Pennsylvania Trust & Estates Attorney Launches New Trust Administration Firm

Written on May 28, 2009 by Patti Spencer

Spencer Fiduciary Services offers trust and estate expertise to law firms and banks

 

LANCASTER, PA – May 27 – BUSINESS WIRE – At a time when law firms are scaling back operations or completely dissolving, Pennsylvania-based trust and estates attorney Patti S. Spencer has taken the bold step of starting a new corporate entity.

 

Spencer Fiduciary Services (SFS, www.spencerfiduciaryservices.com) is a private consulting company dedicated to providing trust and estate services to law firms and financial institutions. Founding attorney Patti Spencer, head of Lancaster-based Spencer Law Firm (www.spencerlawfirm.com), saw a need in the market for outsourced trust administration and estate settlement services.

 

“Handling trust and estate matters for clients is a natural expansion opportunity for many law firms, but it requires specialized expertise that may not be available within a firm,” says Spencer. 

 

SFS is designed to help Pennsylvania law firms and banks administer estates and trusts; value assets; and prepare and file inheritance, federal estate, or fiduciary income tax returns. SFS also helps clients comply with the Uniform Prudent Investor Act (UPIA), the Uniform Principal and Income Act (UPAIA), and the Uniform Trust Act (UTA).

 

“We work behind the scenes or directly with a firm’s clients to provide a wide range of estate and trust services,” says SFS Director M. Yvonne Crouse. “The client always remains the attorney of record.”

 

Law firms and banks that partner with SFS can maintain their client relationship while gaining in-depth tax knowledge, state of the art technology, and experienced staff.  Every client of Spencer Fiduciary Services receives a password-protected Internet portal for unlimited access to all account documentation.

 

When trust and estate disputes lead to fiduciary litigation or arbitration, Ms. Spencer is also available to serve as an expert witness in matters relating to fee disagreements, attorney malpractice, breach of fiduciary duty, failure to pay taxes, estate violations, or fiduciary investment management.

 

About Patti S. Spencer, Esq.

 

Patti S. Spencer is a nationally recognized trusts and estates attorney, author and educator. She is a peer-nominated Fellow of the American College of Trust and Estate Counsel. Her publications include “Pennsylvania Estate Planning, Wills and Trusts Library” (Data Trace, 2007), and “Your Estate Matters” (AuthorHouse, 2005). Her blogs include www.pennsylvaniafiduciarylitigation.com and www.pennsylvaniatrustsandestates.com.

 

Contact:

 

Margaret Grisdela

Legal Expert Connections, Inc.

866-417-7025, mg@legalexpertconnections.com

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Post-Mortem Planning with Tax Elections

Written on January 27, 2009 by Patti Spencer

So you think you can do the estate and inheritance tax returns for Mother’s estate by yourself? Maybe.

The forms for filing death tax returns look deceptively simple. They consist of a series of schedules for different types of property and deductions. Each schedule has a title at the top and then the rest of the page is left blank for you to list the property, deductions, and values. It’s your basic tabula rasa (for the Latin-challenged, a blank slate).

What goes on the schedules and how the value is determined is the important part. To know this you have to have a clear and detailed understanding of both the federal estate tax and the Pennsylvania inheritance tax regulations. In addition, there are lots of tax elections that can be made that will change the tax effect for estate tax, inheritance tax and income tax.

Making a plan to minimize estate, inheritance and income taxes for the estate is a complex matter. Let’s look at some of the elections just to give you an idea of the issues.

If the value of the estate declines, the executor may elect to value all assets as of the date 6 months after the date of death (or if disposed of at an earlier date, valued at the disposition date). This is called alternate valuation. It is available for the federal estate tax return but not the PA inheritance tax return. This means the same assets could be reported at different values on the two returns.

The executor may choose a fiscal year for the estate and may make an election to have the decedent’s estate and revocable trust taxed together as if they were one entity instead of two.

The executor chooses whether to take expenses of administration as deductions on the estate tax return or on the estate’s income tax return. Yes, Virginia, the estate has to file an income tax return too. While the assets are held in the estate, the income is taxable to the estate - which makes sense. The decedent is certainly not paying income tax any more, and the beneficiaries don’t have the money yet. The estate files a Form 1041 for federal income tax and Form PA-41 for Pennsylvania income tax.

The income tax rates that apply to the estate are the same as individual income tax rates except that the brackets are very compressed. An estate reaches the top bracket of 35% at just $9,950 of income while an individual doesn’t get to the highest 35% bracket until she has $319,100 of income. This difference in income tax rates often makes it desirable to distribute income from the estate to the beneficiaries during the course of administration. Then the income can be taxed at beneficiaries’ lower brackets. Planning for these distributions must take into account the estates fiscal year, liquidity, and the tax situations of the beneficiaries.

Similarly, when to close the estate and when to pay the administration expenses requires planning. This is an area where haste often causes more tax to be paid earlier.

There is another choice for the executor to decide whether to deduct payments for medical expenses on the decedent’s final 1040 or on the estate tax return.

For Series E Bonds the executor can elect to have accumulated interest taxed on the decedent’s final return or on the estate’s income tax return.

A election is available to qualify certain types of trusts for the marital deduction. This is called a “QTIP” election, not for the cotton swab, but for a “qualified terminable interest in property.”

The executor is responsible for filing the decedent’s final income tax return and the decedent’s final gift tax return, if one is due. There are elections available here, too. One of them is whether or not to “split” gifts with the surviving spouse.

For Pennsylvania inheritance tax there is an election for certain trusts called spousal sole use trusts, whether to pay the inheritance tax on the first spouse’s death or on the second spouse’s death. This election involves an actuarial computation based on the survivor’s life expectancy. .

Then there is the family farm. The estate may qualify for special use valuation which allows the farm to be valued, under certain conditions, as working farmland instead of at its highest and best use which may be for development. To elect the farm value, the beneficiaries must continue to use it as a farm for 10 years and meet other technical requirements.

It is quite a challenge for the executor and his attorney to figure out which combination of elections and options will produce the best overall tax result for the estate. Obviously, paying less in tax increases what the beneficiaries receive.

This list of elections is not exhaustive and is not intended to teach you how to do this on your own. Thanks to our Senators and Representatives, we have an extremely complex system of tax laws governing estates. Don’t try this at home - get professional help.

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What is a Fiduciary Accounting?

Written on January 27, 2009 by Patti Spencer

A fiduciary account is a well-recognized term of art and refers to the presentation of the fiduciary’s information about how he managed the affairs that were his responsibility.

The purpose of the account is to provide the parties in interest - whether they be estate or trust beneficiaries, the principal of an agent, a minor, or the court - with a statement of all receipts and disbursements of the fiduciary. In other words, what property did the fiduciary start with, what happened to it, and what is left.

The account will begin with what assets are included in the estate or trust, or are under the fiduciary’s control and management. This also includes subsequent additions to the assets controlled by the fiduciary.

The fiduciary must separate principal from income. Principal is the amount originally received plus capital gains, minus capital losses, and less any expenses or distributions chargeable to principal. Income is the interest, dividends, and other income earned by the principal. In estates and trusts, sometimes the beneficiaries of income are different from the beneficiaries of principal so it is very important to keep them separate. The Pennsylvania Uniform Principal and Income Act gives the rules for how to determine if a receipt or disbursement is allocable to principal or income.

After the listing of principal receipts, usually the next schedule shows sales or other dispositions. The fiduciary carries the assets in his account at a “book value” which is really the value the asset had when the fiduciary received it. If the asset is sold, the fiduciary shows the difference between the book value and the sales price as a gain or loss. Often the fiduciary will need help in preparing her account. Book value, or the fiduciary’s carrying value, is different from the assets cost basis for income tax purposes. Thus, the fiduciary’s gain or loss in the accounting may be different from the capital gain or loss realized for income tax purposes.

The next schedule shows any items paid out of principal including distributions and expense chargeable to principal. Logically, the next schedule is the principal balance on hand - this shows what is left. The usual format is to show both the book value or carrying value of the asset and the fair market value at the end of the accounting period. When an account covers a long period of time sometimes it is very difficult to determine the investment performance.

There are various events or transactions that don’t change the value of the assets under management but which should be shown on the accounting. Stock splits are a good example. Investments made with cash are another example.

Next are the income schedules. Income is usually grouped by type of receipts, interest, dividends, rents. Each income item is listed separately with its date of receipt. That way you can easily see if something is missing: a quarterly dividend, a monthly interest payment, a rent receipt.

Payments out of income are shown next. These are usually the ordinary operating expenses of the fiduciary along with distributions of income to beneficiaries or the principal.

Finally the account shows the balance on hand. If it is an interim accounting, that is the end. Sometimes the fiduciary shows a schedule of proposed distribution if the fiduciary services are complete.

The account is given to the parties in interest, and may be filed with the Orphan’s Court if court approval of the accounting is sought. The court’s approval of the fiduciary’s account after notice to the beneficiaries and then holding a hearing or “audit” relieves the fiduciary of most liability for his actions. If the court is not involved, often the fiduciary will ask for the beneficiary’s or agent’s consent to the accounting before releasing funds. The fiduciary will ask the beneficiary to release him or her from any liability before handing over the funds. This is usual and customary and is often less expensive and less burdensome than seeking court approval of the fiduciary’s account.

If any interested party has objections to the accounting, these objections are brought to the fiduciary’s attention. Objecting to the fiduciary’s’s account is the typical way that the fiduciary is brought to task for bad investment decisions, improper spending or distributions, and careless management. A careful review of the accounting will bring these matters to light. Providing an accounting is one of the duties of the fiduciary, and it provides the only means by which the fiduciary’s actions can be examined and it can be determined whether the appropriate standard of care has been met.

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Predeceased beneficiaries: The law, the exceptions, and the overrides

Written on January 27, 2009 by Patti Spencer

A will “speaks” at the moment of death. If Grandma’s will gives $100 to each member of her quilting club, only those members of the club who are living when she dies are entitled to receive $100. Past members are not entitled. Deceased members are not entitled. Persons who become members in the future are not entitled. To receive $100 the person has to both be a member of the quilting club and be alive when Grandma dies.

Let’s suppose Grandma leaves $10,000 to each of her brothers and sisters. Obviously, brothers and sisters of Grandma who are living when she dies will receive $10,000. What about a sibling who predeceased Grandma? What happens to his or her $10,000? It depends.

Survival required

I the $10,000 bequest by its express terms is conditioned on survivorship, then the bequest to a deceased sibling “lapses,” that is, no one receives it and it falls into the residue of the estate for distribution to the ultimate beneficiaries. An example of a bequest conditioned on survivorship would be: “I give $10,000 to each of my brothers and sisters who are living at the time of my death.”

Silence on survival

The common law rule is that gifts made in a will to a beneficiary who predeceases the testator (maker of the will) lapse. Pennsylvania, and many other states, have enacted anti-lapse statutes to change this result in certain circumstances. The purpose of an anti-lapse statute is to change the harsh results of the common law rule, which often operated to disinherit grandchildren when the parents predeceased the testator/grandparent.

Pennsylvania’s anti-lapse statute applies to bequests to issue (children and other descendants of all generations), brothers or sisters, or a child of a brother or sister. A bequest to any of these named relatives does not lapse but is payable to the issue of the deceased beneficiary unless the will provides to the contrary or the law’s exception noted below applies.

Anti Lapse Example

To illustrate the application of the anti-lapse statute, let’s look at an example. If I bequeath $30,000 to my daughter, and she predeceases me but leaves three children surviving, each of my three grandchildren would receive $10,000. Note that this happens because of state law even though the will does not specifically include this provision.

If I didn’t want that result, I would have had to condition the bequest of the $30,000 on my daughter’s survival. If my will had said “I give $30,000 to my daughter if she survives me,” then, the anti-lapse statute would not apply, the bequest would lapse, and the $30,000 would pass as part of the residue of my estate. Note that the words “if she survives me” make the difference between the grandchildren receiving the $30,000 or not. Large sums of money can hinge on a very few words.

Non-relatives

If I leave $1,000 to my friend, Mary Jones, and she fails to survive me, her bequest lapses. The anti-lapse statute does not apply to my friends. Mary Jones is deceased, and neither her estate nor her issue have a right to receive the bequest on her behalf. Instead, the bequest is not paid, and the $1,000 that would have been distributed to Mary Jones, if she had survived me, is added to the residue and distributed to the beneficiaries specified there.

Overriding Anti-lapse

Any will can override the anti-lapse statute by conditioning the bequest to a beneficiary on survivorship. For example, I give $10,000 to my nephew if he is living 30 days from the date of my death. If the nephew is not living at that date, the bequest lapses. It is clear from the will that the testator had taken into account the fact that the nephew might not survive to the appointed time and no alterative disposition is directed.

Anti-lapse exception

Pennsylvania’s anti-lapse statute’s exception provides that it does not apply to a bequest to a brother, sister, or child of a brother or sister if the lapsed bequest would go to the testator’s spouse or issue. (Nothing is simple.) Suppose I leave a bequest of $10,000 to my sister and the rest, residue and reminder of my estate to my children. Now, let’s assume my sister predeceases me. Do her children get the $10,000?

In Pennsylvania, the answer is no. Even though as a sister she is in the class protected by the anti-lapse statute, if the $10,000 lapses, it would pass to my children. In that case, the anti-lapse statute doesn’t apply. The $10,000 that would have gone to my sister (had she lived) goes to my own children, not hers.

If my will provided $10,000 to my sister and the rest, residue and remainder of my estate to XYZ charity, then, if my sister predeceased, the $10,000 would go to her issue.

What to remember

Just as Microsoft has default rules to determine whether that file you just dragged to another folder gets moved or copied, states have rules that determine whether a bequest lapses or not. Just as use of the Shift and Control keys override Microsoft’s defaults, use of “or her issue, per stirpes” and “if she survives me” override a state’s anti-lapse statutes. It’s better to use the overrides and be sure than to rely on use of rules, especially if the rules change when you change home states.

The French Connection

Let’s look at another scenario. Grandma’s will gives $5,000 to each of her grandchildren. When Grandma dies, only grandchildren who are living at her death are entitled to receive $5,000. Grandchildren who are born in later years, don’t get a bequest from Grandma. One notable exception is a child “en ventre sa mère” This French phrase refers to a child in gestation and means “an unborn child inside the mother’s womb.”

For some purposes the law regards an infant en ventre as a being. It may take a legacy; have a guardian; an estate may be limited to its use, etc. The phrase is also used in discussing whether or not a wrongful death action may be entered for a child in the womb.

A child who is “en ventre sa mère” and is later born alive is entitled to inherit just as if the child was living at the time of the testator’s death.

“En ventre sa mere” is one of many phrases of Law French that are part of our legal system. The Norman influence in Great Britain after the Norman conquest made French the language of the courts. It’s not always Latin, you see, that makes law so difficult to understand. Words from Law French that are commonly used are demurrer, disclaimer, joinder, merger, ouster, remainder, lessee, mortgage, payee, defendant, escheat, felony, and tort - just to name a few.

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