Question: As the Executor, if I sell my mother’s Chester County home, do I have to pay the Pennsylvania probate tax before dividing up the sale proceeds with my siblings?
First, let’s clarify a few things. In Pennsylvania the “probate tax” is the Pennsylvania Inheritance Tax. Because the estate is being divided up between the mother’s children, that rate is 4.5% on the date of death value of her entire taxable estate. The house is included in that taxable estate.
The executor is given broad discretion to decide when the estate assets are distributed. If he decides to make a distribution before paying the Pennsylvania Inheritance Tax, he is making an “At Risk Distribution”. This means, the executor is giving the beneficiaries estate assets prior to all the creditors being paid. The executor is “At Risk”, because if the assets he keeps in the estate to pay creditors are not enough, he is responsible for the shortfall out of his own funds. The executor is “At Risk” of being personally liable.
Some executors do not mind making At Risk distributions, as they are sure that the estate’s remaining funds are enough to pay the bills. The wise decision is to have an experienced Chester County Probate Attorney draft an agreement for the other beneficiaries to sign stating that they understand that it is possible that the funds may have to be returned if a creditor shows up. The even smarter move is to not distribute any funds until the executor knows all the creditors and taxes are satisfied.
Another wrinkle that the executor will face is that a good title company will not release the sales funds until he can prove that all Pennsylvania Inheritance Taxes are paid. They will escrow the entire sales proceeds…collecting the interest for themselves…until he provides them the Department of Revenue release. Klenk Law has good experience negotiating this with Chester County title companies, usually obtaining an agreement where a portion of the sales funds adequate to satisfy the Inheritance Taxes are held in our escrow accounts and agree to only release them to the estate once the Department of Revenue release arrive.
If anyone has questions about Chester County Probate, feel free to contact our office for a free consultation. Wills, Trusts and Estates, It’s all we do!