SOLE USE TRUSTS 72 P.S. 9113

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1 SOLE USE TRUSTS 72 P.S Trusts and similar arrangements for spouses (a) In the case of a transfer of property for the sole use of the transferor s surviving spouse during the surviving spouse s entire lifetime, all succeeding interests which follow the interest of the surviving spouse shall not be subject to tax as transfers by the transferor if the transfer was made by a decedent dying on or after January 1, 1995, provided that the transferor s personal representative may elect, on a timely file inheritance tax return, to have this section not apply to a trust or similar arrangement or portion of a trust or similar arrangement. (b) Succeeding interests not subject to tax as transfers by the transferor by reason of subsection (a) shall be deemed to be transfers subject to tax by the surviving spouse of the property held in the trust or similar arrangement at the death of the surviving spouse. The tax on that property shall be based upon its value at the death of the surviving spouse, the tax rates applicable to dispositions by the surviving spouse or by the transferor, whichever are lower, and any exemptions relating to the kind or location of property held in the trust or similar arrangement at the surviving spouse s death. (c) Subsection (b) shall apply even if the succeeding interests not subject to tax as transfers by the transferor by reason of subsection (a) were also not subject to tax by reason of an exemption based upon the kind or location of property at the transferor s death. (d) This section shall not apply to inter vivos transfers otherwise exempt from inheritance tax.

2 PA Bulletin, Doc. No Page 1 of /15/2011 STATEMENTS OF POLICY Title 61 REVENUE DEPARTMENT OF REVENUE [ 61 PA. CODE CH. 94 ] Taxation of Trusts [41 Pa.B. 5994] [Saturday, November 5, 2011] The Department of Revenue (Department) has adopted a statement of policy under 3.2 (relating to statements of policy). The statement of policy in 94.3 (relating to taxation of trusts terminated under 20 Pa.C.S ) is new and takes effect upon publication in the Pennsylvania Bulletin. This statement of policy is promulgated by the Department to implement a consent requirement for termination of noncharitable irrevocable trusts made without court approval or notice to the Department. Specific questions regarding this statement of policy may be directed to the Department of Revenue, Office of Chief Counsel, P. O. Box , Harrisburg, PA DANIEL MEUSER, Secretary (Editor's Note: Title 61 of the Pennsylvania Code is amended by adding a statement of policy in 94.3 to read as set forth in Annex A.) Fiscal Note: No fiscal impact; (8) recommends adoption. Annex A TITLE 61. REVENUE PART I. DEPARTMENT OF REVENUE Subpart B. GENERAL FUND REVENUES

3 PA Bulletin, Doc. No Page 2 of /15/2011 ARTICLE IV. COUNTY COLLECTIONS CHAPTER 94. INHERITANCE TAX PRONOUNCEMENTS STATEMENTS OF POLICY Taxation of trusts terminated under 20 Pa.C.S (a) Effective for Resident and Non-Resident Pennsylvania Inheritance Tax Returns filed on or after July 1, 2012, wherein the person responsible for filing the return has not made an election to prepay tax under section 2113(a) of the Inheritance and Estate Tax Act (act) (72 P. S. 9113(a)) concerning trust assets reported on the return as part of a qualified spousal trust under section 2113 of the act, the Department will reserve the right to assess Pennsylvania Inheritance Tax at the highest applicable rate in effect at the time the Department issues its initial Notice of Inheritance Tax Appraisement, Allowance or Disallowance of Deductions and Assessment of Tax, unless the person responsible for filing the return requests a Future Interest Compromise from the Department in conjunction with the filing and in the manner prescribed by the Department. (b) If a Future Interest Compromise is not requested in accordance with subsection (a), the person responsible for filing the return shall acknowledge in writing, in the form and manner provided by the Department, the person's assumption of liability for inheritance tax consequences that result from the termination of a trust under 20 Pa.C.S (relating to nonjudicial settlement agreements UTC 111) that occurs after the return has been filed. This assumption of liability applies to a termination made without court approval or notice to the Department. This liability does not apply to a termination made under a specified termination date as contained within the trust instrument provided to the Department. (c) If a trust has been terminated under 20 Pa.C.S , without request for a Future Interest Compromise in accordance with subsection (a), the assets of the trust will be valued for Pennsylvania Inheritance Tax purposes as of the date of termination and tax will be due and owing as of the date of termination. Interest will accrue on an inheritance tax liability as of the termination date and in accordance with section 806 of The Fiscal Code (72 P. S. 806). [Pa.B. Doc. No Filed for public inspection November 4, 2011, 9:00 a.m.] No part of the information on this site may be reproduced for profit or sold for profit. This material has been drawn directly from the official Pennsylvania Bulletin full text database. Due to the limitations of HTML or differences in display capabilities of different browsers, this version may differ slightly from the official printed version. webmaster@pabulletin.com

4 REV-1649 EX+ (01-14) INHERITANCE TAX RETURN RESIDENT DECEDENT SCHEDULE O DEFERRAL/ELECTION OF SPOUSAL TRUSTS ESTATE OF FILE NUMBER PART A - DEFERRING STATEMENT For all trust assets reportable for Pennsylvania inheritance tax purposes for which a deferral of tax is chosen, the personal representative responsible for filing the return and the trustee(s) of the trust in question hereby acknowledge the department s Statement of Policy set forth at 61 Pa. Code 94.3 concerning any potential termination of the trust under 20 Pa.C.S that occurs after the return was filed. PART B ELECTION TO TAX AMOUNTS Complete this section only if making the election to tax the sole use trust. If the election applies to more than one trust or similar arrangement, a separate form must be filed for each trust. This election applies to the Trust (marital, residual A, B, bypass, unified credit, etc.). Enter the description and value of all interests for which the election is made. DESCRIPTION VALUE Total If more space is needed, insert additional sheets of the same size.

5 REV-1649 EX+ (6-98 ESTATE OF COMMONWEALTH OF PENNSYLVANIA INHERITANCE TAX RETURN RESIDENT DECEDENT SCHEDULE 0 ELECTION UNDER SEC.9113(A) (SPOUSAL DISTRIBUTIONS) FILE NUMBER Do not complete this schedule unless the estate is making the election to tax assets under Section 9113(A) of the Inheritance & Estate Tax Act. If the election applies to more than one trust or similar arrangement, a separate This election applies to the form must be filed for each trust. Trust (marital, residual A, B, By-pass, Unified Credit, etc.). If a trust or similar arrangement meets the requirements of Section 9113(A), and: a. The trust or similar arrangement is listed on Schedule 0, and b. The value of the trust or similar arrangement is entered in whole or in part as an asset on Schedule 0, then the transferor's personal representative may specifically identify the trust (all or a fractional portion or percentage) to be included in the election to have such trust or similar property treated as a taxable transfer in this estate. If less than the entire value of the trust or similar property is incl uded as a taxable transfer on Schedule 0, the personal representative shall be considered to have made the election only as to a fraction of the trust or similar arrangement. The numerator of this fraction is equal to the am ount of the trust or similar arrangement included as a taxable asset on Schedule 0. The denominator is equal to the total value of the trust or similar arrangement. Part A: Enter the description and value of all interests, both taxable and non-taxable, regardless of location, which pass to the decedent's surviving spouse under a Section 9113(A) trust or similar arrangement. Description Value Part A Total $ Part B: Enter the description and value of all interests included in Part A for which the Section 9113(A) election to tax is being made. Description Value Part B Total $ (If more space is needed, insert additional sheets of the same size)

6 on or after January 1, 1992 and before January 1, In order to claim the credit, complete this schedule, furnish required supporting information and make the election by filling in oval 10 on the REV-1500 cover sheet. If the oval is not filled in and Schedule N is not completed, the credit will not be allowed. Contact the Inheritance Tax Division for additional information. SCHEDULE O ELECTION UNDER SECTION 9113 (a) SPOUSAL DISTRIBUTION The election to tax a trust or similar arrangement for the sole use of the surviving spouse during the spouse s lifetime, or portion thereof, as a taxable transfer in the first decedent spouse s estate must be made by filling in oval 11 on the REV-1500 cover sheet and by completing Schedule O. Failure to fill in oval 11 and file Schedule O may result in the entire trust or similar arrangement being included as a taxable transfer in the estate of the surviving spouse. A separate Schedule O must be filed for each qualified trust or similar arrangement affected by an election to tax. Schedule O can be used for nonresident decedent estates, as well as resident decedent estates. Section 9113(a) of the Inheritance & Estate Tax Act of 1991, as amended by Act 23 of 2000 provides for the inclusion of a trust or similar arrangement that benefits only the surviving spouse during the spouse s entire lifetime as a taxable transfer in the estate of the surviving spouse and not as a taxable transfer in the transferor s, or first decedent spouse s, estate. The tax on a qualified trust or life estate arrangement is not due until the death of the second spouse, at which time it becomes fully taxable in his or her estate at the rate(s) applicable to the remainder beneficiary(ies) as of the surviving spouse s date of death or the original testator s date of death, whichever is less. There will be no deduction of the original value of the survivor s expired life estate. Section 9113(a) benefits the surviving spouse because the payment of tax on the decedent s assets is postponed until the death of the surviving spouse. In situations where the surviving spouse must rely on the trust assets for maintenance income, the trust assets are not depleted by the payment of tax, but instead are preserved in order to provide the maximum income, and principal should an invasion of the principal, if the instrument so authorizes, become necessary for the surviving spouse s benefit. Similarly, when the trust assets are comprised of real property and limited cash assets, the tax does not impose a burden which would necessitate the sale of the real property, which is often the residence of the surviving spouse. The estate can elect to include such a trust, or similar arrangement, or portion thereof, as a taxable transfer in the transferor s, or first decedent spouse s estate. The election to tax in the estate 18 of the first decedent spouse can be advantageous for tax purpos-es if there are sufficient cash assets to pay the tax without impos-ing a burden on the surviving spouse. Although there are numer-ous considerations, including estate tax consequences, it may be advantageous to make the election to tax in the first estate since the value of the surviving spouse s interest in the trust or similar arrangement is subject to tax at the spousal rate of zero percent. Schedules K and M can be used to determine the value of the surviving spouse s interest. Schedule O, which is only applicable to estates of decedents dying on or after January 1, 1995, must be completed if the election to tax the trust in the first decedent spouse s estate is made. It is not necessary to complete this schedule if all of the property received by the surviving spouse is transferred outright to the spouse without the incidents of a trust or other similar arrangement, or if the estate representative has determined that it would be more advantageous to allow the payment of the tax on the qualified trust or similar arrangement to be postponed as provided under the law until the death of the second spouse (see instructions for Schedule J). The trust or similar arrangement for which an election to tax is being made must be clearly identified. The name of the trust, or the paragraph or item number of the instrument in which its terms are set forth should be entered on Schedule O in the section below the decedent s name and estate file number. Values reported on this schedule must be consistent with Schedules K and/or M. The value of all assets should be the fair market value on the date of the decedent s death net of any deductions allocable against the interests passing to the trust or similar arrangement. PART A: ALL INTERESTS PASSING TO THE QUALIFIED TRUST OR SIMILAR ARRANGE- MENT List all property interests that pass from the decedent to a trust or similar arrangement for the sole use of the surviving spouse during the spouse s entire lifetime. Examples of these interests include, but are not limited to: 1. Assets passing under the decedent s will. 2. Assets passing by operation of law because of the designation of a beneficiary, such as IRA s, pensions, in trust for accounts, payable on death accounts, transfer on death accounts, etc. 3. Assets held in trust. 4. Annuity contracts. If Schedule O includes a bequest of the residue or part of the residue of the decedent s estate, attach as an exhibit a computation showing how the value of the residue was determined. PART B: VALUE OF TRUST OR SIMILAR ARRANGEMENT FOR WHICH A SECTION 9113(A) ELECTION IS BEING MADE: List in Part B the value of a trust or similar arrangement that passes to the surviving spouse for the spouse s sole use during his or her entire lifetime for which a Section 9113(a) election is made. The value as calculated on Schedules K and M, net of any deductions allocable to the surviving spouse s interest, should be listed. Specific reference should be made to items listed in Part A to allow cross reference of the items. If the election is made for more than one trust, please specifically identify the individual trusts.