1.  Failure to Coordinate.  It is important to review governance documents, such as articles of incorporation/organization, bylaws/operating agreements, and loan documents or other significant contracts, to determine how they affect the buy/sell agreement, or vice versa.

2.  Improper Selection of Type of Buy-Sell Agreement.  Selection of the wrong type of agreement can create unintended and unwanted results.  Consider the various scenarios under the agreement to make sure that the parties’ real desires are carried out.

3.  Improper Selection of Triggering Events.  If the buy-sell agreement doesn’t cover a particular event, the owner or the entity may have no rights in such a situation.  Consider the possible applicability of triggering events beyond death and disability.  For example, what if one owner loses a professional license or is no longer qualified as an employee or becomes divorced or bankrupt?

4.  Rights and Obligations Following Occurrence of a Triggering Event.  The consequences of a triggering event can be no action at all, mere notice or mandatory liquidation-and all points in between!  Take care to track through the rights and obligations for each triggering event to make sure that the rights and obligations for each party are appropriate.

5.  Valuation Issues.  The uncertainty of future value often seems to make clients minimize the importance of the valuation of a business interest in the event of the exercise of a purchase right or sale right.  Be sure to ascertain the standard and level of value for the interests.  If a formula is used, understand the formula’s basis, play out the scenarios, and try to develop a backup method.

6.  Funding Issues.  Parties must consider payment sources while they are putting together a buy-sell agreement.  An unfunded buy-sell agreement may be a bigger problem than no buy-sell agreement at all.  Make sure the owners have identified funding sources and that those sources, such as life insurance, are properly aligned with the people who will be entitled/obligated to purchase.

7.  Financing Terms.  Many buy-sell agreements contain installment payout plans for payments of purchase price that exceed life insurance.  In determining the details and flexibility of installment payments, pay close attention to the size of the projected installment payout relative to the amount of the currently available cash flow from the person who is entitled/obligated to purchase.

8.  Failure to Coordinate Related Properties.  Sometimes the business is dependent on related properties not owned by the business.  Related property can include life insurance polices on the life of the selling owner, interests in land (such as property on which a business operates), intellectual property, leases or other contractual obligations.  It is important to analyze the subject company to see if it is reliant upon property that is owned by others and the terms of those arrangements.

9.  Failure to Put it All Together.  Many, if not all, of the preceding points are interrelated.  For example, selection of a triggering event must be carefully coordinated with the rights and obligations that are triggered by that event.  Those rights and obligations must in turn be carefully coordinated with the terms of installment payout for any purchased interest.  Don’t neglect to look over the document as a whole and coordinate it with each owner’s objectives and personal estate plans.

10. Using a “Standard Form”.  Buy-sell considerations differ from business to business and even from owner to owner within each business.  Be sure the agreement reflects those unique circumstances.

2. Attend to the memorial and funeral arrangements for the decedent if this has not already been done or is not being handled by someone else, and work with funeral director to prepare obituary.

3. Locate military papers and contact VA regarding possible benefits, including American flag.

4. Arrange for help as needed with children, pet care, cooking, telephones, house keeping during funeral, etc.

5. Arrange for after-service luncheon or reception for friends and relatives.

6. Arrange for cemetery lot, mausoleum or crypt as necessary.

7. Don’t make any rash decisions or act hastily regarding the distribution of any estate assets! If assets are distributed without proper observance of possible tax liabilities, potential creditors’ claims or precise fulfillment of the trust instructions, the administrator could be held personally liable for the consequences.

8. Contact the decedent’s estate planning attorney (or if unknown or unavailable, another attorney who specializes in estate planning) and schedule an appointment to establish a professional relationship for guidance and direction to properly handle the estate administrator’s responsibilities. This does not have to be done immediately, but is recommended within 20 to 30 days after the decedent’s death.

9. Create list of flowers, cards, donations and other expressions of sympathy.

10. The time preceding the attorney visit should be used to help settle the emotions that follow the death of a family member or close friend and to begin the accumulation of documents and information (described hereafter) that will be needed by the attorney.
11. Send notes to acknowledge expressions of sympathy.

Accumulation of documents and information:
Since the death tax return, if required, is due nine months after the decedent’s death, the accumulation of documents, appraisals, etc. described hereafter should be completed as soon as possible either before or shortly after the first meeting with the estate’s attorney.
A general description of what will have to be compiled and the steps or procedures for the estate administrator to do are summarized as follows:
• Obtain and organize all billings or other papers regarding the decedent’s final medical treatments.
• Request several certified copies of the death certificate as well as such will be needed for various steps in the estate administration and termination process. Usually, 4 to 8 certified copies will be sufficient.
• All safe deposit boxes if there are any (hopefully in the name of the living trust – if there was a trust – so as to be readily accessible), should all be checked and all ownership documents, insurance polices and other important papers should be removed for delivery to and review by the estate’s attorney. (This usually cannot be done until the estate administrator has a certified death certificate and appropriate pages form the trust as the successor trustee, or appointment by the court as the probate administrator to present to the bank.)
• Locate all original estate planning documents (trust, will, amendments, powers of attorney, etc.) that the decedent has. (If not found, the decedent’s attorney usually has a copy.)
• If the decedent was living alone, the locks should be changed and other steps taken, if necessary, to close and secure the residence. If the residence will be vacant, the insurance carriers should be notified of the fact.
• Automobile insurance and any other pertinent insurance policies should be checked to be certain estate assets are insured against potential loss or liability.
• All life insurance policies should be located or searched out and then compiled for the eventual filing of the claims to recover the proceeds that would now be due to the estate or other beneficiary if one was named.
• A list of all household furniture and furnishings (by major items or categories) should be made, and to be absolutely safe if several beneficiaries are involved, photographs should be taken of the household contents or an unrelated and disinterested witness should be present when the list is made. The witness should then sign the list as to its accuracy and completeness. The list will also be of great help in keeping track of where personal property items are eventually distributed, and to provide a record of compliance with the terms of the trust, will or intestate requirements.
• All other assets of the estate such as automobiles, stocks, bonds, mutual funds, pensions, IRAs and other retirement funds, boats, plans and other vehicles, bank accounts, business or partnership interests, trust deeds or promissory notes payable to the decedent or the trust, etc., etc, should all be inventoried with a description of each and statement of value when the decedent died. If financial statements form banks or investment companies or similar items are available, they should be compiled as well.
• The names of all institutions or person holding assets should be included in the inventory with their address and phone number and, of course, the account numbers.
• After the inventory is compiled, it may become appropriate to consolidate whatever accounts exist depending on the terms and instructions found in the trust or will and to simplify eventual distribution to heirs and accounting of the monies as part of the administration process. However…this should not be done prematurely and is best deferred until after the first meeting with the estate’s attorney, and possibly later.
• Whatever funds are received or disbursed to satisfy expenses or possibly as a partial distribution of the estate, the transactions must be promptly and accurately written into the check register book or other appropriate accounting record so as to be easily substantiated at a later date if ever challenged. This information is also very important for tax reporting purposes, since if records aren’t kept showing where income came from and what expenses were paid, it’s impossible to determine what income is taxable and what expenses are deductible.
• Although it is not necessary to pay any bills of the estate of the decedent immediately (and sometimes it’s better to wait until everything settles before doing so), all bills should be gathered for evaluation as to their legitimacy and priority status, if any, for eventual payment. Sometimes, the estate administrator can be held personally liable for debts of the estate if the estate has funds to pay those debts, but fails to do so, of if the administrator distributes the funds in a way that should not have occurred. Thus, again, it is safest to determine outstanding liabilities and to complete the inventory of assets before making distributions to beneficiaries, since it is very awkward for an administrator to go back to beneficiaries and ask that the assets be returned.
• If the estate will generate income from the date of death until all assets are distributed, (which is generally the case), a tax identification number needs to be obtained for the estate. The estate’s attorney will normally attend to that process.
• In other instances, or at least for part of the calendar year prior to the decedent’s death, his or her social security number will continue to be all that is necessary.
• Income tax returns will probably be required for the decedent to the date of his or her death, which would be due the following April 15th just as normally required for individuals. However, there may also be a need to prepare and file a 1041 fiduciary income tax return for all income received by the estate after the decedent’s death. The estate’s attorney and whatever accountant selected to handle the estate administration will normally direct the administrator on all the accounting and tax return requirements.
• Some states require that the decedent’s Will be filed in the Probate Court for safe keeping even though a probate process may not be required. Thus, if the decedent or the estate owned assets in another state, the filings of the Will in that state’s probate court may be necessary.
• Once the above mentioned steps are completed and the exact status of the estate is determined, the estate administrator and the estate’s attorney will be able to complete the final administration and distribution to heirs that may then be appropriate and called for in the trust, the will, or under the intestate laws. Sometimes, however, there will be need for on-going estate management for minors, life-beneficiaries, or provisions for distributions at ages not yet attained by the beneficiaries, if such is part of the trust or will structure.
• One important point to remember is that the beginning accounting and inventory established as of the date of death for the decedent mush reconcile with the balances taken at the end of the administration period after adjustments for funds or assets received and distributions made during that time. The accounting may then show how assets on hand are to be distributed to beneficiaries based of the plan of distribution specified in the estate.
• When distributions are made, a written receipt and release form should be executed by each beneficiary to complete the record keeping and to protect the estate administrator from further responsibility or liability. Funds or assets should be distributed to the beneficiaries only when they have signed the receipt and release form. (Once distributions are made, it is much more difficult to obtain signatures, since it is no longer a priority for beneficiaries). Again, this is a function that will usually be handled or at least directed by the estate’s attorney.
This may sound like a complicated and time-consuming job. However, it is required by law. And, again, if the estate was properly structured in a comprehensive living trust plan, the process will be considerably easier, faster, and substantially less expensive than probate. Also, the successor trustee as estate administrator will be able to access accounts for the estate immediately (once a death certificate is available), rather than waiting for authorization from the probate court.
Remember…, however, it is very important not to act without proper professional guidance, because to do so could easily cause the estate of heirs to lose out on many protections and/or tax benefits that might otherwise be available.
Final comments on inventories, accountings, and tax issues:
In preparing the inventory of assets, it is important to contact each institution holding assets to obtain date of death value, owner, beneficiary (if any), and other pertinent information in regard to the assets. In this way, specific ownership, and beneficiary designations, and other pertinent information can be determined before distributions are made.
It is not acceptable to take values off of statements, since the IRS has specific requirements for ascertaining date of death values, including calculating income earned to date of death even if income has not yet been credited to the account. Written verifications of values from institutions holding the assets or a record of the calculations will be very helpful in the event of an audit. A formal inventory also prevents errors, and keeps tax records clean.
The preparation of an inventory and a comprehensive accounting is also an excellent method of verifying how all the assets are actually titled so appropriate decisions and actions can be made.
The bottom line is that all the steps touched upon above are not only important from a legal stand point and the protection of the estate administrator, but also are necessary to fulfill the specific financial distributions, protections and other goals that were intended by the decedent in his or her living trust or will, or under the state’s probate system.
CONCLUSION:
Use and follow the advice of the estate’s attorney to avoid or reduce death or income taxes and to protect against personal liability for the estate administrator.
Don’t act hastily or distribute assets of the estate without consulting with the estate’s attorney.
Prepare an inventory and accurately account for all assets and funds that come into the estate.
Obtain receipts and releases for all distributions when they are eventually made and follow all instructions of the estate documents or probate laws in order that once the directed distributions are completed, remaining administration of the estate (if required for any heirs) will be able to continue without difficulty.

What property is subject to Inheritance Tax?

All real property and all tangible personal property of a resident decedent, including but
not limited to cash, automobiles, furniture, antiques, jewelry, etc., located in
Pennsylvania at the time of the decedent’s death is taxable. All intangible property of a
resident decedent, including stocks, bonds, bank accounts, loans receivable, etc., is also
taxable regardless of where it is located at the time of the decedent’s death.

In the case of a nonresident decedent, all real property and tangible personal property
located in Pennsylvania at the time of the decedent’s death is taxable. Intangible personal
property of a nonresident decedent is not taxable.
Jointly-owned property with right of survivorship, except between husband and wife,
including but not limited to real estate, securities, bank accounts, etc., is taxable to the
extent of the decedent’s fractional interest in the joint property (calculated by dividing the
value of the joint property by the number of joint owners at the time of the decedent’s
death). Joint property is taxable even though the decedent’s name was added as a matter
of convenience. Further, if the decedent created the joint interest in the property within a
year of his/her death, the full value of the property is taxable in the decedent’s estate.

What is the Inheritance Tax rate in Pennsylvania?

The tax rate for Pennsylvania Inheritance Tax is 4.5 percent for transfers to direct
descendants like children and grandchildren (lineal heirs), 12 percent for transfers to
siblings, and 15 percent for transfers to other heirs (except charitable organizations,
exempt institutions, and government entities which are exempt from tax). Property
owned jointly between husband and wife is exempt from Inheritance Tax. Since 1995,
property inherited by a surviving spouse, or from a child 21 or younger by a parent, is
taxed at a rate of 0 percent.

Who are lineal heirs and lineal descendants for the purpose of Inheritance Tax?

Lineal heirs are grandfathers, grandmothers, fathers, mothers and their children.
“Children” include natural children (whether or not they have been adopted by others),
adopted children and stepchildren.
Rev. 07/21/09
Lineal descendants include all children of the natural parents and their descendants
(whether or not they have been adopted by others), adopted descendants and their
descendants and step-descendants.

Is there a discount on PA Inheritance Tax?

The tax is due at the date of death and becomes delinquent nine months after the date of
death. There is a discount of five percent of the tax paid or the tax due, whichever is less,
when the payment is made within three months of the date of death.

Can the funeral expenses and unpaid bills of the decedent be deducted from the amount subject to tax?

Yes. Unsatisfied liabilities incurred by the decedent prior to his/her death are deductible
against his/her taxable estate. In addition to debts incurred by the decedent or the estate,
the cost of administration of the estate, attorney fees and fiduciary fees incurred to
administer the estate, funeral and burial expenses, including the cost of a burial lot,
tombstone or grave marker, and other related burial expenses, are deductible.
For the sake of convenience, I put my mother’s name on my savings account.
Recently my mother died and now I am being told that I will have to pay an

Inheritance Tax on my own money. Can this be correct?

Under the Inheritance Tax Law, the account was jointly owned because you and your
mother had equal access to the account. Therefore, in this example, the survivor is taxed
on one-half of the amount in the account.

If an individual dies before they reach the age of 59 1/2, is the decedent’s IRA or 401K subject to PA Inheritance Tax?

IRA’s are not subject to Inheritance tax when the decedent is under the age of 59 ½ at the
time of death. For 401K’s, the same provision applies unless the owner of the plan could
have closed out the plan during their lifetime. In most plans, the right does not accrue
until the “normal retirement age” is reached, which is usually 62 or 65 years of age.

Who files the Inheritance Tax return?

Inheritance Tax returns are due nine months after a person’s death. The responsible party
is the person named in the will as executor, or if the person dies without a will, the
individual who is approved as administrator by the Register of Wills after a petition is
filed. If no executor or administrator is named, and property or transfers exist, then the
person receiving the property is required to file a return and pay the tax.

Yes. Because safe deposit boxes may contain assets which are subject to the
Pennsylvania Inheritance Tax, the law prohibits the removal of the contents of any safe
deposit box solely-owned by a decedent, or by a decedent and others, except a spouse,
without conducting a safe deposit box inventory. (These rules do not apply to boxes
jointly owned by husband and wife.)

Who May Enter A Safe Deposit Box After The Death Of A Decedent?

No one is allowed to enter a safe deposit box, not even a joint owner, except to remove a
will and/or burial instructions and it must be done in the presence of a bank employee.
The bank employee must complete PA Form REV-487 (Entry Into A Safe Deposit Box
To Remove A Will Or Cemetery Deed) to record the entry and mail it to the PA
Department of Revenue. Pennsylvania law states that the contents of safe deposit boxes
must be inventoried before they can be removed.

Who Conducts Safe Deposit Box Inventories And Who Must Be Present At The
Inventory?

A bank employee, a representative of the PA Department of Revenue, or an attorney
representing the estate (with written permission from the Department) can conduct safe
deposit box inventories. The person conducting the inventory and the executor or
administrator of the estate must be present at the inventory. If the executor or
administrator of the estate is not present, he/she must give a notarized limited power of
attorney to whoever is representing them. If the decedent and a surviving joint owner
owned the box, the surviving owner should be present.

How Do I Arrange An Inventory Of A Safe Deposit Box For Someone Who Died In Pennsylvania?

To arrange an inventory of a safe deposit box, contact the financial institution where the
box is located to see what items are required to access the box. The law states that a bank
official is authorized to perform the inventory. If the bank will not perform the
inventory, the attorney who represents the estate may be authorized to perform the
inventory, or you may contact the Revenue District Office which serves the county where
the box is located.

Life insurance is often free of income tax, but it is likewise usually subject to estate tax unless it is planned carefully.

2. Giving The Client “Incidents Of Ownership” In The Policy

If the insured has incidents of ownership, then the death benefit will be included in the insured’s taxable estate. Other than outright ownership, an insured can have incidents of ownership if the insured has the right to change the beneficiary, borrow against the policy, use the policy as collateral, cancel the policy, retain a reversionary interest of greater than five percent, or veto any of the above powers.

3. Having The Spouse Own The Policy

If the spouse owns the policy, the death benefit will be included in the spouse’s estate. If the spouse has any incidents of ownership, as noted in Mistake #2, the same applies.

4. Having The Children Own The Policy

Having the children own the policy avoids inclusion in the estate of the insured, but it moves inclusion to the estate(s) of the children. It also creates difficulty in determining who should pay the premiums. When one sibling pays and the others benefit from that, the payor made a gift to the other siblings that may impact the payor’s estate planning. Also, if one sibling pays and one or more do not, do the non-payors still receive the death benefits?

This method can also create problems with the exercise of ownership. Who can change the beneficiaries? Who can cancel the policy? Who can borrow against it or use it as collateral? With multiple owners, the answers to these questions are usually not what the client wants to hear.

5. Transferring An Existing Life Insurance Policy To A Trust Without Consideration Of The Consequences

If the insured dies within three years of transfer of an existing policy to a trust, the death benefits of the policy will still be included in the insured’s estate. There are ways around this, including the option of having the trust purchase the insurance from the insured, or buying short-term insurance for the three year window.

6. Applying For The Policy With The Plan To Have A Life Insurance Trust

Later As with Mistake #5, if the insured applies for the policy, then the issuance of the policy in the name of the trust may be deemed a transfer of an existing policy. In many instances, the insured can begin a preliminary process, including a medical exam, without a full-blown application and avoid this problem.

7. Not Considering In Advance Whether Premiums Will Be Annual Exclusion

Gifts Or Otherwise Every time the person who pays the premium for life insurance is not the only person who will receive a death benefit, the payor is making a gift to the beneficiaries. Even if the payment is made by a trust, if someone gifted money to the trust in order to make that payment, there is a gift to the beneficiaries. Therefore, the team of advisors must give careful consideration to whether that gift will qualify for the annual exclusion, the lifetime gifting exemption, or will otherwise be taxable.

8. Having The Insured Pay The Premium Directly Where The Insurance is Owned By A Trust

Although some practitioners are of the belief that the IRS isn’t currently concerned with this, the law is still clear that if the insured pays the premium directly, this is a non-present interest gift to the beneficiaries. That’s important because only gifts of a present interest qualify for the annual exclusion or “under the radar” treatment. If a gift is not of a present interest, it is still a taxable gift, and must either apply to the lifetime exclusion or be subject to gift tax.

9. Not Warning The Insured And The Trustee Of The Need For Crummey Letters

Even if the insured makes a gift to the trust and then the trust pays the premium, the insured made a non-present interest gift to the beneficiaries unless the beneficiaries had a chance to take the money directly. The usual practice is to gift the funds to the trust, then write letters to the beneficiary informing them of their right to take the funds. When they don’t take the funds, generally after 30 days, then the trustee can use the funds to pay the premium. The letters to the beneficiaries are called “Crummey letters” because they were approved in a court case involving an insured named Crummey.

10. Not Working With A Qualified Team Of Advisors

As the previous nine mistakes indicate, life insurance and trusts are complex matters involving income tax, estate tax, gift tax, and general financial advice. The client is best served if the advisor brings in a team or works with the client’s existing team to provide income tax advice and estate planning advice to fill out the insurance and financial planning advice the client needs.