Three Small Words Could Cause a Big Tax Problem for Your Spouse

Cohen Seglias Pallas Greenhall & Furman PC
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If your will has a trust arrangement in place for your spouse, -and it probably does, the trust must be a sole use trust for Pennsylvania purposes in order to qualify the trust assets to be taxed at 0%. If the trust under your will is not a sole use trust, it could trigger a 4.5%, 12%, or 15% tax on the full value of the assets in the trust upon your death depending on who the ultimate beneficiaries are.

For Pennsylvania Inheritance Tax purposes, property passing to a surviving spouse is taxable, but at a rate of 0%. This rate applies to both outright transfers and to transfers for the sole use of the surviving spouse, such as a transfer in trust under which the surviving spouse is the only possible income and principal beneficiary during the spouse’s lifetime. All succeeding interests that follow the surviving spouse’s interest in a sole use trust will be subject to tax at the death of the surviving spouse.

However, if anyone else is a possible income or principal beneficiary then the tax will be triggered at the death of the first spouse. Examples:

  • Qualified Sole Use Trust: “to my spouse for her health, education, maintenance and support…”
  • Disqualified Sole Use Trust: “to my spouse and my children for their health, education maintenance and support….”

Just those 3 little words “and my children” and the trust has now triggered a tax when there did not need to be one.

Is the spousal trust under your will a sole use trust? Do you remember why you have a trust for your spouse anyway? Do you still want or need the trust arrangement?

Estate law is ever changing and something that made sense years ago, may not make sense anymore. Something that was innocuous or beneficial in your trust could now be poisonous like those three little words. It is always a good idea every few years to have your attorney review your will so things like a spousal trust still work the way that you want them to and do not trigger unnecessary expenses for your grieving family.

P.S. Drafting a trust is a complicated bit of business. Besides the qualification of a spouse being the only lifetime income and principal beneficiary, there are other clauses and phrases that can cause problems for your trust. For example, if anyone, including the surviving spouse, possesses an inter vivos power of appointment it will disqualify the trust and trigger the above mentioned unnecessary inheritance tax.

P.P.S. If your spouse has just died and you have a trust under your will it is imperative that you see an attorney immediately and before you start transferring assets so if there is a problem with the trust, as mentioned above, that the attorney might have a chance to remedy the problem.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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