claims have higher priority have been paid. Therefore, the personal representative will be personally liable for DPW’s claim when property subject to that claim is transferred without valuable and adequate consideration to an heir or anyone else with a claim of lower priority if DPW has not been paid when the transfer occurs. “Valuable and adequate consideration” is defined by DPW as a sale of property at fair market value by the estate’s personal representative to a party who is unrelated to the decedent or the personal representative. If this amount is obtained, then the personal representative would not be liable for payment of DPW’s claim.

As will be discussed briefly, DPW may postpone its claim under certain circumstances. However, the personal representative remains liable for transfers during this period. The personal representative must take steps to protect DPW’s claim. This may require a mortgage or other recorded encumbrance to be placed against real property in the decedent’s 威而鋼
estate on behalf of DPW. There also are provisions for perfected security interests to be placed against items of personal property worth more than $10,000 as well as cash (or cash equivalents such as securities) to have a total value exceeding $50,000 to be placed in trust, with DPW receiving the remainder at the trust’s termination up to the amount of its claim.

In addition, a person who receives property subject to a Medicaid Estate Recovery claim by DPW will be liable if the property’s fair market value was not paid for it. The transferee’s liability is the difference between the property’s fair market value and the amount of money received by the estate for the property. This person also must protect DPW’s claim during a period of postponement so that it is paid when the period ends.

When will a claim under the Medicaid Estate Recovery Program be postponed or waived?

Postponements can be requested under certain circumstances. For example, DPW will wait to collect its claim against a decedent’s home when any of the following reside there: a surviving spouse; a child who is “totally and permanently disabled” (as defined by the Supplemental Security Income (SSI) program); a surviving child is under the age of 21; or a sibling who has lived in the home at least one year before the death of the MA recipient and who also owns an equity interest in the property. When the last of these individuals has died, transferred the property, or left it, the postponement period ends, and the Medicaid Estate Recovery claim must be paid.

Undue hardship waivers are more complex so what follows is not an all-encompassing review. However, the most important difference between these and postponements is that a waiver means that DPW has relinquished its right to collect its claim against the estate forever.

The most common type of waiver probably involves a person who meets certain criteria relating to the primary residence of the decedent. First, the person must have continuously resided in the home for at least 2 years immediately before the decedent started to receive nursing facility services or for at least 2 years during which MA-funded home and community based services were received. Also, the person cannot have an alternative permanent residence. The third requirement is that the person provided care or support to the decedent for at least 2 years while MA-funded home and community based services were received by the decedent or for at least 2 years before the decedent received nursing home services and while the decedent needed care or support to remain at home for those two years.

Other sources of waivers involve income-producing assets that were the primary source of household income, without which gross family income would be less than 250% of the Federal poverty guideline — family farms and businesses are examples; payment of necessary and reasonable expenses to maintain the home while the decedent was receiving home and community based services or while the home was vacant when the decedent was in a nursing facility; and the administered estate of the decedent had a gross value not greater than $2,400 and  there is an heir.

 

Medicaid Estate Recovery is a complex area of law, and answers to these questions only touch its surface. For all of the needed details, you should contact an attorney familiar with this subject to protect the interests of all concerned.

Medicaid Estate Recovery in Pennsylvania

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In 1993, the federal government enacted a law requiring states to create estate recovery programs for repayment of long-term care costs covered by Medicaid (which also is known as Medical Assistance in Pennsylvania). How to do this was left to each state to decide, for the most part. As people are living longer, they often live their final days in nursing homes. Pennsylvania’s Medicaid Estate Recovery Program places an emphasis on recouping costs for nursing-home care, as well as home and community-based services that can be covered by Medicaid under a waiver authorized through the Social Security Act because these are provided to avoid having to place a person in an institution such as a nursing home. The third focus of estate recovery involves Medicaid payments for related hospital and prescription drug services that accompany the two other categories of services. The Medicaid Estate Recovery Program can be a major concern during the administration of an estate and could be an important consideration in estate-planning decisions, too.

Medicaid estate recovery targets estates of deceased individuals who received the services previously mentioned after they turned 55 and needed assistance from Medicaid to pay the bills. Pennsylvania generally requires repayment from these estates so the decedent’s personal representative (commonly known as the executor when there is a Will or the administrator when the decedent died without a Will) must be aware of this possibility.

The key here is whether or not the decedent was on Medicaid during the last five years of her or his life. If you are the personal representative and you know this was the case, then you must send a letter containing with specific information that the Department of Public Welfare (DPW) requires. Then, in general, DPW has 45 days to send you a Notice of Claim. Depending on the circumstances, the agency is not confined to making a claim regarding only the prior five years. If Medicaid paid for nursing-home services before this period, then DPW’s claim could go further back.

In addition, when you are the personal representative, you have to look at the 5-year period. You would have an ethical obligation to notify DPW if you are aware of Medicaid payments that actually occurred for the targeted services more than five years ago, as long as the individual was 55 or older period that period of time.

After DPW provide notice of its claim, you could appeal this at an administrative hearing. If the Department’s claim survives, then the recovery phase begins. It can make its claim against all property (both real and personal) that could be administered by a personal representative, even if the personal representative decides not to administer some of the estate’s property. So, if you are the personal representative, you cannot shield property that is in the estate by ignoring it.

On the other hand, most property that does not have to go through the estate process cannot be claimed by DPW. This would include property owned jointly with survivorship rights (or owned by spouses through a tenancy by the entireties). Life insurance that is paid directly to a named beneficiary also avoids the DPW claim, but the same policy – when payable to the estate – can be recovered. Assets in a testamentary trust, which is created by a Will, are subject to DPW’s claim; assets in a trust created by the decedent prior to the individual’s death escape the recovery program as long as they are not payable to the estate. This can be important to remember when an estate plan is being drafted.

Another point that you should remember if you are in charge of the estate is that DPW has a claim to estate property but does not have a lien against it through the Medicaid Estate Recovery Program. Anyone with a lien on property has priority versus DPW’s claim, which, unlike a lien, is unsecured. Among claims to payment from the estate, DPW’s claim only is in the third category, and that is limited to Medicaid payments made during the person’s last six months. Any other claims by DPW are relegated to the sixth payment class.

We have gone through some of the basics concerning Medicaid estate recovery. There are others that bear mentioning whether you are the personal representative in charge of administering an estate or you are a person setting up an estate plan that you want to provide as much to your chosen beneficiaries and as little to the government as possible. These factors raise such issues as the duty to protect DPW’s claim when the transfer of estate property is involved, the timing of transfers prior to going to a nursing home as well as prior to death, and the possibility of postponing or even waiving claims under Medicaid estate recovery when you would be an heir. I will touch on these topics next time. You should keep in mind that this can be a complex area of law so you probably should discuss them in more depth with an attorney if any of these subjects applies to a situation in which you are involved.

 

Responsibilities of the Trustee of a Trust

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Depending on the size and the purpose of a trust, the grantor (sometimes called the settlor) who established the trust may decide upon a relative or a close associate to act as the trustee of that trust. If you are chosen to handle this responsibility, you need to understand what you will be required of you before you take on this role.

The basic reason why a trust has to have a trustee is because the document that the grantor used to create the trust will convey that person’s intention(s) regarding how the assets in the trust are to be used on behalf of its beneficiaries. Some trusts are created to minimize taxes and preserves more assets to pass to the ultimate beneficiaries; the so-called “generation-skipping” trust might be used to accomplish this.

Other people may want to take care of needs of a child who has a disability which entitles the child to certain types of government assistance. However, direct payments from the trust could reduce this assistance while payments for financial or health needs might take the place of items that the government, otherwise, would have provided. To prevent these possibilities, the grantor might establish what is known as a “supplemental needs” trust for the child. Whatever the intention stated by the grantor in the trust document, the trustee must understand it, must understand how to manage the trust’s assets to carry it out, and must be willing to do so.

You generally have to follow the directions of the trust’s creator. You only have discretion to make decisions that are permitted in the trust instrument. A supplemental needs trust would give a trustee a certain amount of discretion, but you have to read the document to be sure. Other trust instruments can contain very specific criteria for the manner in which the principal and interest that comprise the trust’s assets are to be distributed. If language regarding discretionary decision making is nowhere to be found, then you have no authority to deviate from the grantor’s instructions.

In addition to the grantor’s intentions, a trustee must remember that the role always carries fiduciary duties. This means that you must act for the benefit of others, who are defined by the grantor’s intent in setting up the trust. Among those duties are good faith, candor, and loyalty.

There also is the duty to treat beneficiaries impartially (unless the trust’s language expresses a different intent), as well as a duty to balance the interests of the lifetime beneficiaries with those of the remainder persons (who would receive what remains in the trust at its termination). You have to keep beneficiaries updated periodically with an accounting of the trust’s performance. Meanwhile, as a fiduciary, you must avoid self-dealing in addition to conflicts of interest that could undermine your ability to act in the best interests of beneficiaries. Trustees can be held liable when fiduciary duties are breached.

For trusts governed by Pennsylvania law, trustees must understand the Prudent Investor Rule, which was enacted in 1999. Its general rule is as follows: “A fiduciary shall invest and manage property held in a trust as a prudent investor would, by considering the purposes, terms and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust.” The Prudent Investor Rule also defines permissible investments of a trust and considerations when making investment and management decisions.

This law does allow you to delegate investment and management decisions if someone with skills comparable to yours might do so. You will not be responsible for your agent’s investment decisions when you can show that you used reasonable care, skill, and caution in selecting the agent and you have reviewed periodically the agent’s performance and compliance with the terms of the delegated duties. Any trustee without sufficient investment experience would be wise at least to consider seeking professional advice when investing the assets of the trust so that distributions can be made and expenses can be paid while taxation of the trust is minimized to the extent possible. Obviously, the job of a trustee is not an easy one.

As you undertake these and other actions as a trustee, you generally are entitled to some compensation, defined in the trust instrument, as well as reimbursement for legitimate expenses. Again, you are a fiduciary so you must act in good faith and not inflate these expenses, for example. You always face being held accountable for your actions and could end up being ordered by a court to repay improper payments. If you go too far, the court could remove you as the trustee.

While all of these factors may make being a successful trustee an impossible task, you should remember that many trusts exist and each has, at least, one trustee. The vast majority of trustees handle the role without great difficulty. You simply must understand what is expected of you and know how to carry out your obligations. If you have doubts, you should consult with an attorney with experience in this area to discuss what you need to do to be a successful trustee.

Responsibility for Inheritance Tax

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In Pennsylvania, inheritance tax basically is a tax on your right to receive property of someone who has died. The tax rate is based on which class of beneficiary that you are in. For example, the spousal rate currently is zero percent while transfers to brothers and sisters face a tax rate of 12 percent. Because inheritance tax is assessed on a “transferee” having the right to receive property and the amount of the tax is calculated based on this person’s relationship to the decedent, an argument could be made that transferees, who are the individuals receiving the property, should be taxed. This also is reality, although they usually do not file returns or pay the tax directly to Pennsylvania.

According to Pennsylvania law, the estate’s personal representative (who also is called the administrator or the executor) must file the inheritance tax return that would include property of the decedent over which he or she had control, as well as any other property of which the personal representative has knowledge and that will be subject to inheritance tax when it is transferred. Simply put, the personal representative has the primary responsibility to file the return.

However, complications do arise. If the personal representative does not file an inheritance tax return or does not include property that you received as a transferee, then you are responsible for filing a return regarding that property and also for paying the inheritance tax. Remember that, ultimately, inheritance tax is based on a person’s right to receive estate property, and rights come with obligations. You have the responsibility to pay the inheritance tax on this property when the personal representative fails to do so. For example, a personal representative could exclude a beneficiary in the inheritance tax return when the property was owned jointly with the right of survivorship by the decedent and someone other than a spouse. The personal representative can fill in a circle on the return which states that the survivor, who automatically becomes owner of the entire amount, is to be billed separately by Pennsylvania’s Department of Revenue. The survivor needs to file a return and pay the inheritance tax on the portion that had been owned by the decedent.

The usual situation will involve the personal representative writing the check for the amount of inheritance tax owed, though. While the inheritance tax statute places the “ultimate liability” for payment on the transferee who receives the property, Section 9144 (entitled “Source of payment”) of Pennsylvania’s Fiscal Code, also specifies that the inheritance tax generally is to be paid by the personal representative from the residuary estate (which is what remains after all debts, expenses, claims, and testamentary gifts have been paid out).

If the personal representative does not pay the inheritance tax, then anyone receiving the residuary estate is supposed to pay it. Ultimately, if none of these individuals makes the payment, anyone who received property from the estate will be liable for paying the inheritance tax on the value of what she or he received. This is why you are said to have “ultimate liability” regarding anything that was transferred from the estate to you.

Because the possibility of receiving property from an estate often seems to bring out the worst in people, you might want to consider eliminating as many potential controversies involving the estate that you eventually will leave. An estate plan can be used to make clear how any inheritance tax on your estate is to be paid. This is why a Last Will and Testament commonly includes a clause directing how the inheritance tax, as well as other costs that can typically arise when a person is dying and other common costs after death, are to be handled by the individual who will be in charge of the estate. Setting forth your clear intent regarding payment of inheritance tax ensures that one possible estate controversy is eliminated. At the very least, this shows how good estate planning can prevent a hard time from becoming even harder for your family and friends.

Possible Liability of the Personal Representative of an Estate and How to Avoid It

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The personal representative (known as the executor when a Last Will is being probated or the administrator when a person died without a Last Will) is in charge of handling a decedent’s estate, with one of the major responsibilities being the payment of debts owed by the estate. The personal representative should not pay any debts or distribute any assets until determining if the estate is solvent, what debts exist, and whether or not all of the bills can be paid.

The reason for this is simple: the personal representative can have liability to a creditor that cannot be paid because property was distributed to a beneficiary or heir and also can be liable for an overpayment if a creditor receives more than it should have. Either way, the personal representative would be responsible for making up the difference to creditors that were underpaid.

However, if you end up being the personal representative of an estate, you can avoid any problem with liability by following the path set forth in the applicable laws. When you take the oath to be the estate’s personal representative, you are granted letters to administer the estate. Pennsylvania law requires you to advertise the grant of letters in a local newspaper of general circulation and the designated legal periodical for publishing such notices (for example, the Pittsburgh Legal Journal for Allegheny County).

In general, creditors with unsecured claims (basically, debts for which no estate property is collateral for any debt) have one year from the date of the first full advertisement of the grant of letters to give you notice of their claims. If they fail to do so, then estate property can be distributed without any liability for these claims.

It should be noted that two types of claims are treated specially under the notice requirements when applicable, and you must follow the requirements to avoid potential liability. These include claims that are owed to the Commonwealth or any political subdivision for maintenance of the decedent in an institution in which the decedent died as well as claims owed to the Commonwealth for medical assistance paid on behalf of a decedent for all nursing facility services, home and community-based services, and related hospital and prescription drug services. Both involve time periods that are shorter than one year and require that you inform them of the grant of letters.

Also, an exception is made for any “secured” claim, in which there is estate property that guarantees payment of the claim (up to the value of the property that acts as security for the repayment). This has to be paid even if no notice is given so your potential liability would equal the secured value. Beyond the amount of the secured claim, any additional amount is treated as other unsecured debts are in terms of payment and liability.

When an estate’s assets are not sufficient to pay all of the estate’s debts, Pennsylvania law establishes the order of payment of unsecured claims, which also means liability to the personal representative if debts are paid in the wrong order, leaving debts that should have been paid outstanding. The order is as follows: (1) costs of administration of the estate; (2) the family exemption provided under Pennsylvania law; (3) costs of the decedent’s funeral and burial, costs of medicines furnished to the decedent within six months of death, costs of medical and nursing services (including costs of services furnished under the Commonwealth’s medical assistance program) performed for the decedent within that time, and costs of services performed for the decedent by any of employees within that time; (4) the cost of a grave marker; (5) rent for the occupancy of the decedent’s residence for six months immediately prior to death; (5.1) claims by the Commonwealth and its political subdivisions; and (6) all other claims.

No claim within each class has priority over others in the same class, but claims in a higher ranking class must be paid before payments to the classes that follow. Otherwise, the personal representative faces liability for making improper payments. Also, when an estate is unable to pay all of its debts, the personal representative must pay claims owed to the federal government according to the priority established under federal law. Personal representatives who do not give federal claims their proper priority have liability for these claims if they are not paid.

If you are in charge of an insolvent estate, which cannot pay all of its debts as a result, you can avoid the problems that can arise in this situation by taking necessary precautions to protect against payment mistakes that can trigger liability. For example, a distribution to a beneficiary or heir that is not done with court approval is an “at risk” distribution; if you decide to do this, you at least should have the recipient sign an indemnification agreement requiring repayment to the estate if the property later is needed to pay debts; otherwise, you will be found liable for the incorrect payment. However, the safest course – especially with an insolvent estate – is to prevent personal liability for any distributions simply by not acting until the court approves your proposed actions. You also should consider retaining an estate attorney to help you through this process and its potential minefields.