TRANSFER OF PROPERTY

AFTER DEATH:

Guide to Estate Settlement




Prepared by:

John C. Becker and Anthony D. Kanagy













The Pennsylvania State University
University Park, Pennsylvania 16802
March 2002

TRANSFER OF PROPERTY AFTER DEATH:
GUIDE TO ESTATE SETTLEMENT

Transfer of Property After Death............................................................................................... 1
By Operation of Law.......................................................................................................... 2
By the Intestate Law.......................................................................................................... 3
By a Last Will and Testament ........................................................................................... 4
By a Living Trust ............................................................................................................... 7
Inheritance Tax Effects of the Transfer ............................................................................. 8
Federal Estate Tax Effects of the Transfer ..................................................................... 10
Federal Gift Tax Effects of the Transfer .......................................................................... 10

The Steps Involved in Estate Settlement................................................................................ 14
Initial Decisions ............................................................................................................... 14
Appointment of Personal Representative........................................................................ 16
Beginning the Administration .......................................................................................... 19
Review of Income Tax Issues ......................................................................................... 19
Valuing Property in General ............................................................................................ 21
Date of Valuation............................................................................................................. 21
Fair Market Value............................................................................................................ 21
Value of Types of Property.............................................................................................. 22
Notification of Heirs......................................................................................................... 27
Settlement of Small Estates on Petition.......................................................................... 28
Filing the Inventory.......................................................................................................... 28
Initial Payment of Inheritance Tax................................................................................... 29
Administration of Assets.................................................................................................. 29
Preparation of the Pennsylvania Inheritance Tax Return................................................ 31
Payment of Pennsylvania Inheritance Taxes .................................................................. 33
Preparation of Federal Estate Tax Returns..................................................................... 33
Payment of Federal Estate Taxes................................................................................... 37
Preparation of Account, Schedule of Distribution Audit .................................................. 37
Family Settlement Agreement ......................................................................................... 38
Receipt and Release....................................................................................................... 39
The Final Steps............................................................................................................... 40

Summary.................................................................................................................................... 40

Levels of Property Distribution Under the Intestate Law of Pennsylvania .................................. 40

Glossary..................................................................................................................................... 43

Endnotes.................................................................................................................................... 44


Prepared by John C. Becker, professor of Agricultural Law and Economics, Director of
Research for the Agricultural Law Center of the Dickinson School of Law of the
Pennsylvania State University and Anthony D. Kanagy, Research Assistant for the
Agricultural Law Center. Revised March, 2002.

i

1
A death is a traumatic event for most families. Whether the death is sudden or
expected, most people need an adjustment period to cope with the reality of the
death of a family member. While this period runs its course, surviving family
members may be distracted and have difficulty dealing with business and personal
problems.

Nonetheless, during the adjustment period, distribution of property owned by
the deceased must be considered. In some families this is cause for anxiety
because the situation involves the legal system and the services of an attorney. For
some people, death of a family member may bring them in contact with the legal
system for the first time. Inexperience with the legal system and the emotional
adjustment to the death can combine to create even greater anxiety for a bereaved
family.

This publication will address legal issues and procedures for the settlement of
an estate. The settlement process refers to the method of transferring property
owned by a person at the time of death. This discussion will cover a typical estate
situation and will refer to the steps needed to complete the process. The discussion
is general and does not cover all possible contingencies. Some situations may
require additional steps to complete the process.

Anyone who has questions concerning a procedure used in a particular case should
consult someone familiar with the situation or his or her personal attorney. This
publication does not provide legal or tax advice to the reader and is not intended to
be a substitute for such advice or service. The reader should seek such advice or
service on his or her own before making a decision or taking any action.


TRANSFER OF PROPERTY AFTER DEATH

Why should we be concerned with transferring property following a person's
death? A simple answer to this question is that all items of property are owned at all
times by someone, or something such as a corporation. When a person dies owning
property, some disposition of the property must be made to provide a new owner for
the property. When an artificial person such as a corporation that owns property
goes out of business, dissolution of the business will address the question of transfer
of property. When property is abandoned by its owner, the original ownership
continues. But someone who finds the property and controls, uses, and protects it
may acquire an ownership interest, if the original owner fails to exercise control of
the property. Each of these examples points to the need to identify the owner of
property at all times.

This publication discusses the transfer of property owned by people at their death
and the tax consequences of the transfer. This can generally take place in one of
four ways: by operation of law, by the intestate law, by a last will and testament, or
by a trust created during their lifetime that provides for this transfer.

2
By Operation of Law

A transfer by operation of law takes place when a person makes a lifetime
decision to share ownership of property, and provides that at the death of one of the
joint owners the surviving joint owner(s) will become the owner(s) of the property. A
typical example of such a transfer is joint ownership with the right of survivorship.

In this case, ownership is shared with one or more people, and each person
is treated as the owner of an equal share in the property. This property can be
either real or personal property, or tangible or intangible personal property. During
the lifetime of the joint owners, their rights to the use of the jointly-owned property
are dependent on the intent of the property owners when the joint ownership interest
was created. In the case of a bank account, unless there is clear and convincing
evidence of a different intent at the time of creation of the account, each joint owner
has access to the account in an amount that equals their net contribution to the
account.1 For example, if a property owner decides to add an additional owner to
an account, thereby creating a joint ownership interest, the question would be
whether the original owner intended to give the added owner a present gift of a
one-half interest in the account, or did the owner simply intend that the new owner
receive whatever balance remains at the original owner's death? If clear and
convincing evidence of an intent to create a present gift is established, then each
owner would have access to an equal share of the account. Each owner would be
treated as having contributed an equal amount to the account. If such evidence
cannot be established, then each owner would have access to the account in
whatever amount is equal to the proportion of their net contributions to the account.
If the original owner contributed all of the funds and the added owner failed to
contribute any funds, then the original owner would have lifetime access to the full
account and the added owner would have no lifetime access to the account. At the
death of one of the owners, the survivorship feature transfers the deceased owner's
share to the surviving owner(s), who acquire an equal share of the portion previously
owned by the deceased.2

For example, if three people were joint owners with the right of survivorship,
at the death of one person, that person's share would be divided equally between
the surviving owners. Their ownership share would increase by one-sixth; their new
ownership share would be one-half (1/3 or 2/6 + 1/6 = 3/6 or 1/2). At the death of
one of the two owners, the surviving owner would become the sole owner of the
property by receiving the deceased's one-half share and adding it to his or her
one-half share. Transfer takes place automatically upon the death of a person who
owns property as a joint owner with the right of survivorship. Documents which
show ownership must specifically state that it is owned as joint tenants with right of
survivorship.

Property owned by a husband and wife is generally classified under a special
form of joint ownership called tenants by the entireties. At the death of the first
spouse, the surviving spouse becomes the owner of the property automatically.
3
When two people are married and property is placed in the names of both of the
persons, a presumption arises that the property is held in a joint tenancy by the
entirety relationship.3

One situation in which joint ownership can create a problem is the
simultaneous death of both owners under such circumstances that it cannot be
determined which owner died first. Since surviving the death of the other owner is
the key requirement to transfer of ownership, time of death of the first party to die
must be established to make that determination.

To resolve the problem Pennsylvania law provides that, unless a will, living
trust, deed, or insurance contract provides otherwise, when there is no sufficient
evidence that joint tenants or tenants by the entirety died other than simultaneously,
the property held in these forms will be distributed one-half as if one had survived
and one-half as if the other had survived.4 If there is a joint tenancy of more than
two and all die under such circumstances, the property distributed under this rule will
be in the proportion that each owner bears to the whole number of joint owners, i.e.
one of three or one-third; one of four or one-fourth, etc.5 As mentioned above, a
person can change this result by specifying in a will their own rule for determining
the order of death in such situations. This decision is frequently made when
planning to minimize federal estate taxes.

By the Intestate Law

If a person owns property in his or her name alone, the transfer of ownership
will be made either under a will prepared during the person's lifetime or under the
provisions of the intestate law of the state where the owner resides.6 If a person
does not have a will, the intestate law creates a schedule for the distribution of
separately owned property. Within the schedule, the statute specifies who is to
receive the property, how much they are to receive, and any special conditions that
apply to this transfer.7

For example, under Pennsylvania's intestate statute, the following distribution
would be made of the sum of $70,000 owned by a person at death when the person
is survived by a spouse and two children who are children of the marriage.
Following the payment of debts, administrative expenses, and an exemption, the
spouse receives the first $30,000 plus one-half of the difference.8 The children
share equally the remaining one-half of the difference. If $70,000 remains after the
obligations are paid, the spouse receives $50,000 from the $70,000 ($30,000 +
one-half of $40,000). The children each receive $10,000 of the remaining $20,000.9

If one of the children is not a child of the marriage between the deceased
person and the surviving spouse, but was born from a prior marriage or other
relationship, then the shares of the spouse and children change. The spouse is
entitled to one-half of the amount or $35,000 (1/2 of $70,000). Each childs share
increases to $17,500 (1/2 of $35,000).10
4

If the deceased person and spouse did not have any children from their
marriage or a prior relationship, but the deceased person is survived by parents,
then the spouse receives the first $30,000 plus one-half of the difference. The
deceased person's parents receive the remaining one-half of the difference. The
surviving spouse receives the entire estate only when the deceased spouse is
survived by the spouse but no surviving children, grandchildren, or parents.11

In addition to provisions for surviving spouses, children, grandchildren, and
parents, the intestate law controls the distribution of property when none of the
previously listed relatives survive the deceased. Additional provisions cover distribu-
tion to brothers, sisters, and their children; grandparents; aunts, uncles and their
children; children of first cousins; and finally the Commonwealth of Pennsylvania. If
a person dies but is not survived by a relative who is closer in relation than
grandchild of a first cousin, ownership of that person's property passes to the
Commonwealth.12 Except when the Commonwealth would receive the property,
each listed heir must survive the deceased for at least five days in order to receive
the share designated by the schedule.13

The intestate statute can be revised by the legislature, and the distribution of
property described above can change. Since this plan of distribution applies to
those people who have not made their own decisions about the transfer of their
property, it can be said that we all have an estate plan-- either one that we have
prepared for ourselves or one that has been prepared for us by the legislature.

By a Last Will and Testament

Property owners who want to control distribution of their property after death
can do so by preparing a will. Like the intestate law, a will only provides for the
distribution of separately owned property. Unlike the intestate law, which primarily
benefits family members, a will can bestow benefits and property on family
members, strangers, corporations, charities, churches, and other beneficiaries.

A valid and enforceable will in Pennsylvania is one prepared by a person
eighteen years of age or older and of sound mind and understanding.14 The
document must recognize an intent to distribute property after death and be signed
at the end by the person making the will.15 A will can be formally prepared by an
attorney trained in these matters or by the property owner.16

Pennsylvania, unlike other states, does not require that people witness the
signature of the person who prepared the will. Although witnesses are not required
in order to have a valid will, most wills are witnessed by several people since the
signature of the person who prepared the will must be proven when the will is filed
with the Register of Wills after a person's death. At that time the witnesses will come
to the Register's office to sign a document that confirms their role as witness and the
validity of the person's signature.17
5

An alternative procedure is available that eliminates the need for the
witnesses to appear before the Register of Wills. This procedure is known as
"self-proving." Under this procedure, when a will is executed, the person making the
will signs a separate acknowledgement before a notary public that he or she
executed the document as his or her last will and testament and that it was done
voluntarily.18 Witnesses then sign an affidavit stating that they were present and
saw the person sign the will; that it was signed voluntarily; that the witnesses signed
the will in the hearing and sight of the person who made the will; and that to the best
of their knowledge the person who made the will was eighteen years of age or older
at the time, of sound mind, and under no constraint or undue influence. The
acknowledgement and affidavits are notarized and attached to the will. When the
will is ultimately filed, the register of wills can accept the acknowledgement and
affidavits to support the statements made therein.19 This procedure eliminates the
need to locate witnesses to the will and helps the register of wills proceed quickly.

Within six months after a person's death or before the expiration of six months
after the date of probate, whichever is later, a surviving spouse has a right to elect
against what the will provides and take what Pennsylvania law has designated as a
surviving spouse's share.20 This election requires the surviving spouse to give up
his or her claim to certain property in return for a statutory share of one-third of
certain other specifically identified property.21 In deciding whether to elect against a
will, a surviving spouse should calculate what the spouses share would be with an
election and without an election. Whichever choice provides the surviving spouse
with the most beneficial treatment can be selected.

A surviving spouses right to elect against a will can be forfeited for failure to
financially support the deceased spouse, for desertion, and for participation in the
willful or unlawful killing of the deceased spouse.22 In addition, the right to elect can
be waived, as in the case of an agreement made by two parties before they
marry.23 This agreement, which is often called a premarital agreement, is subject to
its own standards and rules for enforcement. Other family members do not have this
right to elect against what the will provides.

Although a will provides some assurance that a person's property will be
distributed according to its terms, a will can be challenged either before or after it is
presented to the register of wills after the person's death. Some of the people who
can challenge the will are beneficiaries who are named by the decedent in one will
but not in another, the intestate heirs of the decedent, and beneficiaries whose share
would increase or decrease depending on which will is admitted to probate. Some
of the common grounds for a challenge to a will are that the decedent was not of
sound mind when the will was prepared, that someone unduly influenced the
decedent to prepare his or her will with particular terms, fraud practiced on the de-
cedent, that the decedent intended to give property away during lifetime rather than
at death, and that the decedent failed to properly execute the document.

6
In addition to cases where a will is challenged, a will can also be modified as
a result of certain events. For example, if a married person prepares a will that
provides for his or her spouse, and the marriage is later ended by divorce, the
termination of the marriage voids all provisions in the will for the divorced spouse.24
In a somewhat reverse situation, if a single person prepares a will and then marries
after the will is prepared, the surviving spouse will be entitled to an intestate share of
the decedent's property if the person has not provided for the spouse in a will.25 If a
person prepares a will and a child is born to or adopted by that person's family after
the will is prepared and before the person dies, the share of the after-born or
adopted child could be either an intestate share comparable to that of all of the
children, a share mentioned in the will, or nothing if the person clearly expressed an
intention to leave nothing to after-born children.26 If a person participates in the
willful and unlawful killing of someone, the slayer will be prevented from receiving
any benefit or acquiring any property from the estate of the person who was killed.27

If a person who is a resident of Pennsylvania at the time of death is divorced
from his or her spouse, but after having designated that spouse to be the beneficiary
of a life insurance contract, annuity, pension or profit-sharing plan or any other
contractual arrangement that provides benefits to the spouse, the designation of the
divorced spouse to receive the benefit will not be effective.28 An exception to this
result applies where the document that designates the spouse to receive the benefit,
or a court order, or written contract between the parties clearly expresses the
intention that the designation is to survive the divorce.29

Transfers by a will have other advantages that are important to the estate and
the heirs. A person with a will can name a guardian for the children and thereby
somewhat reduce the time and expense involved to obtain the necessary court ap-
pointment. Guardians have legal authority to hold property for a minor child until the
child reaches eighteen years of age.30

At a person's death, a personal representative is appointed to deal with the
deceased's separately owned property. The personal representative has the
authority to deal with the estate assets and the obligation to administer the assets
according to the will or intestate law. This obligation includes filing all necessary
estate, inheritance, and income tax returns for the estate. The person who prepares
a will can select the personal representative to perform these duties and
responsibilities. If the deceased did not have a will, the personal representative is
appointed from a list of those eligible to petition the court for appointment to this
position. Pennsylvania law determines who is eligible to petition the court.31

In the case of a business owned by one person, a will gives the owner the
opportunity to name a personal representative to operate the business for the benefit
of heirs or other beneficiaries. Without such authority the personal representative
must seek court approval to get the authority.32 This procedure may be time
consuming and expensive.

7
By a Living Trust

Transfer of property under terms of a living trust reflects the owners lifetime
decision to use the trust vehicle to own, control, and manage property, and to
designate those who have a beneficial interest in the property. To create a trust, a
property owner transfers real or personal property to a trustee who has ownership of
the property subject to the interests of the beneficiary selected by the owner.
Following the trust beneficiary's death, the living trust by its own terms can provide
for the transfer of ownership to some other beneficiary. When the trust is created,
the property owner and trustee negotiate an agreement that controls the trustee's
ownership of the property, and its eventual distribution to a beneficiary. A trust
created during an owner's lifetime is called a living trust in contrast to a testamentary
trust which is created in a will. Under a living trust arrangement, an owner may
reserve the right to receive some benefit from the trust property during his or her
lifetime. If the owner becomes disabled, incapacitated, or simply does not want to be
responsible to manage the property, a living trust is a convenient alternative that
gives someone the needed authority to take effectve action regarding the property.
This saves the expense of having a court appointed guardian named to accomplish
the same thing. The appointment of the trustee s a decision made by the person
who creates the trust. The decision to name a guardian is made by a court.At the
owner's death, the trust agreement would direct the trustee to distribute the property
to an eventual beneficiary. In this context, a living trust becomes an effective way to
transfer the property to the designated beneficiary after the owner's death. Many
living trusts also grant the property owner the right to terminate the trust and
re-acquire the property. This gives the property owner flexibility to deal with
changing circumstances. Such trusts are commonly called revocable trusts. Trusts
that cannot be changed after being created are called irrevocable trusts.

Comparing Distributions by Living Trust to Distributions by Will

In comparison to each other transfers by a will and transfer by a living trust
both require a property owner to take action during his or her lifetime.

If the trust is revocable, as many living trusts are, the value of the property in
the trust will be subject to inheritance and federal estate taxes if the value of the
property is large enough for these taxes to apply.

The applicable exclusion amount under federal estate tax, which is discussed
below, is available in both cases.

Distributions by will follow a process that allows creditors of the decedent to
present their claims to the personal representative of the estate. This is also
described below. In living trust cases, these creditors present their claims to the
trustee on the basis of the decedents failure to fulfill the terms of a contract or
agreement. This may allow the creditor a longer period of time in which to file the
claim and take the claim out of the procedure normally followed for estates.
8
Under income tax law, income that is generated by an estate or trust and is subject
to tax at that level is taxed at a higher income tax rate than that for individuals.
Estates are able to take a deduction for the amounts they distribute to heirs. Trusts
have a similar opportunity. During the lifetime of the owner who created a revocable
living trust the owner generally reports the income of the trust as personal income.

The cost for preparing a revocable living trust and other documents for a
person who is subject to federal estate tax often reflects the time, effort and
expertise of the person providing the service. This cost is generally higher than the
cost of preparing a will. This is a lifetime expense as the service is provided then.
Other lifetime costs that can be associated with a revocable living trust involve fees
to the trustee for the service the trustee provides. These fees are most common
when a financial institution is named as a trustee. The cost of settling an estate that
is subject to federal estate taxes will also reflect the time and effort involved as well
as the expertise of the person who is providing the service. This is a post death
expense which is treated as an administrative expense of the estate which may be
paid before distributions to heirs

When a will is filed in the Registers office after the person dies, the will
becomes a public document. When a petition for Letter Testamentary is filed at the
same time as the will, a fee is paid to the Register of Wills. A revocable living trust
generally is not filed on the public record if the trust does not own real estate. If the
trust is not recorded it does not pay a filing fee. In the case of revocable living trust,
after an owners death the trustee files the inheritance tax return and distributes the
property to those identified in the trust agreement This may give the property owner
a greater degree of privacy than the decedent whose property is transferred under a
will or the intestate law.

If a person owns property in several states, having the out of state property
owned by a revocable trust can avoid the necessity to have a separate probate
proceeding opened in each state where property is located. This is accomplished by
the fact that the trust owns the property. If a trustee is authorized to act, the trust
can transfer the property without having the personal representative be given the
same authority. This may save some expense and time in completing the transfer.

Inheritance Tax Effects of the Transfer

For Pennsylvania residents and nonresidents who own real or tangible
personal property located in the state, an inheritance tax is imposed on the transfer
of property following an owner's death. The tax is imposed at one of four rates.

Tax-free transfers include transfers to recognized charities; to federal, state,
or local governments; transfers to a surviving spouse which occur on or after
January 1, 1995; transfers from a child aged 21 or younger to his or her natural or
adopted parent(s) or stepparent, transfers of life insurance proceeds and social
security death benefits.33 No inheritance tax is imposed on these transfers.
9
Transfers under a trust for the sole use of a surviving spouse are not necessarily
taxable in the estate of the first spouse who dies, but can be included in the
surviving spouses estate when that spouse dies.34 The exclusion of the asset from
the estate of the first decedent may be bypassed if the estate elects to include the
trust in the first decedents estate. This election is made on a timely filed inheritance
tax return in the first decedent's estate.35 Retirement benefits and individual
retirement accounts may also be exempt from inheritance tax if the decedent was
younger than age fifty nine-and-one-half years at death, or otherwise did not have
the right to withdraw the retirement funds without penalty.36

Transfers taxed at 4.5 percent include transfers to decedent's grandparents,
parents, lineal descendants, or to the wife or widow, husband or widower of a
child.37 Lineal descendants, for inheritance tax purposes, include natural children
and their descendants, adopted children and their descendants, and stepchildren
and their descendants. Adopted children are considered to be natural children of
their adoptive and their natural parents for inheritance tax purposes.38

Transfers taxed at 12 percent include transfers on or after July 1, 2000 from
a decedent to a sibling. A sibling is considered to be a person who has at least one
parent in common with the decedent, whether by blood or adoption.

Transfers taxed at 15 percent include transfers to any other person or entity
that does not fall into the tax-free, 4.5 percent, or 12-percent tax categories,
including for example a decedent's aunt, uncle, nephew, niece, all other family
members, and all nonfamily members.39

Property may be transferred before death. Transfers by gift may still be
subject to inheritance tax if the gift takes place within one year of the person's death
and the value of the property given away to a single person is more than $3,000.40
In this context, the property transfer means to give away something of value yet
receive nothing in return, such as a gift. If something is given in return, the amount
of the gift equals the difference between the value of the item given away and the
value of the item received in return.

Other provisions of the inheritance tax law affect transfers that restrict the
right of the person receiving the property to immediately use and enjoy it, that
reserve a right to use the property during the original owner's lifetime, or that reserve
the right to alter, amend, or revoke a gift.41 In the case of jointly owned property
with the right of survivorship, the transfer of the deceased owners interest to the
surviving owner or owners is subject to inheritance tax in an amount equal to the
value of the deceased owners share.42 In cases in which the joint ownership
interest is created within one year of the deceased owners death, the full value of
the property above $3,000 may be subject to inheritance tax if the decedent was the
person who created the joint ownership by giving the interest to the surviving owner.

10
Pennsylvania law also provides for an estate tax. This tax applies only in
situations where federal estate tax is payable and the amount of the inheritance tax
paid to the Commonwealth and other states is less than the state death tax credit
amount that is allowed under federal law.43 For a person who resides in
Pennsylvania at death, the amount of the Pennsylvania estate tax is equal to the dif-
ference between the amount of the state death tax credit allowed by federal law and
the total amount paid in inheritance taxes and state death taxes. For a resident of
Pennsylvania who dies owning property in Pennsylvania, as well as other states, the
Pennsylvania estate tax is reduced by the greater of either the amount of death
taxes actually paid to other states, or an amount computed by multiplying the state
death tax credit by a fraction of the numerator of which is the value of property
located in other states and the denominator of which is the value of the decedent's
gross estate for federal estate tax.44

For a person who is not a resident of the Commonwealth at the time of death,
the amount of the estate tax is calculated by determining the ratio of property subject
to Pennsylvania inheritance taxes compared with the decedent's gross estate for
federal estate tax purposes. This ratio is then applied to the allowed state death tax
credit under federal law. If the amount of Pennsylvania inheritance taxes paid does
not exceed the amount determined by applying the ratio above, then a Pennsylvania
estate tax in the amount of the difference is applied.45

For example, if assets subject to Pennsylvania inheritance tax comprise 50
percent of the assets in the federal gross estate, 50 percent of the state death tax
credit is allowed against these assets. If the Pennsylvania inheritance tax paid is
less than the death tax credit allowed, the difference in amount is imposed as the
Pennsylvania estate tax.

The amount of state death tax credit allowed under federal law is calculated
as a percentage of the taxable estate of the deceased and is limited to taxes actually
paid. The first $60,000 of the taxable estate is not considered when calculating the
credit. Percentages used to calculate the credit range from 0.8% to
16%.46Beginning in 2002, the state death tax credit will be reduced by 25% each
year until the tax is repealed in its entirety for the estates of people dying after 2004.
After the tax credit is fully repealed, decedents will be allowed to deduction state
death taxes when calculating federal estate tax. In 2011, the amending law will
expire and the law in place in 2001 will return and become effective

Federal Estate Tax Effects of the Transfer

In addition to state inheritance tax, a federal estate tax applies to the transfer
of property following an owner's death. In 2001, Congress amended the Federal
Estate tax in very dramatic ways. Beginning in 2002 and continuing until 2009, the
law will undergo a variety of important changes. In 2010, the law that creates the tax
will be repealed. However, for individuals who die after December 31, 2010, the law
that is in existence in 2001 will return. This is due to a sunset provision that
11
appears in the 2001 amendments. In other words, the 2001 amendments
themselves will expire after December 31, 2010 and the law will return to the
provisions in place in 2001.

Unlike the fixed rates of Pennsylvania inheritance tax, the federal estate tax
has a graduated tax rate that currently starts at 18% and goes to a maximum tax
rate of 50%.47 Between 2003 and 2009 the maximum tax rate will fall to 45%. In
2010, the Federal estate tax will be repealed. In 2011 the amending law will be
expire and the law in place in 2001 will return. Under federal estate tax rules, the
greater the property subject to tax, the greater the tax can be. But, for two reasons,
not all estates are affected by the federal estate tax.

First, the federal tax law gives each person an applicable exclusion that can
be applied against either federal estate tax liability owed. The amount of this
applicable exclusion for 2002 is $1,000,000..48 This means that an individual whose
gross estate is less than $1,000,000 can use the applicable exclusion to avoid
federal estate tax.

Over the next several years the applicable exclusion amount will be rising. In
2004, the exclusion amount will be $1,500,000; from 2006 through 2008 it will be
$2,000,000; in 2009 it will be $3,500,000;. In 2010 the Federal Estate Tax law is
repealed. In 2011, the Federal Estate Tax law returns and the applicable exclusion
will fall to $1,000,000 for people who die in 2011 or later..49 Estates valued below
these applicable exclusion amounts will not be subject to estate taxes.

The rules that determine whether an estate tax return must be filed reflect the
amount of the applicable exclusion. If the estate value does not exceed the amount
of the applicable exclusion, there is no need to file a federal estate tax return.50 This
rule only applies to the amount of the applicable exclusion that is available to the
person's estate. To determine the amount of the exclusion that is available to the
estate, the personal representative must carefully examine the decedent's records,
including prior year gift tax returns. If some portion of the exclusion has been used,
the applicable exclusion will be reduced.

A second factor in calculating the property amount that is finally subject to
federal tax is the list of available deductions. Current tax law provides that estate
administration fees, attorneys fees, casualty losses, debts, and a marital deduction
are allowed in calculating the amount subject to tax.51 Of the deductions on this list,
the marital deduction is the most significant; it allows one spouse to transfer
practically an entire estate to the other spouse and have the full value of the transfer
deducted when calculating the amount subject to federal estate tax.52 However,
when the surviving spouse dies, that property will be part of the surviving spouse's
estate and the full value may be subject to tax at that time. Various types of
transfers to a surviving spouse can qualify for marital deduction treatment, including
transfers to a surviving spouse as a tenant by the entirety or as beneficiary of life
insurance proceeds.53
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Another important federal estate tax concept is the gross value of a
decedent's estate gross estate. This is the amount that is calculated and compared
to the exclusion amount available to the estate. To calculate the gross estate,
include all separately owned property, one-half of all property owned as tenants by
the entirety, and that portion of the current value which represents the portion of
amount paid or contributed by the decedent toward the cost of an item of jointly
owned property.54 If the decedent at the time of death had the right to control the
payment of insurance proceeds through a change in beneficiary, a right to cancel the
policy, or a right to borrow against its cash value, then the insurance proceeds will
be included in the calculation of the gross estate.55 As in the case of the
Pennsylvania inheritance tax, if a person restricts the right of the person given the
property to immediately use and enjoy it, or reserves a right to use the property
during the original owner's lifetime, or reserves the right to alter, amend, or revoke
the gift, the value of property transferred under these conditions is included in the
calculation of the gross estate of the deceased person.56

This discussion has illustrated several differences in estate, gift and
inheritance tax calculations. Many different kinds of property and special rules are
included in determinations of the gross estate. Some different rules are used for the
federal estate tax system and the Pennsylvania inheritance tax system. The
treatment afforded life insurance proceeds is a good example, since the
Pennsylvania system excludes these payments from the calculation of inheritance
tax while the federal system includes the value of the proceeds if specific conditions
are met. Note that including the amount of the insurance proceeds in the calculation
of a gross estate does not bring the proceeds back to the estate, but that the value
of the proceeds is part of a calculation to determine how much tax is due. The
proceeds of the life insurance policy will be paid to the beneficiary named in the
policy.

Federal estate tax law also provides for a generation skipping transfer tax.
This tax is designed to prevent the tax free transfer of property from one generation
to a generation of beneficiaries who are more than one generation below the
transferor's generation (grandparent and grandchild or lower or a non-family member
who is more than thirty-seven-and-one-half years younger than the transferor).57
This tax is a separate tax that is involved in planning for the transfer of property to
these younger generations of beneficiaries. Transfers that are typically subject to
this tax include transfers that arise from a direct transfer by gift or inheritance,
transfers at the termination of a trust or transfers in the form of distributions from the
income or principal of a trust. In each case, the transfer must be to a person who
meets the generational requirement for the tax to apply.

If this tax applies, it is calculated at the flat rate which is equal to the
maximum federal estate tax rate in effect at the time of the transfer.58 Currently,
that rate is 50 percent. Individuals have an important exemption of $1,100,000 from
the generation skipping transfer tax.59 In addition, this tax does not apply to gifts
13
that are eligible for the $11,000 per person, per year, federal gift tax annual exclu-
sion, and the tuition and medical expense exclusions, which are discussed below.60

Individuals whose estate values are high enough to merit concern about
federal estate taxes or federal gift taxes, should also evaluate the impact of this tax
on the distribution of property during lifetime or after death.

Federal Gift Tax Effects of the Transfer

Giving property away during a person's lifetime is sometimes a means to
avoid inheritance taxes. A federal gift tax applies to transfers of real or personal
property for less than the value of the property given away.61 For many years this
tax was part of a unified Federal Estate and Gift Tax structure that taxed these
transfers at the same rates as the federal estate tax.62 In addition the unified credit
that was available to federal estates was also available to individuals who faced
federal gift taxes. Beginning in 2002 these taxes will start a process by which they
will no longer be unified. From 2002 through 2009, a taxable gift will be subject to tax
at the same rates as the federal estate tax. After 2009, when the federal estate tax
is repealed, the federal gift tax will continue and have its own tax rate that will start at
18% and reach a maximum rate of 35% for taxable gifts of $500,000 or more. In
2011 these amendments expire and the law in place in 2001 will return.

The current federal gift tax has an annual exclusion that permits a person to
give up to $11,000 to any one person or any number of people, in a calendar year,
free of federal gift tax liability.63 (This $11,000 limit will be adjusted for inflation in
upcoming years. It is important to check the statute in order to be sure of the current
exclusion amount.) For example, a person who has $110,000 to give away can give
$11,000 to each of ten grandchildren in any year without any gift tax liability or loss
of the credit. No federal gift tax is due on the transfer and, therefore, no portion of
the applicable exclusion is needed to offset this tax liability.

The federal gift tax also has an applicable exclusion amount. In 2002 this
amount is increased to $1,000,000 and does not increase later.

Federal law allows special treatment for joint gifts by married individuals.
Each spouse can contribute his or her $11,000 exclusion to any gift made by the
other spouse.64 This raises the amount excluded in such gifts to $22,000 per
person per year. This is called splitting a gift. Similarly, a married couple can write
one $22,000 check from their joint checking account to make a combined gift.

Gifting during a person's lifetime may avoid some taxes. Gifting allows a
substantial amount to be transferred out of one's federal gross estate. If the annual
exclusion limits can be followed, then such transfers will also be free of federal gift
taxes. One problem in this situation, however, is that the Pennsylvania inheritance
tax applies to gifts in excess of $3,000 if they are made within one year of a person's
death.65 The federal gift tax annual exclusion amounts may eliminate federal gift
14
tax concerns but perhaps not the state inheritance tax concerns. Aside from the
inheritance tax treatment of gifts, Pennsylvania does not tax gifts. But other states
have separate gift tax laws, and these may entail separate consideration.

THE STEPS INVOLVED IN ESTATE SETTLEMENT

Immediately after a person's death, the question arises, who will take charge
of the situation? The person in charge will have many concerns, such as funeral
arrangements, security of property, care for dependent children or adults, and
notification of family members. Frequently, the person named as executor in the will
is asked to take charge. An executor who is already aware of the appointment and
is willing to serve in that capacity usually can take charge soon after the death.
Individuals who prepare wills should take time to speak with the person they plan to
name as executor to inform him or her of their intentions, to ask if he or she is willing
to accept the appointment, and to share information about funeral arrangements and
where documents are located.

Initial Decisions

After the deceased's funeral, the person in charge will survey the deceased's
personal papers and other records to identify property owned by the deceased and
to locate a will, if one was prepared. This survey is important to the estate for a
number of different reasons, including inheritance taxes and distribution of estate
property. If a will is found, the document may name the person who will take over
administration of the estate. Responsibility may be transferred from the person in
charge initially to the person named in the will.

The search for a deceased person's will may require access to a safe deposit
box. Following a death, access to such boxes is limited until an inventory of the
contents is taken for inheritance tax purposes.66 Before the inventory, a family
member can open a safe deposit box, but only to review the contents in search of a
will or cemetery deed.67 If a will or cemetery deed is found, it can be removed. If
neither of these is found, nothing can be removed from the box until an inventory is
made. These access rules apply whether the deceased owner is listed as the sole
owner of the box or as a joint owner with someone else. If the deceased owned the
box jointly with his or her spouse, these access limitations do not apply and the
surviving spouse may open the box and remove items from it before an inventory.68
If items removed are subject to inheritance tax, these items must be included when
the tax calculations are made.

At this point, three questions must be answered. First, how will the
deceased's property be transferred after death? Second, will it be necessary to use
the estate settlement process to accomplish these transfers? Third, who has the
authority to see that the property is transferred?

15
The first question requires a review of the property's ownership. If the property was
owned as a joint tenant with the right of survivorship or as a tenant by the entirety,
nothing need be done to transfer ownership to the surviving joint owner or tenant by
the entirety. This transfer takes place automatically at the moment of death, as
described above, and the estate settlement process does not apply. The surviving
joint owner generally will face the need to establish the death of the joint owner, but
the survivor controls the situation.

Other types of property may pass from a deceased owner without using the
formal estate settlement process. These include:

living trusts created during a persons lifetime for the purpose of accomplishing
this transfer after a persons death;
tentative trusts created during a persons lifetime where the trustees death
transfers control of the trust property to the beneficiary, such as an account
opened by a parent in trust for a child;
social security and veteran's death benefits;
employee benefits; and individual retirement accounts being transferred to the
designated beneficiary;
automobiles;
savings bonds paid to or registered to someone sharing in the decedent's estate;
and
the family exemption which is explained later.

Four other transfers of property can be made without using the formal estate
settlement process in limited circumstances. First, if a person is entitled to wages,
salary, or employee benefits at the time of death, the employer may pay up to
$5,000 of such benefits to the deceased's spouse, children, father, mother, or any
sister or brother, in the order stated. This payment can be made by the employer
without regard to whether a personal representative of the estate has been
appointed.69

Second, a transfer of up to $3,500 can be made from the decedent's bank or
savings account. This amount can be transferred to the spouse, child, father,
mother, sister or brother of the deceased in the order stated. The person receiving
the funds must present a paid funeral bill or an affidavit showing that arrangements
have been made for the payment of funeral services.70

Third, insurance proceeds of $11,000 or less held by an insurance company
(under a policy of life, accident, or endowment insurance or annuity contract) and
owed to the estate of an individual who resided in the Commonwealth may be paid
to the spouse, child, father, mother, sister, or brother of the deceased in the order
stated. A requirement to receive these funds is that at the time of payment the
personal representative has not made a claim for the funds.71

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Fourth, upon the death of a person who is a patient in a county-affiliated
nursing home, up to $3,500 from the patient's care account can be paid to a funeral
director for burial expenses. The facility may pay these funds to the funeral director
and pay an additional amount to the spouse, child, father, mother, sister, or brother
of the deceased patient in that order. The total of all payments made by the facility
may not exceed $4,000.72 In each of these cases, if it is later determined that
payment to the person was improper, and payment should have been made to
someone else, the person who received the improper payment may have to return
the funds.

If the decedent owned other property in his or her own name, it may be
necessary to use the estate settlement process to transfer the property and to
appoint a personal representative to accomplish the transfer by a person who has
the authority to do so. If the decedent had a will, that document will determine who
is entitled to ultimately receive the property. If the decedent did not have a will, the
intestate distribution schedule will determine ultimate entitlement to the property.

Appointment of Personal Representative

To begin the process, a representative is appointed for the estate. Except as listed
above, no one has the right to deal with separately owned property until a personal
representative is appointed. If a person prepared a will, the executor or executrix
named in the will is the personal representative. (Executor signifies a man, executrix
signifies a woman.) If a person did not prepare a will, the personal representative of
the estate is an administrator if a man, or an administratrix if a woman. A personal
representative can be a person or a corporation that has authority to act in that ca-
pacity, such as a bank or trust company that has a trust department. In preparing a
will, a person can name one personal representative or several representatives who
share the position and authority.

To achieve official status, a petition is presented to the register of wills of the
county where the decedent has his or her last family or principal residence.73 If the
decedent did not have a domicile in Pennsylvania, but had property located in
Pennsylvania, the petition can be filed with the register of wills of the county where
the property is located.74 If an executor or executrix files this petition, it is called a
petition for letters testamentary. If an administrator or administratrix files the petition,
it is called a petition for letters of administration.

The petition must provide the following information:

Personal information about the deceased and the place and date of death.
If the deceased died without a will, the names and addresses of the deceaseds
surviving spouse and heirs.
If the deceased died with a will, whether the will was modified by divorce,
marriage, or birth of a child after the will was prepared.
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If the deceased was domiciled in Pennsylvania at death, the estimated value of
all personal property and the estimated value and location of real property within
the state.
If the deceased was not domiciled in Pennsylvania at death, the estimated value
of personal property located in the state, the estimated value of personal property
located in the county where the petition is filed, and the location of real property
in the state.
Name and address of the person who is requesting that letters be granted.75

In this context, domicile refers to the place where a person lives and intends
to stay and call his or her home. A domicile is not just a place where a person
resides for a period of time.

Under the Probate, Estates, and Fiduciaries Code of Pennsylvania, the
register of wills of the county where the petition is filed may grant letters of
administration to one or more people in the following order:

Those entitled to the residuary estate under a will.
The surviving spouse.
Those who are entitled to the estate under the intestate law and who are
determined to be best able to administer the estate.
The principal creditors of the estate.
Other fit persons.76

If any of the above parties renounce their right to be appointed and nominate
someone to act in their place, the register of wills may, at his or her discretion,
accept the nominee of the person who renounces the appointment.77

Certain persons cannot act as a personal representative. Such persons
include minors, corporations not authorized to act as fiduciaries in the
Commonwealth, people found by the register to be unfit to be entrusted with the
administration of the estate, and, in certain cases, the nominee of a beneficiary who
is a citizen of a foreign country (if it appears doubtful to the register that the
distribution of the estate will actually be received by the beneficiary).78 If a
nonresident of Pennsylvania petitions for letters of administration, the register can
refuse to grant the petition.79

In addition to the petition, the original signed copy of the deceased's last will
and testament is filed with the petition. In most cases the deceased's death
certificate is also filed with the petition. The petition can be filed anytime after the
deceased's death.80

A personal representative is responsible for the true and faithful performance
of his or her duties. In some cases, this security is provided by a bond for twice the
estimated value of personal property in the estate.81 The bond is purchased from a
company authorized to do business in Pennsylvania. In many situations, however, a
18
bond is not needed. This could be a case where the appointed personal
representative is a bank and trust company incorporated in Pennsylvania, or a
national bank with a principal office in Pennsylvania.82 In addition, the personal
representative may be excused from this requirement by the deceased when the
executor is a Pennsylvania resident. Many wills make that provision to eliminate the
need for a bond. If the executor is not a Pennsylvania resident, but will serve as co-
executor with a resident excused from the bond requirement, the nonresident may
also be excused from the bond requirement if the nonresident acknowledges that all
assets will remain in the custody and control of the resident co-executor. A bond is
not needed by a resident who is granted letters of administration and is the sole heir
to the residuary estate or by a resident who is the next of kin. If the court orders the
personal representative to be bonded, the requirement must be fulfilled.83

When presented with a petition for letters testamentary and the original copy
of the decedent's will, the register will determine whether to accept the will as the
last will of the deceased and require proof that the will was signed by the deceased.
This proof may come from witnesses present when the will was signed and who
signed the will themselves, or from persons familiar with the deceased's
handwriting.84 If the self-proving procedure was used, the register of wills can
accept the acknowledgment and affidavits to support the statements made
therein.85 This procedure eliminates the need to locate witnesses to the will and
helps the register of wills proceed quickly. The process followed by the register of
wills is called probate or probating the will. Probate means that the register of wills
is determining the validity of the will.

After the petition for letters is granted, the register of wills issues a certificate
of authority, which is formal proof of the personal representative's authority to act on
behalf of the estate.86 The register issues short-form certificates that the personal
representative uses to close bank accounts or otherwise deal with the deceased's
property. These certificates are commonly called "shorts" or "short certificates."

After letters of administration or letters testamentary are granted, the personal
representative arranges to publish a notice of the grant of the letters and the opening
of the estate administration. This notice runs once a week for three successive
weeks in one newspaper of general circulation published where the deceased
resided. If the deceased did not live in Pennsylvania, a newspaper in the county
where the letters are granted is selected to publish the notice. In addition to this
notice, an advertisement will also appear in a legal periodical once a week for three
successive weeks.87 This is a publication designated by the local court as a place
where legal notices are published. In many counties, this is a law journal published
by the local bar association and distributed to lawyers, other professionals, and
libraries.

The notice specifies the name of the deceased, the name and address of the
personal representative, and requests all people having claims against the estate to
make the claims known to the personal representative or the attorney to the estate
19
without delay. Giving this notice is important because it affects the rights of the
estate and its unpaid creditors as they deal with debts and expenses of the estate
and the decedent.

Beginning the Administration

After being appointed to represent the estate, the personal representative
collects as much information as possible about the assets of the estate and the heirs
who are to receive them. If the person originally in charge prepared lists of property,
these lists will form a portion of the personal representative's inventory. The
personal representative should attempt to find all assets and heirs.

Review of Income Tax Issues

Following an individuals death, important state and federal income tax issues
arise. For example, if the individual died before filing a tax return for the prior tax
year, the need to file that return must be addressed. Likewise, from the beginning of
the current tax year to the date of the decedent's death, a short tax year is created
and an income tax return would be filed for that period as well. In addition, the
creation of an estate for the transfer of property creates a new tax entity that is
obligated to file an income tax return in a timely fashion. Each of these three in-
stances provide significant opportunities for the surviving spouse, personal
representative, and heirs to plan a tax strategy that accomplishes specific goals and
may minimize the tax burden that arises. Important decisions must be made and
should not be overlooked.

The first important decision is filing of state and federal income tax returns for
a prior tax year when the decedent had not done so. These returns are generally
due by April 15 of the following year. For example, if the individual died on January
15, 1999, the deceased's income tax return for the calendar year of 1998 would be
due on April 15, 1999. The individual's death in the 1999 tax year generally will
require a final income tax return to be filed by April 15, 2000, to report income
received from January 1 to January 15, 1999. A surviving spouse can elect to join in
these returns and file joint returns for the prior and final tax years, if the spouse has
not remarried during the current tax year.88 In deciding to elect to file joint returns
for the prior and final tax years, the surviving spouse has important factors to weigh
in reaching the decision. Close coordination with an income tax advisor is important
because, depending upon the circumstances, the surviving spouse may or may not
be entitled to the refund, if any.89

The estate of a decedent also faces income tax liability. Income earned by
the estate (from investments, sales, or exchanges) or income earned by the
decedent but received by the estate, can be subject to income tax.90 Income in the
hands of the beneficiary can be subject to tax if distributed by the estate during the
tax year. In effect, income is subject to tax only once.

20
Property that has appreciated in value and that passes through an estate also
enjoys other tax advantages that do not apply to gifts of property made during
lifetime. For example, when appreciated property is given away during the owners
lifetime, the owner also gives the recipient the owner's basis in the property.91 If the
recipient sells the property, the owner's basis is used to calculate gain from the sale
of the property. There may be a substantial difference between basis and fair
market value which will be subject to income tax as gain from the sale.

When appreciated property passes to an estate, however, the tax basis of the
property is increased from its value in the hands of the decedent to the value of the
property as reported by the estate.92 This reported value can be either its fair
market value as of the date of the decedent's death or the special use value which
has been elected by the estate.93 Both of these concepts of valuing property are
explained below. When the personal representative sells property for an amount
that is close to the date of death value, little or no gain from the sale may be
recognized for income tax purposes. When property is passed directly to heirs, the
heirs' basis in the property is the value of the property as reported by the estate.
Personal representatives should be certain that heirs have the relevant information
about property they receive.

As part of the 2001 amendments to the Federal income tax law, this step up
in basis rule will be changed for individuals who die after 2009. In such cases, the
heir who received inherited property will take as the basis in the property the lower of
the decedents basis in the property or the propertys fair market value. Executors of
estates will be able to allocate up to $1.3 million of basis increase to any property
passing under the decedents estate. If property passes to a decedents spouse,
this basis increase allocation opportunity is an up to an additional $3,000,000. In
2011, the law that amended the Federal Income Tax law will expire and the law in
place in 2001 will return and become effective.

For state and federal income tax purposes, an estate becomes a separate
and independent taxpayer at the time of the individual's death.94 In the year of
death, the estate has an opportunity to select as its federal income tax year-- either
a calendar year or an acceptable fiscal year (which ends any time on or before the
last day of the month before the month in which the decedent died).95 The separate
income tax status of an estate continues until final settlement of the estate. This
period cannot be unduly prolonged, but the time required to settle an estate varies
significantly with the complexity of the estate and the nature of the assets.

In selecting the tax year of an estate, the personal representative has an
important opportunity to tax plan for the receipt of income, distribution of the income
to the beneficiaries, and final termination of the estate. In the final tax year of an
estate, certain unused income tax deductions, commonly called excess deductions,
can be passed out to the beneficiaries for use on their personal tax returns. Timing
the receipt of income, distributions to the beneficiaries, and payment of deductible
21
expenses is an important part of the estate settlement process. Close coordination
with an income tax advisor is likewise important.
For state personal income tax purposes, similar issues arise in the filing of
state income tax returns for the decedent's final year or years. The state income tax
status of a decedent's estate will follow the tax year selected for the federal fiduciary
income tax return.96

Valuing Property in General

Property in the estate must be valued and protected. Certain types of property
are in general easily valued; others may require appraisal by someone with special
knowledge and experience about assets such as jewelry, antiques, and land. The
personal representative should be certain that the property is adequately insured
against damage or loss. Value of the assets should guide the decision about the
amount of insurance needed. The actual policy should be reviewed for important
terms and conditions of coverage.

In calculating value, a number of points must be known before applying
valuation rules. First, the property to be valued must be clearly identified. A
description such as the "family farm" or "family antiques" may not be sufficient to
identify all items or pieces of property. Ambiguous descriptions may result in
incomplete calculations when assets are finally totaled. Second, the owner of the
property and fractional ownership must be accurately identified to ensure a proper
calculation. In trying to decide who owns property, all documents or receipts that list
a buyer or owner are reviewed for relevant information. These documents may
include cattle registration certificates, purchase receipts, checking accounts,
installment sales contracts, tax returns, certificates of title to registered vehicles, and
other documents of that kind. Third, any and all records should be obtained to help
establish ownership and acquisition costs.

Date of Valuation

The next consideration is the date of valuation. The value of some items varies over
time. For most purposes, including Pennsylvania inheritance tax, the value of
property as of the date of death is used.97 In some situations, a tax statute may
allow for an alternative valuation. The personal representative should calculate
these values and then select the value that is most beneficial to the estate.

Fair Market Value

The general rule for determining property value is to consider its fair market
value on the valuation date. Fair market value is the price that a willing and able
seller of property would accept from a willing and able buyer, assuming that neither
party is forced into the transaction and that both parties are similarly knowledgeable
about the property. If the item is generally sold on a public market, the current
22
market price is included in the calculation.98 All types of forced sales, such as
sheriff's sales, are excluded from the concept of fair market value.

Fair market value also can be based on a recent sale or purchase of the
property by the deceased. If there has not been a recent sale, then a review of the
sale of comparable property would help to estimate fair market value. However, the
differences between these properties must be borne in mind.

Another method of valuing property is to have it appraised. The usefulness of
the appraisal value depends on the qualifications and experience of the persons
doing the appraisal. A statement that the property value is a certain amount without
an explanation of the methods and factors used in determining that amount might
not be acceptable.

Value of Types of Property

There are many different kinds of property and value is often difficult to
determine. The following paragraphs describe common items of property and the
valuation rules that apply.

Real property. Comparable sales and appraisals are frequently used in
valuing real estate. Some characteristics of land that affect its value are size and
shape, natural resources, location, accessibility to roads and utilities, deed
restrictions on use or transfer, and current lease arrangements. Zoning and property
potential are also factors. Property is valued at its highest and best use, and zoning
may determine what uses are possible within the communitys comprehensive
development plan.

If property has been held for rental income, capitalization of such income may
provide a value figure. However, capitalization may not be useful if the tenant is a
related party who obtained a favorable lease.

Offers to purchase property on the market may serve as an opinion of its
current value. If an offer is rejected (i.e., the seller is unwilling to accept the offer), it
is reasonable to view the value of that property as higher than the rejected offer.

Current development of natural resource deposits on the property, such as
coal, oil, or gas also affects its value.

Special-use valuation of farm and business real property. Under
special-use valuation provisions, anyone facing federal estate or Pennsylvania
inheritance taxes and qualifying for the provision may elect to value agricultural or
other business real estate at its value in its particular use rather than at its fair
market value. This valuation, known as a 2032A valuation, can substantially reduce
the value of real estate assets from their fair market value to their value as used in
agriculture or another business. But the election is subject to a maximum reduction,
23
currently $820,000 in the case of federal estate taxes. Each of these tax laws has its
own requirements and conditions for special use valuation.

For example, under federal estate tax provisions, the valuation technique is
limited to land used for a purpose that qualifies either as a farm for farming purposes
or in some other trade or business.99 The valuation technique requires that the land
devoted to farming or other trade or business comprise at least 25 percent of the
entire estate value.100 The value of the land and personal property combined and
used in the farm or other business must exceed 50 percent of the entire estate
value.101 The deceased owner of the land or a member of his or her family must
have materially participated in the operation of the farm or other trade or business
for at least five of the last eight years before the deceased owner's death, retire-
ment, or disability.102 Material participation is a term with special meaning under
this provision. In deciding if material participation exists, factors such as the
deceased's active involvement in the business by providing labor, management, and
capital are considered.103 The deceaseds tax returns showing self-employment
income from the business are also considered. To be eligible for this treatment, the
land that is specially valued must pass to or be acquired from the estate by a quali-
fied heir, as that term is defined in the tax provision.104 As a condition of the use of
this provision, the qualified heir and all others who have an interest in the land must
agree to continue to own and use the land in the qualified use or face a recapture of
the tax benefits gained by use of this provision.105 Under the federal provisions, the
recapture period runs for a period of ten years after the deceased's death (or after
the qualified heir has taken over the business that makes the land eligible for this
provision).106 Another factor that one must consider when valuing property under
2032A is that the beneficiarys basis in the property will be limited to the value given
to the property under 2032A.

This description covers only a few of the requirements, and those who
consider use of the tax provision are well advised to carefully review all of the
requirements for its use and the conditions imposed to avoid the recapture of the tax
benefit.

Under the state Clean and Green provision, land that is used for agricultural
purposes, as an agricultural reserve, or as a forest reserve may qualify for special
valuation.107 In addition, land that is devoted to an agricultural use must have been
in such use for three years preceding the owner's death, and be not less than ten
contiguous acres in area, or have an anticipated yearly gross income of $2,000
derived from agricultural use.108 If land is devoted to use as an agricultural reserve
or a forest reserve, the tract must be not less than ten contiguous acres in area. If
any of the land valued under this provision is applied to a use other than the three
uses listed above, within seven years of the death of the decedent, the owner of the
land at that time is liable to repay the amount of the inheritance taxes saved by use
of this provision.109 This brief summary of the requirements indicates that these
requirements are substantially different from those of the federal provision. Many
estates may be able to take advantage of this valuation provision; and those who
24
consider it should carefully review all of the requirements and the conditions
imposed in order to avoid the recapture of the tax benefit.

Section 2057. A new tax law provision introduced in the 1997 Taxpayer
Relief Act and later amended by technical corrections found in the Internal Revenue
Service Restructuring and Reform Act offers some additional federal estate tax relief
for owners of family owned enterprises.

The new provision, which is structurally similar to the special valuation
approach under section 2032A, allows a federal estate tax deduction for qualified
family owned business interests.110 The amount of the deduction is coordinated
with the amount that is passed tax free under the unified credit against federal and
estate gift tax and is capped at $675,000.111 The maximum family owned business
deduction allowed under section 2057 is $675,000, and if the deduction applies, then
the maximum exclusion of property under the unified credit is $625,000.112 If the
deduction allowed under section 2057 is less than $675,000, or the deduction does
not apply at all, the amount of the applicable exclusion under the unified credit will be
increased to the maximum amount which would apply without regard to 2057.113
The addition of the family owned business exclusion is important for it will aid family
businesses by allowing an additional amount of business property to pass free of
federal estate taxes at the death of the business owner. This will enable the next
generation family business owner to acquire the business interest in a more intact
form and at a lower transfer tax cost.

To be eligible for the exclusion, an estate must meet four requirements: (1)
The decedent must be a United States citizen at death; (2) The estate executor must
make a 2057 election and file a recapture agreement; (3) the adjusted value of the
qualified family-owned business interest must exceed 50% of the decedents
adjusted gross estate; and (4) the decedent or members of the decedents family
must have materially participated in the operation of the business in an aggregate of
at least five years of the eight-year period ending on the decedents death.114

Three important concepts in this set of qualifications are the includible gifts
of interests, the decedents adjusted gross estate, and the adjusted value
of the qualified family owned business.

Qualified family owned trade or business interests can be carried on as sole
proprietorships or as other entities.115 In regard to other entities, the decedent, or a
member of his or her family must own (1) at least 50% of the entity or (2) at least
30% of an entity in which members of two families own 70%; or (3) at least 30% of
an entity in which members of three families own 90%.116 For corporations, the
family must own the required percentage of the total combined voting power of all
classes of stock entitled to vote and the required percentage of the total value of
shares of all classes. For partnerships, ownership is determined by the percentage
of capital interests of the partnership.117

25
Certain interests can not be qualified as family-owned business interests,
such as (1) interests in a business whose principal place of business is outside the
United States; (2) interests in a business whose stock was readily tradable on an
established securities market or secondary market within three years of the
decedents date of death; (3) the portion of the interest that is attributable to cash
and/or marketable securities in excess of the reasonable expected day-to-day
working capital needs of the business or certain passive assets; and (4) an interest
in a business if more than 35% of the adjusted ordinary gross income of the
business for the year of the decedents death was personal holding company income
as defined by section 543 of the Internal Revenue Code.118

As is the case of the special valuation opportunity under section 2032A, the
estate tax benefit of using the exclusion is recaptured if within 10 years after the
decedents death and before the qualified heirs death: (1) the material participation
requirements are not met with respect to interests acquired from the decedent; (2)
the qualified heir disposes of a portion of the qualified family-owned business
interest, and other than to a member of the qualified heirs family or a qualified
conservation contribution; (3) the qualified heir loses U.S. citizenship or no longer is
a U.S. resident; or (4) the principal place of business ceases to be located in the
United States.119 The adjusted tax difference attributable to a qualified family-
owned business deduction is recaptured as the personal responsibility of the
qualified heir to the extent of the heirs interest in the qualified family-owned
business if the recapture occurs within six years following the decedents death.120
The percentage recaptured thereafter is annually reduced in 20% increments, until
20% is recaptured in the tenth year. Interest on the recaptured amount is also due
at the rate set for underpayment of taxes for the period beginning on the date the
estate tax liability was due under this chapter and ending on the date such additional
estate tax is due.121 One difference between 2032A and 2057 is that basis in
property is not reduced when taking the 2057 deduction.122

Note: For decedents who die after 2003, the qualified family owned business
deduction will no longer be available as the provision will be repealed. In cases
where estates qualified for the deduction in years prior to its repeal, the full 10 year
recapture period described above will continue to be applied. In 2001 the
amendments that repealed this deduction will expire and the law in place in 2001 will
return and become effective.

Land subject to a qualified conservation easement. Section 2031 of the
Internal Revenue Code allows a valuation deduction for land that is subject to a
qualified conservation easement.123 This deduction can be up to 40% of the value
of the land. In order to be eligible for this treatment in the case of transfers before
2001, land must be (1) located within 25 miles of a metropolitan area, (2) located
within 25 miles of a national park or wilderness area that is under significant
development pressure, or (3) located within 10 miles of an Urban National
Forest.124 For transfers in 2001 and later years these distance requirements are
26
eliminated. However, the law that introduced the elimination of the distances will
expire in 2011 and the law in place in 2001 will return and become effective.

In addition, the land must have been owned by the decedent or a member of
the decedents family for 3 years before the decedents death.125 A number of
other requirements exist before this deduction can be taken. The requirements are
complex, and one should consult a professional before attempting to take this
deduction.

Corporate stock. Corporate stock can be valued according to the amount it
would generate if sold. Stock sold on any of the stock exchanges is valued at the
average of the high and low selling prices on the date in question. If no sales were
made on that day, stock is valued at the average price on the nearest sale days
before and after that date.126

For stock sold on the over-the-counter market with a bid and asking price, the
average between these prices on the valuation date can be used. If no prices were
quoted for that day, the stock is valued at the average price on the nearest sale days
before and after the valuation date.127

Other methods may be needed for stock of a closely held corporation that has
not had recent sales. Stock can be valued according to the company's net worth
(assets minus liabilities) or its history of earnings and dividend payments.128 In a
closely held business, an existing buy-sell agreement may specify the amount to be
paid for the stock of an owner who withdraws from the business. Other factors to be
considered are the nature of the business, its history, the economic future of the
business, values set in the corporation's own books and records, goodwill as carried
on the corporation's books, voting authority of stock, and the power of the voting
authority to control corporate decisions.129

The concept of goodwill involves a comparison of one business's performance to
that of other businesses of the same type in the same area. A business's greater
success may be used to determine its goodwill when compared to other businesses.

Partnerships and sole proprietorships. Ownership of partnerships and sole
proprietorships is represented not by shares of stock but by an ownership interest in
the value of the business itself. In a partnership, the value of the business is shared
among the partners; in a proprietorship, this value is held by the individual owner. In
both cases, some of the same concepts may be used to assess value when the
business has not been sold recently. Concepts such as the net worth of the busi-
ness and capitalization of earning capacity can be very helpful in calculating value.
Buy-sell agreements or other provisions in a partnership agreement may enable the
partners to calculate the amount due a withdrawing partner.130

Machinery, equipment, and livestock. Value of machinery, equipment, and
livestock is determined by reviewing market value figures for recent sales of similar
27
items, especially livestock. People in the business of selling these types of property
can provide market value information for the estate.

Life insurance. For federal estate tax purposes, the proceeds paid by a life
insurance company are the valuation amount.131 Insurance proceeds are not
taxable under state inheritance tax law, and value is not a consideration. For federal
estate tax returns, a form 712 should be obtained from the insurance company. This
form describes the value of the policy that is reported.

Tangible personal property. The fair market value of general personal
property may be difficult to establish since value drops immediately after sale. If the
estate settlement and valuation occur soon after the purchase or sale of the
property, the sale price may be a factor in valuation. This price, however, should not
be viewed as the only proof of value.

General personal property. General personal property includes such
common items as furniture, clothing, household appliances, and tools. For gift tax
purposes, it may be worthwhile to ask the recipient to place a value on the item.
When payment of estate or inheritance taxes is involved, items may be sold at an
auction and the value of the property is the proceeds of the sale (before paying the
auctioneer's commission).

Antiques, collectibles, special property. If the property includes recognized
antiques or collectibles valued at over $3,000, a qualified appraiser is needed to
establish the fair market value of these items. The appraisal of the expert must be
filed with the return.132

Notification of Heirs

Within three months after letters testamentary or letters of administration are
granted, the executor must notify the heirs of the deceased's death and the estate
administration.133 In the case of an estate distributed under the intestate law, the
personal representative may have to do some investigation to identify the surviving
family members who will receive property under the distribution schedule. For
decedents dying on or after January 1, 1999, the personal representative must
determine a current address and send the form of notice that is listed in Rule 5.7 of
the Orphans Court Rules. This required notice is to include information regarding
the date and place of decedents death; whether the decedent died with or without a
will; the name and address of the personal representative; and how the person may
obtain a copy of the will Within ten days of sending this notice to each heir, the
personal representative certifies having sent the notice by filing a document with the
local register of wills.134 Heirs may respond to this notice by requesting information
about the amount they will receive from the estate, although it may be too early to
determine that amount accurately. Communication between the personal
representative and the heirs should be continuous throughout the estate
administration.
28

Settlement of Small Estates on Petition

If a person who is a Pennsylvania resident dies owning personal property
having a value of not more than $25,000 the orphans' court division of the county
where the person resided may act on a petition to distribute this property to heirs
designated by the court.135 This procedure is available to settle estates of low
value and is not restricted by the fact that the decedent owned real estate,
regardless of its value.136

In this simplified and less formal process, any heir or other person who has
an interest in the distribution of the decedent's personal property may file the
petition. The orphans' court division will determine what notice is to be given to
other interested parties, and then act on the petition to direct distribution of the
property to the parties entitled thereto in a decree of distribution. This action can be
initiated and acted upon regardless of whether the decedent's will has been filed for
probate or a personal representative has been appointed.137

Within one year after the court's decree of distribution has been made, any
other party who has an interest in the distribution of decedents personal property
may file a petition to revoke the decree of distribution on grounds that it ordered an
improper distribution. If the court finds the decree of distribution was improper, it
may revoke the decree and direct distribution of the property as it determines to be
just and equitable.138 This may require a person to return property or make
restitution of improperly received funds.

When planning an estate settlement, one should not confuse the provisions in
this section of the Probate Code with the provisions of section 3531. Section 3531
can apply when the value of all real and personal property is less than $25,000, but
note that 3531 requires the appointment of a personal representative and the
submission of the will for probate. One advantage of section 3531 is that the
expense of a formal account is avoided.139

Filing the Inventory

Every representative must file an inventory of real and personal property
owned by the deceased.140 The inventory also includes a memorandum list of real
estate owned by the decedent, but located outside of Pennsylvania. This list may
include the value of such property, but the amounts will not be included in the
inventory total or as real estate in a later accounting of estate assets.141

This inventory must be filed no later than the date of filing the estate account
(described later) or the due date of the inheritance tax return, whichever is earlier.
Any party with an interest in the estate may request the filing of an inventory at an
earlier date by making a written request to the personal representative. If such a
request is made, the inventory is due within three months of the representative's
29
appointment or thirty days after the request, whichever is later. The orphans' court
division may direct the filing of an inventory at any time.142

Initial Payment of Inheritance Tax

Every representative must keep in mind the obligation to pay any applicable
inheritance and estate taxes. Under Pennsylvania inheritance tax law, the tax
payment becomes delinquent if not paid within nine months after the death of the de-
ceased.143 A 5-percent discount is available for amounts paid toward the
inheritance tax within three months of the death.144 In deciding whether to take
advantage of the discount on the inheritance tax, the personal representative should
consider the income earned on the tax payment and then compare that amount to
the tax savings generated by the early payment. This comparison should be made
to ensure the maximum benefit to the estate. Overpayment of inheritance should be
avoided, because no discount is available for an excess prepayment.

Administration of Assets

During administration of an estate, the representative has the right and
obligation to take possession of real and personal property of the deceased, except
for real estate occupied at the deceaseds death by an heir who had the consent of
the deceased.145 The representative has power to collect rent and income from the
assets until sold or distributed and to make all reasonable expenditures needed to
preserve and maintain the property. In addition, the representative has the right to
maintain any action with respect to the property (i.e. bring a lawsuit).146

The representative has a fiduciary duty to the estate and is held to the highest
degree of faith. The representative is under a duty to act with the same degree of
judgment, skill, care, and diligence that a reasonable or prudent person would
exercise in his own affairs.147

If the deceased owned a business at death, a will may give the representative
authority to operate the business during the period of estate administration. If the
deceased dies without a will or did not give such authority in a will, the personal
representative must petition the court for such authority to operate the business or
face personal responsibility for any loss that results from the operation of the
business without such authority.148

A personal representative generally is obligated to liquidate estate assets not
specifically given to a beneficiary and to promptly distribute the proceeds to the heirs
when estate administration is completed. A property owner can give an executor the
authority to distribute property to heirs rather than sell it, specifically describing the
executor's authority as including the right to retain property and distribute it "in kind."

Unless restricted by a will, the personal representative has authority to sell
personal property as well as real property that has not been specifically given to
30
someone in the will.149 If the person who is specifically given real property joins in
the sale, the personal representative may sell this property as well. If the personal
representative was required to give a bond, as explained above, the representative
must obtain a court order that determines the need for additional security.150

A personal representative considers the sale of assets when cash is needed
to pay debts, expenses, or gifts provided in the will or under the intestate law. The
sale of an asset may also be considered when the asset is losing value in its present
form. Converting the asset to cash puts it in a form that can be invested to grow in
value.

In many situations, distribution is postponed until administration is completed,
and the personal representative must invest estate funds to make the assets
productive. Unless otherwise directed by the court or the will, the representative
should generally invest in government bonds, interest bearing bank deposits, and
accounts in savings associations insured by the Federal Savings and Loan
Insurance Corporation.151 The personal representative has a wide range of powers
to deal with the estate property and a high degree of responsibility to keep the funds
safe while still earning a reasonable income on the funds. The representative is
expected to perform as a person of ordinary prudence, acting in good faith in dealing
with his or her own property.

A personal representative must file a status report with the register of wills.
The first such report is due no later than two years after the deceased's death.152 If
the administration continues beyond that date, similar reports are filed annually
thereafter. Each report must show the date that the personal representative
believes the administration will be completed.153

The personal representative must also file a report of completed
administration with the Register of Wills when the administration is finished. This
report must show that the administration of the estate is completed; whether a formal
account was filed with the Orphans Court; whether a complete account was
informally stated to all parties in interest; whether final distribution has been
completed; and whether approvals of the account, receipts, joinders and releases
have been filed with the Clerk of the Orphans Court.154

Administration of an estate may be delayed by contests over the validity of a
will, disputes with creditors as to the amount owed by the estate, disputes with
debtors as to the amount owed to the estate, poor market conditions for the sale of
estate assets, and litigation involving the estate as a party arising from an incident or
injury. Delays involving litigation can be substantial but unavoidable. For each
estate administration, different circumstances can increase or reduce the amount of
time required. Few people, if any, benefit by delay in the conclusion of the
administration; courts promote a prompt settlement in as many situations as
possible. Questions about what seems to be an exceptionally long delay should be
resolved with the personal representative or attorney.
31

Preparation of the Pennsylvania Inheritance Tax Return

Preparation of the state inheritance tax return involves gathering information
about the estate assets, the beneficiaries, and supporting statements about the
value of estate assets and the deductible expenses of the estate's administration.
Included in the list of deductions is the family exemption. This exemption is a pay-
ment of $3,500 that is allowed only from probate assets of the estate to the spouse
of a deceased person, or, if there is no surviving spouse, to eligible children of the
deceased, or, if there are no children, then to the parent or parents of the deceased
provided they are members of the same household as the deceased.155 If claimed,
the exemption will be listed on the tax schedule with the claimant's name,
relationship to the deceased, and address at the time of the deceased's death. Also
listed will be funeral expenses, administrative costs, miscellaneous expenses, and
other payments from the estate.

The Pennsylvania inheritance tax return consists of these schedules:

Identifying information, recapitulation, and tax calculation

Schedule A -
real estate
Schedule B -
stocks and bonds
Schedule C -
closely-held corporate stock and partnerships interest
Schedule C-1 -
closely-held corporate stock information
Schedule C-2 -
partnership information report
Schedule D -
mortgages and notes receivable
Schedule E -
cash and miscellaneous personal property
Schedule F -
jointly-owned property
Schedule G -
inter-vivos transfers and miscellaneous non-probate property
Schedule H -
funeral expenses, administrative costs
Schedule I -
debts of deceased, mortgages, and liens
Schedule J -
Beneficiaries
Schedule K -
life estate, annuity, term certain
32
Schedule L -
remainder payment or invasion of trust principal
Schedule L-1 -
remainder payment election- assets
Schedule L-2 -
remainder payment election credits
Schedule M -
future interest compromise
Schedule N -
spousal poverty credit
Schedule O -
election under Sec. 9113(A) (Spousal Distributions)

If the estate does not have any assets falling into some of these categories,
the schedule need not be submitted for those categories.

In calculating tax due, total gross assets are calculated and from that figure,
costs, expenses, debts, mortgages, and liens are deducted to determine net value of
the estate. From this amount, any charitable bequests are deducted to determine the
net value subject to tax. The estate determines the portion of the net value subject
to tax at the 0, 4.5 and 12 percent rates; the remainder of the net value is subject to
tax at the 15 percent rate.156 Each of these figures is then multiplied by the
respective tax rate and totaled to yield principal tax due. From this, total prior tax
payments plus allowed discounts are deducted to determine the balance due to the
register of wills, which is paid when the return is filed. An estate that includes
among its assets a small business interest may elect to pay the inheritance tax
applicable to this interest in installments, as provided in the inheritance tax law.157
Various documents are needed when preparing the schedules of the
Pennsylvania inheritance tax return. Copies of documents submitted with the return
generally include bank statements, appraisal reports, stock value statements, and a
statement of remaining balance due. If information of this type is not attached, the
Department of Revenue may request it, and the appraisement of the return
(explained below) will be delayed.158

After the return is filed, the Department of Revenue reviews it and issues a
notice of appraisement that is its own valuation of estate assets, allowable
deductions, and inheritance tax due. If the figures agree with those submitted by the
estate and the tax is paid, the estate has met its obligation to pay Pennsylvania's
inheritance tax. If the figures do not agree, the differences should be identified and
resolved between the estate and the Department of Revenue as soon as possible in
order to minimize additional expense.159

Objections to the appraisement may be filed. A taxpayer or any party in
interest who is not satisfied with the appraisement, allowance or disallowance of a
deduction, assessment of tax, or any other matter relating to the inheritance tax,
33
may object. An objection is initiated by taking any of the following actions within
sixty days of receipt of the notice to which objection is made:

Filing a written protest with the Department of Revenue Board of Appeals. The
protest should specify all objections.
Notifying the register of wills in writing that the objecting party elects to have the
issue decided at the audit of the personal representative (explained below).
Filing an appeal to the orphans' court division to have the objection determined at
the audit of the account of the personal representative, or at a time fixed by the
court.160

Payment of Pennsylvania Inheritance Taxes

A deceased's will may specify a source for the payment of taxes, but in the
absence of such instructions the following rules apply:

Taxes for specific bequests and devises in a will are paid from property that
passes under the residuary clause of the will.161 This clause provides for the
transfer of all property not specifically given to someone.
Taxes on transfers for a limited time, such as life estates or transfers for a
specific number of years, are paid out of the assets that form the life estate.162
Taxes on property that specifically passes to a trust and is not part of the
residuary clause of the will are paid from the property that passes under the
residuary clause.163
Taxes on property that passes under a trust created during the deceased's
lifetime and that is not part of the residue of the trust are paid out of the residue
of the trust.164
In other cases, the liability for the payment of inheritance tax rests upon the
person who receives the property.165

A willful failure to file a return results in liability for the personal representative, or
the person receiving the property if such person is obligated to pay the inheritance
tax. In addition, a penalty of 25 percent of the tax ultimately due or $1,000,
whichever is less, may be charged.166 Interest on the delinquent tax amount will be
charged from the day after the tax becomes delinquent and will be calculated at the
fluctuating rate provided in state law.167

Preparation of Federal Estate Tax Returns

The federal estate tax is different in many respects from the state inheritance
tax, but it is a tax which many estates do not face. If an estate does not include
property equal to or greater than the applicable exclusion available to the estate, the
personal representative of the estate need not file a federal estate tax return.168 An
estate that qualifies for the entire applicable exclusion need not file a federal estate
tax return unless the gross estate exceeds $1,000,000 (For 2002 and 2003). An
earlier discussion highlighted the rules for calculating the gross estate in a given
34
situation. These rules may differ from those applied in a Pennsylvania inheritance
tax situation. It is likely that the amount of property subject to inheritance tax will
differ from the amount of property that is included in the decedent's federal gross
estate.

When a return must be filed, specific information is gathered and presented
on the various schedules of the return.

The federal estate tax return, form 706, consists of these schedules:

Identifying information and tax computation.

Elections by executor and general information.

Recapitulation.

Schedule A
real estate
Schedule A-1
Section 2032A valuation
Schedule B
stocks and bonds
Schedule C
mortgages, notes, and cash
Schedule D
insurance on the decedent's life
Schedule E
jointly owned property
Schedule F
other miscellaneous property
Schedule G
transfers during life
Schedule H
powers of appointment
Schedule I
annuities
Schedule J
funeral and administration expenses
Schedule K
debts of the decedent
Schedule L
net losses during administration and expenses incurred in administering
property not subject to claims
Schedule M
bequests to surviving spouse
Schedule O
35
charitable, public, and similar gifts and bequests
Schedule P
credit for foreign death taxes
Schedule Q
credit for tax on prior transfers
Schedule R
generation skipping transfer tax
Schedule R-1
generation skipping transfer tax payment voucher
Schedule T
qualified family-owned business interest deduction
Schedule U
qualified conservation easement exclusion

In addition to these forms, it is necessary to file a certified copy of the will, an
original death certificate, evidence of payment of state death taxes, and copies of
any trust agreements and power of appointment documents. To assist in processing
the return, the estate should attach copies of documents for appraisal of property,
life insurance statements, and statements to support the contribution of a surviving
joint tenant. The nature of the decedent's property will determine the need for
additional information.169

In calculating the federal estate tax due, a value for the total gross estate is
calculated. From that amount, the allowable deductions are subtracted to yield
taxable estate. Adjusted taxable gifts made by the deceased after December 31,
1976, are added to the total gross estate. To this combined figure, the tax rate
schedule is applied to calculate a tentative tax. Total gift taxes payable on gifts by
the deceased after December 31, 1976, are added to yield gross estate tax due. To
this amount, the allowable unified credit, credit for state death taxes, and other
credits are applied to determine the balance due on the federal estate tax.170

The federal estate tax is due nine months after the date of the decedent's
death unless an extension is granted or the estate elects to pay the tax in
installments as provided in the Internal Revenue Code.171 This installment
payment option is available to estates that include among their assets an interest in
a closely held business and that meet the requirements of the code.172 The return
is filed with the district director of the Internal Revenue Service or the Internal
Revenue Service Center for the state where the decedent was domiciled at the time
of death.173

Upon receipt, the return will be reviewed by the IRS. If additional information
is needed to complete its review, the IRS may schedule a further examination of the
return. This examination could be conducted in an IRS district office or in the office
of the taxpayer or his or her representative. Occasionally, an examination may be
conducted by correspondence when it is necessary to verify a particular item. The
result of this examination could be either to accept the return as filed or to determine
36
that tax liability was understated or overstated. If tax liability is found to be under-
stated, this results in a deficiency (extra tax) that must be paid by the taxpayer. If
tax liability is found to be overstated, the overpayment of taxes is refunded.

In the next step, the taxpayer and examiner either reach an agreement as to
the return and tax due or proceed to resolve the disagreement. If the parties cannot
agree after the examination, a detailed procedure is initiated that involves various
administrative reviews and opportunities for both parties to review the facts and
determine the application of the tax laws to these facts. Specific questions about
this procedure should be directed to attorneys or other professionals who are famil-
iar with it.

If the values claimed on an estate tax return are less than the correct value, a
special penalty for undervaluation may be applicable.

The initial penalty is 20 percent of an underpayment of tax that is attributable
to a substantial estate or gift tax understatement. The initial penalty will not apply if
the underpayment attributable to the understatement is less than $5,000.174 A
substantial estate or gift tax valuation understatement occurs when the value of the
property claimed on the estate or gift tax return is 50 percent or less of the amount
determined to be correct.175 If the understatement of valuation is 25 percent or less
of the correct value of the property, the understatement is considered a gross
valuation misstatement and the penalty is doubled to 40 percent of the
underpayment.176

If an underpayment is the result of fraud, a penalty equal to 75% of the
underpayment is added to the tax.177

The personal representative is responsible for the payment of the federal
estate tax.178 This payment is made when the return is filed. An extension of time
to file the return does not extend the time for payment. A separate request for an
extension of time to pay the estate tax must be filed and will be granted only if the
taxpayer can show reasonable cause to grant the request.179 During the time that
the estate is granted an extension of the time to pay, interest on the amount of the
tax will continue to accumulate.180

If the taxpayer does not pay the tax shown to be due on the return and cannot
show reasonable cause to grant an extension, a penalty will be charged. This
penalty is equal to one-half percent of the tax due plus an additional one-half percent
for each month or fraction over one month that the tax is not paid. But the penalty
will not exceed a total of 25 percent added to the amount of tax required to be shown
on the return.181

If the taxpayer fails to file a required return by the due date, a penalty of 5
percent of the tax due plus an additional 5 percent for each month or fraction over
one month that the return is not filed is added, but the penalty will not exceed 25
37
percent of the tax due. If the failure to file was due to a reasonable cause, the
penalty will not apply.182

Payment of Federal Estate Taxes

A deceased's will may direct the apportionment of federal estate tax among the
beneficiaries of the estate. In the absence of such instructions, the following rules
apply:

On specific bequests and devises in a will, the tax is paid from the property that
passes under the residuary clause of the will.183
On property that passes under a trust created during a decedents lifetime and
that is not part of the residue of the trust, tax is paid out of the residue of the
trust.184
No federal estate tax is apportioned to property that passes to a beneficiary and
qualifies as a charitable or marital deduction, including a spouse's elective share
that qualifies for the marital deduction.185
The unified credit, the credit for tax on prior transfers, and the credit for gift taxes
paid by the deceased on gifts made by the deceased before January 1, 1977,
benefit all parties who pay federal estate taxes. If a party pays one-fourth of the
tax, one-fourth of the credits will be applied to that person's tax.186
Additional estate tax due when a qualified heir disposes of qualified real property
that has been specially valued is apportioned against the qualified heir.187
Any interest and penalties are apportioned in the same manner as the principal
amount of the federal estate tax, unless a court finds it would be inequitable to do
so.188

Preparation of Account, Schedule of Distribution, Audit

After all tax issues have been resolved, and when necessary, property has
been sold, the personal representative is ready to prepare the estate account. This
account is a complete statement of receipts and disbursements affecting the estates
assets.189 Each item of property is listed at its value as of the date the personal
representative received it. If the property was sold during the administration, the
account will show the sale and the net proceeds after expenses are deducted. Any
interest earned by the estate will be itemized. Payments made by the personal
representative are itemized by date, and listed with the name of the person who
received the payment and the purpose for which the payment was made.190
The personal representative files a complete account with the register of wills
of the county where the will is filed and sends notice of the filing to every unpaid
claimant that has given written notice to the personal representative. This notice is
also sent to every other person known to the personal representative to have a claim
or an interest in the estate as either creditor, beneficiary, heir, or next of kin.191 The
notice states the date, time, and place for auditing the account by the local orphans'
court division. It will state the last day to file objections to the account.192

38
The schedule of proposed distribution is the personal representative's
proposal for distributing all funds or other property remaining in his or her hands.
This property could consist of the original estate as stated above. Objections to
such distributions must be filed before the scheduled date for the court audit.193
Examples of objections include those made by creditors whose claims will not be
paid or heirs who feel they are entitled to more than the proposed distribution. Other
objections may relate to the personal representative's fee, if any, or to inheritance
tax questions concerning allowable deductions or tax calculations that can be
decided at the audit. Other objections look to the propriety of making a particular
disbursement. At the audit, the court reviews the accounting and offers those who
object the opportunity to raise their complaints. After all complaints are resolved,
usually by scheduling a separate hearing, the court orders the personal
representative to make distribution as the court directs.194

An important aspect of court ordered distribution is protection given to the
personal representative. Without the protection of this order, the personal
representative risks being personally liable for any distribution later found to be
improper.
A second aspect of the court ordered distribution affects the rights of
creditors. Having been given notice of the proceedings and an opportunity to
participate in these proceedings, creditors not appearing at the hearing will lose their
right to collect debts from the estate. The notice given to creditors when the estate
is opened and the notice given with the filing of the account are important actions.

In some situations, the estate does not have sufficient assets to pay its debts
and its beneficiaries in the full amount specified in the will. In such cases, either the
will or a state statute will set forth a priority order for payment of the beneficiaries.

If the assets of the estate are insufficient to pay all claims against the estate,
the estate is insolvent. The personal representative must determine whether any of
the claims have a priority such as payments due to the federal government. After
these claims are paid, another priority list applies for all other claims against the
estate. In paying claims, the personal representative goes through the list and pays
each level in full with available funds, until the funds are used.195

Family Settlement Agreement

An alternative method of accomplishing the account and distribution is to do
so by a family agreement.196 Under a family agreement, the personal
representative prepares a statement of all financial transactions in which the rep-
resentative was involved. The information provided in this form can be less than or
equal in detail to the account filed with and audited by the court. A more detailed
disclosure and report will provide the personal representative with more protection
than a sketchy or incomplete disclosure.

39
A proposed schedule of asset distribution is prepared. Each heir to the
estate, each claimant who has notified the estate, and any other party in interest
who is known to the representative is then asked to agree with the accounting and
proposed distribution. If all of these people can agree on the information, the
agreement is executed by all parties, and a copy of it is filed with the clerk of the
orphans' court division for future reference. If the parties cannot agree on these
matters, the formal procedure is followed.

In a situation in which a formal court audit is not held, the rights of creditors
who are not party to the agreement may become an issue. The time at which the
claimant raises the issue of a debt becomes a crucial factor.

Generally, when a creditor has a judgment lien on a persons property and the
owner of the property dies, the lien is not affected by the owners death. The lien
continues for the balance of its recorded life of five years or for at least one year
after the owner's death, whichever period is longer. At the end of this period, the
judgment lien can be revived as any other judgment lien may be revived for an
additional period of time.197

If a person has a claim against someone who dies before the claimant takes
action on the claim, the claimant has the balance of time assigned by the original
statute of limitations to initiate suit against the deceased's estate. If the original stat-
ute of limitations expires within one year after the deceased's death, the claimant is
given at least one year after the deceased's death to initiate action on the claim.198
For example, if a person has a claim against another person and the statue of limita-
tions requires action on that claim before January 1, 1998, the other persons' death
on December 1, 1997, will give the claimant until November 30, 1998, to act on the
claim and still satisfy the statute of limitations.

Therefore, a creditor who does not sign a family settlement agreement must
submit his or her claim to the personal representative of the deceased's estate within
the statute of limitations period or the claim will be barred. Because notice is given
at the time an estate is opened, most claims will be submitted promptly.
Occasionally a creditor is unaware of the death and takes no action to collect on a
debt. When the creditor finally acts, the timing of that action is crucial in determining
the estate's responsibility to pay the claim. Many family settlement agreements
address this possibility by describing a way to handle such cases and pay such
claims.

Receipt and Release

When distribution of estate assets is made, the representative frequently asks
the creditor or beneficiary to execute a receipt for the payment or transfer of property
and a release of liability. The personal representative has a special legal obligation
to the heirs and creditors of the estate. Such receipts and releases are the personal
representatives way of providing a record of his or her efforts to satisfy this
40
obligation. The record will be useful to the representative if a future question arises
concerning distribution of the estate.

The Final Steps

At this point, the end of estate administration is nearing. The personal
representative may want to be certain that all estate checks have been paid by the
local bank, that all bank accounts have been closed, that all bonds have been
cancelled, and that all outstanding matters have been resolved. Copies of various
estate documents, such as the inventory, accounting, or proposed schedule of
distribution, can be provided to the heirs for their personal records. The papers filed
in the office of the register of wills and the office of the clerk of the orphan's court are
public records available for review during normal courthouse hours.

SUMMARY

Settlement of an estate can require a fairly long period of time. However,
there is no standard or stipulated period of time for completion of the process of
estate administration. Each estate must be considered individually. Some factors
affecting estate settlement are the need to sell property, the tax situation, and the
resolution of disputes among the estate and its creditors, its debtors, and other
responsible parties.

The estate settlement process is very detailed, and the personal
representative has many obligations. Often the personal representative selects an
attorney to advise and represent the representative and to handle legal matters.
While hiring an attorney can remove much of the burden from the representative's
shoulders, final responsibility for these actions and potential liability rests with the
representative. Therefore, a representative should work closely with legal counsel
and participate in all matters affecting the estate. This close working relationship will
benefit both the estate and the personal representative.


LEVELS OF PROPERTY DISTRIBUTION UNDER
THE INTESTATE LAW OF PENNSYLVANIA

A. If a spouse survives the decedent, the share of the surviving spouse depends
on the following circumstances.
1. If no children, grandchildren, (etc.) or parents of the deceased survive, then the
surviving spouse receives the entire estate.
2. If there is a surviving child or children of the deceased and the surviving
spouse; a surviving grandchild or grandchildren of the deceased and the
surviving spouse; or a surviving parent or parents of the deceased; then the
surviving spouse receives the first $30,000 of the estate plus one-half of the
remaining estate balance.
41
3. If one or more surviving children or grandchildren are not children or
grandchildren of the deceased and the surviving spouse, then the surviving
spouse receives one-half of the entire estate.199
B. If children and/or grandchildren of the decedent survive, then whatever share
is not distributed to the surviving spouse (i.e., one-half of the remaining
estate balance, as described above), or one-half of the entire estate as
described above, is distributed to the children and grandchildren of the
deceased.
1. If all children of the deceased survive, per capita distribution is made among the
children (equal amount to each child).
2. If some children of the deceased died before their parent, but were survived by
children of their own (i.e., grandchildren of the decedent), these grandchildren
will take the share that their parent would have taken had the parent been living.
The grandchildren will take an equal share of this amount.200

C. If no children or grandchildren survive, then to the parent(s) of the deceased.
1. If both survive, they take as tenants by the entireties.
2. If only one survives, to that person individually.201
D. If no parents of the deceased survive, then to the deceaseds brothers,
sisters, nephews, nieces, grandnephews, or grandnieces.
1. If all brothers or sisters survive, per capita distribution is made to them.
2. If some of the brothers or sisters die before the deceased but are survived by
children (nephews, nieces of the deceased) or grandchildren (grandnephews,
grandnieces of the deceased), then the share which would have passed to the
deceased's brother or sister will pass to their children or grandchildren and be
divided equally among them.202
E. If no brothers, sisters, nephews, nieces, grandnephews, or grandnieces of
the deceased survive, then to the deceaseds grandparents.
1. If one or both of the maternal and paternal grandparents of the deceased
survive, one-half of the estate is distributed to each grandparent(s).
2. If one of either the maternal or paternal grandparents survive and neither of the
other grandparents nor any of their children or grandchildren survive (aunts,
uncles, and cousins of the deceased), the entire estate is distributed to the
surviving grandparent. If an aunt, uncle, or cousin of the deceased from the
other side of the family survives, then one-half of the estate will be distributed to
such aunts, uncles, and cousins and distributed equally among the surviving
aunts and uncles and the children of any deceased aunts or uncles who survive
the decedent.203
F. If no grandparents of the deceased survive, then to uncles, aunts, and
cousins of the deceased.
1. If all aunts and uncles of the deceased survive, per capita distribution is made to
each of these.
2. If one or more has died before the deceased and is survived by children
(cousins of the deceased), the cousins will share equally in the share their
deceased parent would have received.
42
3. If all aunts and uncles of the deceased die before the deceased, but are
survived by their children
(cousins of the deceased), the estate will be divided among the cousins per
capita.204
G. If no cousins of the deceased survive, but one or more cousin has a child or
children who survives the deceased and no other relatives with a closer
relationship survive the deceased, the estate will be divided among the
children of the cousins per capita.205
H. If no children of cousins survive the deceased, the entire estate passes to the
Commonwealth of Pennsylvania.206


Note: In order to be entitled to receive the share that the intestate law designates,
each beneficiary, including a surviving spouse, must survive the decedent by at
least five days. This requirement will not be applied, however, if the result of
applying it would be to have the property pass to the Commonwealth as
described in paragraph H, above.207

43
GLOSSARY

Action - As used in the term "maintain an action," action refers to a lawsuit brought in
court. It is a formal complaint against someone that a court is asked to decide.
Capitalization - A method of calculating the value of an item by referring to the income
it generates over a period of time. For example, if a rental property generates $10,000
a year in income and investors generally invest their funds to get a 10 percent return,
$10,000 of income is generated by property that is worth $100,000. As a method of
determining value, capitalization is only one method among several.
Closely held business - A business that has few owners, whether it is a proprietorship
(one owner), a partnership (two or more partners), or a corporation (one or more
shareholders). Many closely held businesses are owned by members of the same
family, and ownership can be limited to only such people.
Devise, bequeath - These two words are commonly used in a will to express the
intention to transfer property to someone after the owner's death. Devise is the act of
giving real property and bequeath is the act of giving personal property to someone
after the owner's death. A devise is the real property received by the beneficiary. A
bequest is the personal property received by the beneficiary.
Distribution in kind - A transfer of property in its present form or, as is. If an estate
that owns a building gives the building to the heirs, the building is distributed in kind to
the heirs. If the estate sells the building and distributes cash to the heirs, this is not a
distribution in kind.
Estate administration process - The steps taken by the personal representative of an
estate to fulfill the terms of a will or the intestate law by distributing estate property to
the proper party(ies) and to fulfill other requirements by paying the required estate or
inheritance tax.
Guardian - A person or institution that acts on behalf of a person who is unable to act
because of sickness, injury age, or disease. The guardian is responsible to the person
for any action that the guardian takes.
Levels of distribution - The intestate law determines the heirs of a person who dies
without a valid will and the amount of property that the heirs will receive. Under the
Pennsylvania intestate law, this order is established for distributing property: spouse,
children, grandchildren, parents, brothers, sisters, nephews, nieces, grandnephews,
grandnieces, grandparents, uncles, aunts, cousins, and children of cousins. The law
determines at which point full distribution of estate property is made.
Probate Process The court process that determines the validity of a will. This term
often is used to include all matters and proceedings involved with settlement of an
estate.
Residuary estate The portion of estate property that remains after specific devises or
bequests have been made in a will and debts and expenses have been paid by the
estate.
Spouses right to elect against the will The right granted to a surviving spouse to
elect to take a statutory share of the deceased spouses estate rather than the share
provided for the surviving spouse in the deceaseds will. This right can be waived or
forfeited by the surviving spouse.
44
ENDNOTES

1 20 Pa.C.S.A. 6303 (West Supp. 1999).

2 Id. 6304.

3 Constitution Bank v. Olson, 423 Pa. Super. 134, 140, 620 A.2d 1146, 1149 (Pa.
Super. Ct. 1993).

4 20 Pa.C.S.A. 8503, 8505 (West 1976).

5 Id. 8503.

6 Id. 2101 (West Supp. 1999).

7 Id. 2101 et. seq.

8 Id. 2102.

9 Id. 2102,2103.

10 Id.

11 Id.

12 Id. 2103.

13 Id. 2104(10).

14 Id. 2501.

15 Id. 2502.

16 In re Estate of Sidlow, 374 Pa. Super. 624, 543 A.2d 1143 (Pa. Super. Ct. 1988).

17 20 Pa.C.S.A. 3132 (West 1975).

18 Id. 3132.1 (West Supp. 1999).

19 Id.

20 Id. 2203, 2210.

21 Id. 2203.

22 Id. 2106, 2208.
45


23 Id. 2207.

24 Id. 2507(2).

25 Id. 2507(3).

26 Id. 2507(4).

27 Id. 2507(5).

28 Id. 6111.2.

29 Id.

30 Id. 2519.

31 Id. 3155.

32 Id. 3314 (West 1975).

33 72 P.S. 9111, 9116(a)(1.1) (West Supp. 1999).

34 Id. 9113(a).

35 Id.

36 Id. 9111(r), and See, Estate of Rankin, 487 Pa. 70, 408 A.2d 1358 (Pa. 1979).

37 Id. 9116(a)(1).

38 Id. 9102.

39 Id. 9116(2).

40 Id. 9107(c)(3).

41 Id. 9107.

42 Id. 9108.

43 Id. 9117.

44 Id. 9117(a)(2).

46

45 Id. 9117(b).

46 26 U.S.C.A. 2011 (West 1989).

47 Id. 2001 (West Supp. 1999).

48 Id. 2010.

49 Id.

50 Id. 6018.

51 Id. 2053, 2054, 2056.

52 Id. 2056.

53 Id.

54 Id. 2033 et. seq.

55 Id. 2042 (West 1989).

56 Id. 2036 (West Supp. 1999).

57 Id. 2601, 2611, 2651.

58 Id. 2641.

59 Id. 2631.

60 Id. 2642(c)(3).

61 Id. 2501, 2512.

62 Id. 2502.

63 Id. 2503.

64 Id. 2513 (West 1989).

65 72 P.S. 9107(c)(3) (West Supp. 1999).

66 61 Pa. Code 93.31 (1997).

67 Id. 93.37.
47


68 Id. 93.21.

69 20 Pa.C.S.A. 3101(a) (West Supp 1999).

70 Id. 3101(b).

71 Id. 3101(d).

72 Id. 3101(c).

73 Id. 3151 (West 1975).

74 Id.

75 Id. 3153. (West Supp. 1999).

76 Id. 3155.

77 Id.

78 Id. 3156 (West 1975).

79 Id. 3157 (West Supp. 1999).

80 Id. 3133.

81 Id. 3171 (West 1975).

82 Id. 3174 (West Supp. 1999).

83 Id.

84 Id. 3132 (West 1975).

85 Id. 3132.1 (West Supp. 1999).

86 Id. 3155.

87 Id. 3162.

88 26 U.S.C.A. 6013(a)(2) (West Supp. 1999).

89 67 A.L.R. 3
rd
1038.

48

90 26 U.S.C.A. 641 (West Supp. 1999).

91 Id. 1014.

92 Id.

93 Id.

94 Id. 641.

95 Id. 441.

96 72 P.S. 7301(v) (West Supp. 1999).

97 Id. 9121(a).

98 26 C.F.R. 20.2031-1 (1998).

99 26 U.S.C.A. 2032A (b)(2).

100 Id. 2032A (b)(1)(B).

101 Id. 2032A (b)(1)(A).

102 Id. 2032A (b)(1)(C).

103 26 C.F.R. 20.2032a-3 (e)(2) (1998).

104 26 U.S.C.A. 2032A (b) (West Supp. 1999).

105 Id. 2032A (c).

106 Id.

107 72 P.S. 9122(b) (West Supp. 1999).

108 Id.

109 Id. at (c).

110 26 U.S.C.A. 2057(a)(1) (West Supp. 1999).

111 Id. at (a)(2).

112 Id. at (a)(3)(A).
49


113 Id. at (a)(3)(B).

114 Id. at (b)(1).

115 Id. at (e).

116 Id.

117 Id. at (e)(3)(A).

118 Id. at (e)(2).

119 Id. at (f)(1).

120 Id. at (f)(2); (i)(3)(F).

121 Id. at (f)(2).

122 ROBERT M. BELLATTI & SHARI L. WEST, ESTATE PLANNING FOR FARMS AND OTHER
QUALIFIED FAMILY-OWNED BUSINESSES 10-18 (1999).

123 26 U.S.C.A. 2031 (West Supp. 1999).

124 Id.

125 Id.

126 26 C.F.R. 20.2031-2 (b) (1998).

127 Id. at (c).

128 Id. at (f).

129 Id.

130 Id. 20.2031-3.

131 26 U.S.C.A. 2042 (West 1989).

132 26 C.F.R. 20.2031-6 (b) (1998).

133 Orphans Court Rules, Rule 5.6 (West Supp. 1999).

134 Id.
50


135 20 Pa.C.S.A. 3102 (West Supp. 1999).

136 Id.

137 Id.

138 Id.

139 Id. 3531.

140 Id. 3301.

141 Id.

142 Id. at (c).

143 72 P.S. 9142 (West Supp. 1999).

144 Id.

145 20 Pa.C.S.A. 3311 (West 1975).

146 Id.

147 Estate of Campbell, 692 A.2d 1098, 1101-02 (Pa. Super. Ct. 1997).

148 20 Pa.C.S.A. 3314 (West 1975).

149 Id. 3351.

150 Id.

151 Id. 3316 (West Supp. 1999).

152 Orphans Court Rules, Rule 6.12 (West Supp. 1999).

153 Id. at (a).

154 Id. at (b).

155 20 Pa.C.S.A. 3121 (West Supp. 1999).

156 72 P.S. 9116 (West Supp. 1999).

51

157 Id. 9154.

158 Instructions for Form REV-1500, Pennsylvania Inheritance Tax Return, Resident
Decedent, pg. 3.

159 Id. pg. 5.

160 Id. pgs. 5-6.

161 72 P.S. 9144(a) (West Supp. 1999).

162 Id. at (e).

163 Id. at (c).

164 Id. at (b).

165 Id. at (f).

166 Id. 9153 (a).

167 Id. 9143.

168 26 U.S.C.A. 6018(a) (West Supp. 1999).

169 Instructions for Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, Department of the Treasury, Internal Revenue Service, pg. 2.

170 Form 706, United States Estate (and Generation Skipping Transfer) Tax Return.

171 26 U.S.C.A. 6075 (West 1989).

172 Id. 6166 (West Supp. 1999).

173 Id. 6091 (b)(3)(A).

174 Id. 6662 (a), (b), (g).

175 Id. at (g).

176 Id. at (h).

177 Id. 6663 (a).

178 Id. 6018 (a).
52


179 Id. 6161 (a)(2) (West 1989).

180 Id. 6601 (b)(1) (West Supp. 1999).

181 Id. 6651 (a)(2).

182 Id. 6651 (a)(1).

183 20 Pa.C.S.A. 3702 (b)(1) (West Supp. 1999).

184 Id. at (b)(2).

185 Id. at (c).

186 Id. at (d).

187 Id. at (f).

188 Id. at (h).

189 Orphans Court Rules, Rule 6.1 (West Supp. 1999).

190 Id.

191 Id. at 6.3.

192 Id.

193 Id. at 6.10.

194 Id. at 8.3.

195 20 Pa.C.S.A. 3392 (West 1975).

196 See, In re Hammers Estate, 389 Pa. 78, 132 A.2d 275, (Pa. 1957).

197 20 Pa.C.S.A. 3382 (West 1975).

198 Id. 3383.

199 Id. 2102 (West Supp. 1999).

200 Id. 2103, 2104 (West Supp. 1999).

53

201 Id.

202 Id.

203 Id. 2103 (4).

204 Id. 2103, 2104.

205 Id.

206 Id. 2103 (6).

207 Id. 2104 (10).