Pennsylvania Inheritance Tax Issues

Pennsylvania Inheritance Tax Issues Presented by Stern & Eisenberg SEValue@SternEisenberg.com PDF Available Digital & Print

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Webinar Agenda Primer on the Inheritance Tax Law What Happens When a Borrower Passes Away Inheritance Tax and Secured Claims/Mortgages The Current Issue What Does the Law Say Outcomes Solutions and Possible Resolution

Presenters Steven K. Eisenberg, Esq. Chief Executive Officer Troy Freedman, Esq. Managing Attorney Pennsylvania Thomas Shea, Esq. Managing Attorney Trusts and Estates

Part One The Set Up Creation of the Mortgage & Death of the Borrower LVL CAT PDF Basic Secured Transaction s Available

The Setting Property Acquired - Property is purchased - Owner becomes Borrower and takes out mortgage Property Acquired Owner Takes Out a Mortgage: Becomes Borrower

When the Borrower passes At death, the property passes to the borrower s successors subject to the mortgage (and other liens) in the property Property Acquired Owner Takes Out a Mortgage: Becomes Borrower Borrower Passes Becomes Decedent Property Transfers to Successors (sort of )

Part Two Inheritance Tax Law The basics in Pennsylvania LVL CAT PDF Basic Estate Administrati on Available

Inheritance Tax 72 P.S. 9101, et. Seq. 72 P.S. 9106 imposes an inheritance tax on every transfer subject to tax 72 P.S. 9107 enumerates those transfers subject to an inheritance tax under sections (b) and (c)... 72 P.S. 9116 tax rates for taxes imposed under 9106 72 P.S. 9136 who is required to file returns Critical Point Judicial sales are NOT part of the Inheritance tax statutes

9106: An inheritance tax for the use of the Commonwealth is imposed upon every transfer subject to tax under this article at rates specified in section 2116. (72 P.S. 9116) 72 P.S. 9106 & 72 P.S. 9116 9116: inheritance tax upon the transfer of property passing to or for the use of any of the following shall be at the rate of: 4.5% (a)(1)(i). grandparent, parent (except 1.2) and lineal descendents; (ii) spouse (phased out - 1.1). (a)(1.1)(i) 3% for spouses from 7/94-7/95; (ii) 0% for spouses after 1/1/1995. 0% (a)(1.2) from children under 21 to natural parent or adoptive or stepparent; 12% (a)(1.3) from sibling to sibling; 15% (a)(2) all other taxable transfers

9107: (a) The transfers enumerated in this section are subject to the tax imposed by section 2116. (72 P.S. 9116) 72 P.S. 9107 Taxable Transfers (b): All transfers of property by will, by the intestate laws of this Commonwealth (c)(1): All transfers of property specified in subclauses (3) through (7) which are made during his lifetime (c)(2): retained interests in part of property (c)(3): made within 1 year of death and over $3,000.00 (c)(4): interests where decedent retained rights until death (c)(5): property with retained rights (c)(6): transfers where transferee promises to make payments or provide services for life of decedent (c)(7): power to revoke or change retained Tranferees under the Act are those who receive through will, intestacy, etc NOT THROUGH FORECLOSURES

9136: (a) The following persons shall make a return: 72 P.S. 9136 (1): The personal representative of the estate of the decedent as to property of the decedent administered by him (2): The transferee of property upon the transfer of which inheritance tax is or may be imposed by this article, including a trustee of property Who Files Returns (b): The inclusion of property in a return shall not constitute an admission that its transfer is taxable (d) Returns filed within 9 months of death subject to the ability to request 6 month extension Critical Point Notice lienholders/mortgagors are not transferees

72 P.S. 9142 Tax Due 72 P.S. 9144 Source of Payment 72 P.S. 9167 Lien 9142: Tax is due within 9 months of the date of death 9144: (f) In the absence of a contrary intent appearing in the will or other instrument of transfer and except as otherwise provided in this section, the ultimate liability for the inheritance tax, including interest, shall be upon each transferee. 9167: The taxes imposed by this article, together with any interest on the taxes, shall be a lien upon the real property included in the transfer on which the taxes are imposed. Except as otherwise provided in this part, the lien shall remain until the taxes and interest are paid in full. Critical Point Is there even a taxable transfer from a foreclosure

Part Two Cont Inheritance Tax Law The basics in Pennsylvania LVL CAT PDF Basic Estate Administrati on Available

What happens to the property at borrower death: Does it matter to a secured creditor whether or not the Transferee ever receives the property subject to the mortgage? Does it even matter to the secured creditor? BPM EPM TPM Borrower with the Property subject to the mortgage Since property cannot be owned by a decedent, the estate/beneficiaries becomes the successor pending the completion of the transfer from the estate to the transferee. Estate with the Property subject to the mortgage

Where does the inheritance tax arise? We say when there is an enumerated transfer that actually occurs BPM EPM TPM Commonwealth will say at this time Does the above really matter when it comes to the secured creditors from the time when the borrower held the property subject to the mortgage?

72 P.S. 1401 Priorities of liens All State taxes imposed under the authority of any law of this Commonwealth, now existing or that may hereafter be enacted,, shall be a first lien upon the franchises and property, both real and personal,, from the date of settlement, assessment or determination, except as otherwise expressly provided by law under which the claim of the Commonwealth arises, and whenever the franchise or property of a corporation, association or person shall be sold at a judicial sale, all taxes, interest, bonus, penalties, and public accounts due the Commonwealth shall first be allowed and paid out of the proceeds of such sale before any judgment, mortgage, or any other claim or lien against such corporation, association or person, except as otherwise expressly provided by law under which the claim of the Commonwealth arises: Provided, however, Where the lien of a ground rent, mortgage, or other lien created by or entered against a predecessor in title to such corporation, association, or person, or of any mortgage or other lien to which priority over the Commonwealth's lien is allowed by the provisions of the law under which the claim of the Commonwealth arises is discharged by a judicial sale, the lien of the Commonwealth shall be transferred from the property sold to the fund realized from the sale, and the purchaser shall take free of the lien of the Commonwealth, notwithstanding that the fund may be insufficient to pay all or any part of the same, unless such sale is upon a lien subordinate to the Commonwealth's lien in which case the Commonwealth's lien to the extent not paid from the proceeds shall continue in full force and effect. On distribution of the fund, the Commonwealth's lien shall be postponed in payment to said lien or liens created by or entered against such predecessor in title or other mortgagee or lien holder having priority as aforesaid, but shall not be postponed in payment to local taxes or municipal claims, except as otherwise expressly provided by law under which the claim of the Commonwealth arises: Critical Point The mortgage was granted by the prior owner

72 P.S. 1401 Priorities of liens Provided further, That the Department of Revenue, with the approval of the Attorney General and Auditor General, may release from the lien of such taxes, such part or parts of the real property of any corporation, as may be requested by such corporation or owners or lien creditors thereof, upon payment of such proportionate part of the taxes due as the value of the real property released bears to the value of all the real property bound by such lien, except in cases where the value of the real property requested to be released is less than the proportionate share of the taxes due, then upon payment of such portion of the taxes due as may be deemed equitable by the Department of Revenue, with approval of the Attorney General and Auditor General, not exceeding, however, the value of the real property requested to be released, and the department shall furnish the person or corporation paying such tax with a certificate showing the property released, which certificate may be recorded in the office of the recorder of deeds of the county in which the land lies. But the lien of transfer inheritance taxes shall be limited to the property chargeable therewith, and, unless such taxes shall be sued for within five years after they are due, they shall cease to be a lien as against any purchaser of real estate. Critical Point Notice lienholders/mortgagors are not transferees

So what is going on Borrower/Decedent grants mortgage If there is a transfer alleged by Commonwealth, then tax may be due by estate transferee & assessable against transferee s interest in the property But is there even a transfer if it never happens does that even matter as to a mortgagee of the borrower Transferee is a successor, it is not the prior borrower Property Acquired BPM Owner Takes Out a Mortgage: Becomes Borrower * * Borrower Passes Becomes Decedent EPM Property Transfers to Successors (sort of ) TPM Sheriff Sale Scheduled w/ Notice Property Sold at Sheriff Sale * Default in the mortgage

Does the timing of the sheriff/judicial sale after the passing of borrower even change the results for the mortgagee of the prior deceased borrower Borrower/Decedent grants mortgage The potential of an inheritance tax (and tax lien) still remains an issue for a transferee as defined under the inheritance tax act 9107 a successor Transferee is a successor, it is not the prior borrower Property Acquired BPM Owner Takes Out a Mortgage: Becomes Borrower * * Borrower Passes Becomes Decedent EPM Property Transfers to Successors (sort of ) TPM Sheriff Sale Scheduled w/ Notice TPM Property Sold at Sheriff Sale * Default in the mortgage

Part Three The Dispute Is there a tax, who owes it and how does foreclosure impact it LVL CAT PDF Basic Inheritance Tax and Foreclosure Available

72 P.S. 1404.1 Priority in a judicial sale and Pa.R.C.P. 3129.2 Notice of Sale 1404.1: All tax liens required to be filed by the Department of Revenue shall continue and shall retain their priority without the necessity of refiling or revival. All tax liens shall have priority to and be fully paid before any other obligation, judgment, claim, lien or estate paid and satisfied out of the judicial sale of the real and personal property with which that property may subsequently become charged or for which that property may subsequently become liable, subject, however, to mortgage or other liens existing and duly recorded at the time the tax lien is recorded, except for the cost of sale and the writ upon which the sale is made and real estate taxes imposed or assessed upon that property. 3129.2: Notice of Sheriff Sale is sent to all persons/entities having a potential interest in the property, including the Commonwealth The Notice gives those persons the opportunity to protect their junior interests in the property. Beyond the notice, pursuant to Pa.R.C.P. 3136, the junior creditors may challenge the results and distribution of the Sheriff Sale proceeds Critical Point Notice lienholders/mortgagors are not transferees

The Commonwealth position is that upon the death of the borrower there may be an inheritance tax due by the transferee under the succession/inheritance laws. The property and the transferee are responsible for a tax that arises under those specific laws okay, but The Commonwealth also takes the additional positions that: - the possible inheritance tax lien, if any, will survive a foreclosure sale brought by the mortgagee on a mortgage granted by the borrower/decedent prior to decedent s death (the prior owner), and; - that the prior mortgage holder is required to pay any and all theoretical inheritance taxes that it seeks to impose against the property and the successor that inherited the property; and, - the prior mortgagee must report the foreclosure and seek a waiver of the potential claim Property Acquired BPM Owner Takes Out a Mortgage: Becomes Borrower * * Borrower Passes Becomes Decedent EPM Property Transfers to Successors (sort of ) Sheriff Sale Scheduled w/ Notice TPM Theoretical tax arises Property post death only Sold at Sheriff Sale * Default in the mortgage

REV-1839 (EX) 09-18 BUREAU OF INDIVIDUAL TAXES PO BOX 280601 HARRISBURG PA 17128-0601 APPLI CATI ON FOR MORTGAGE FORECLOSURE I NHERI TANCE TAX RELEASE OF LI EN OFFICIAL USE ONLY County Code Year File Number SECTION I. Decedent Name: Last DECEDENT INFORMATION Suffix First MI Decedent Social Security Number Decedent Date of Death SECTION II. Applicant Name APPLICANT INFORMATION Telephone Number Mailing Address City State ZIP Code The Commonwealth Form for reporting SECTION III. REAL ESTATE INFORMATION Attach copy of deed description Street Address City, Township, Borough County Tax Parcel Number SECTION IV. VALUATION DATA Real Estate Value - Computed Value at Date of Death, Current Computed Value or Appraisal (Attach Copy of Assessment Card or Appraisal) Mortgage Balance - Attach Document evidencing Date of Death Balance of Mortgage Now you need to report to the Commonwealth your payoff and property value in addition to everything disclosed through the normal process SECTION V. Name: Last Suffix First MI Relationship to Decedent Street Address City State ZIP Code Name: Last BENEFICIARY INFORMATION List additional beneficiaries on separate sheet of paper Suffix First MI Relationship to Decedent Street Address City State ZIP Code Name: Last Suffix First MI Relationship to Decedent Street Address City State ZIP Code Name: Last Suffix First MI Relationship to Decedent Street Address City State ZIP Code Applicant Signature Phone Number Date

The Commonwealth Form for reporting and its purpose REV-1839 IN (EX) 09-18 PURPOSE For mortgagees who are unaffiliated with an estate to report a parcel of real property under Pennsylvania s Inheritance and Estate Tax Act. By reporting a property under this form, the third party will receive documentation to establish whether any inheritance tax is owed on the property in question. WHO MUST FILE Mortgagees who have an interest in the real property which was owned by a decedent for whom no estate file number exists or for parcels of property which have not otherwise been reported to the Department through a decedent s estate. WHERE TO FILE Submit completed form to: RA-RVBIT-LIEN-REL@pa.gov INSTRUCTIONS By completing this form the real property will be reported and valued under the Pennsylvania Inheritance and Estate Tax Act. The Department will review the filing and determine whether any tax is owed based upon the information provided. Once the property has been reported and valued, and the payment of tax, if any, has been made, the Department would produce a release of lien to the inquiring party for filing at the Register of Wills Office. SECTION INSTRUCTIONS SECTION I DECEDENT INFORMATION Enter the information for the decedent associated with the real estate. Pennsylvania Department of Revenue I nstructions for REV- 1839 Application for Mortgage Foreclosure Inheritance Tax Release of Lien SECTION II APPLICANT INFORMATION Enter the name, address and telephone number of the person or entity preparing the application. The Applicant s signature is required at the bottom of the form. SECTION III REAL ESTATE INFORMATION Enter the address, including County and Tax Parcel Number, of the real property being reported. A clear copy of the property s deed description must be included. SECTION IV VALUATION DATA REAL PROPERTY VALUE Enter the value of the real property using any of the following methods: Computed Value at Date of Death, Current Computed Value or Appraisal. Computed value is derived by multiplying the county assessed value by the common level ratio factor (CLRF). If using current computed value you must use current CLRF. If using date of death computed value, use the CLRF effective at the date of death. Attach a copy of assessment card or appraisal. MORTGAGE BALANCE Enter the date of death mortgage balance. If claiming a mortgage deduction, you must attach a document evidencing the outstanding mortgage balance at the date of death. SECTION V BENEFICIARY INFORMATION If known, enter the name, address and relationship to decedent for each beneficiary of real property reported. If additional beneficiary space is needed, use a separate sheet of paper. Critical Points The Commonwealth will not respond to follow up www.revenue.pa.gov requests to the email box REV-1839 1

The Issues and Problems We see with the Commonwealth position - The inheritance tax is applicable to a transferee who obtains the property as defined under 72 PS 9107 - The inheritance tax is clearly junior to a prior mortgage granted by the borrower before the borrower died when there was no inheritance tax in existence - The ONLY people legally required to file a return are the estate and the transferee under 92 PS 9136 - The law clearly provides for extinguishment of junior claims 1401 and 1404.1 - Mortgagees are being clearly singled out - The Commonwealth receives notice in accordance with the law Pa.R.C.P. 3129.1 - The Commonwealth reliance on sections that are limited to the limits on the life of the lien appear to be completely misplaced. - At a maximum, the Commonwealth may be able to request information, but it goes beyond and seeks to impose taxes upon successor-in-interest who took free and clear of any such inheritance tax theoretical issue - Choate or in choate inheritance tax theoretical claim does not change the Commonwealth rights

Those of the Commonwealth: - File rev. form 1839 with the Dept. of Revenue, await the findings and pay any tax demanded by the Commonwealth. - If there is a tax imposed and you believe it is not appropriate, you may seek a refund under 72 P.S. 9181 Possible Solutions The Other Routes: - Take appropriate legal action on each matter to extinguish the claim and position being taken by the Commonwealth our current motion process to confirm the divestiture of the claims; or, - Bring a declaratory action against the Commonwealth to clarify the rights of the parties; or, - If you have paid amounts to the Commonwealth already then request the refund under 72 P.S. 9181 or further action to recover and recoup those payments individually and/or on behalf of other people who have made payments, as well... - Others are pushing for clear legislative changes to resolve the issue we do not necessarily believe that there is any need for clarification under the laws Critical Point The issue involves real money it will not just go away

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