More HH Legal Updates

In the Estate of Vincent Bavol, 300 A.3d 1051 (Pa Super 2023), the Pennsylvania Superior Court provided another precedential opinion on the question of whether a beneficiary of a non-probate transfer pays the inheritance tax on the value of the transfer or whether the decedent’s estate, based on a tax clause in a will, pays the inheritance tax from the estate.  

Generally, a decedent’s assets pass to a beneficiary either through probate or outside of probate.  A probate asset is one that is part of the decedent’s estate and then is directed to a beneficiary as designated in that decedent’s will, or if no will exists, the asset passes to the decedent’s intestate heirs pursuant to the laws of the state where the decedent resided at his death.  A non-probate asset, such as a bank account that has a transfer on death designation, passes to the beneficiary designated by the decedent through a beneficiary designation associated with that account.

For those probate assets that pass to a beneficiary as a result of a designation in a will, 72 P.S. § 9144(a), provides the guidance to determine who pays the inheritance tax on the transfer.  That statute states "[i]n the absence of a contrary intent appearing in the will, the inheritance tax, including interest, on the transfer of property which passes by will absolutely and in fee, which is not part of the residuary estate, shall be paid out of the residuary estate and charged in the same manner as a general administration expense of the estate. The payments shall be made by the personal representative and, if not so paid, shall be made by the transferee of the residuary estate."  Moreover, pursuant to § 9144(a), the inheritance tax on specific pecuniary bequests must be paid out of the residuary estate unless there is a contrary intent appearing in the will. 

For non-probate transfers, like the previously mentioned transfer on death account, 72 P.S. § 9144(f) states "[i]n the absence of a contrary intent appearing in the will or other instrument of transfer and except as otherwise provided in this section, the ultimate liability for the inheritance tax, including interest, shall be upon each transferee."  § 9144(f) further states "however, the inheritance tax on all other transfers—including transfers of property outside of a will—is paid by the transferee and not the residuary estate.”

Pennsylvania appellate courts have repeatedly held that in order to override the transferee liability provided for in § 9144(f)—which applies to the payment of tax on non-probate assets—the tax clause in a will must be unambiguous and open to no other interpretation.

For example, in the Estate of Gail B. Jones, 796 A.2d 1003 (Pa.Super. 2002), the decedent’s will contained several specific bequests and named her husband as the residuary beneficiary and Executor. The tax clause in the decedent’s will provided:

All federal, state and other death taxes payable on the property forming my gross estate for tax purposes, whether or not it passes under this Will, shall be paid out of the principal of my residuary Estate just as if they were my debts, and none of those taxes shall be charged against my beneficiary.

The decedent in Jones also had an inter vivos trust that named her sister as the sole beneficiary and provided the following:

All property taxes, assessments, fees, charges and other expenses incurred by the Trustee in the administration or protection of the Trust created by this Agreement, including the compensation of the Trustee provided for in this Agreement, shall be a charge on the Trust Estate and shall be paid by the Trustee prior to the final distribution of the Trust Estate in full out of the principal or in full out of the income of the Trust Estate or partially out of the income of the Trust Estate in such a manner and proportions as the Trustee may deem advisable.

The majority of decedent’s assets were held in the trust and the executor was concerned that payment of the inheritance and estate taxes out of the residuary estate would deplete the residuary estate. The executor petitioned the Orphans’ Court for a ruling that the Trust should be responsible for the estate and inheritance taxes attributable to the Trust assets. The Orphans’ Court ruled that the tax clause in the will controlled and required all estate and inheritance taxes be paid from the residuary estate.  In particular, the Court held that since the tax clause specifically stated that all death taxes were to be paid out of the principal of the residuary estate, it was sufficiently clear and unambiguous to overcome the statutory scheme of apportionment of death taxes.

In the Estate of Thomas P. Allen, 960 A.2d 470 (Pa.Super. 2008), the decedent held certain assets with the executrix as joint tenants with rights of survivorship. The will made several specific bequests and provided for the residue to be distributed to his son. The executrix used residuary assets to pay the inheritance tax, including the tax attributable to the jointly held assets. The pay-tax clause in the decedent’s will provided:

I direct my Executor to pay all inheritance, transfer, estate and similar taxes (including interest and penalties) assessed or payable by reason of my death on any property or interest in property which is included in my estate for the purpose of computing taxes. My Executor shall not require any beneficiary under this Will to reimburse my estate for taxes paid on property passing under this Will.

The Superior Court found the second sentence of the tax clause inapplicable since it only referenced assets passing under the will. The Superior Court also held that the first sentence did not contain an unambiguous directive that the estate was to pay the taxes on the jointly held assets because it did not designate the fund from which those taxes were to be paid. In doing so, the court distinguished the will from the will in Jones, which had directed that taxes “shall be paid out of the principal of my residuary Estate.” Instead, the Superior Court interpreted the first sentence as only having “the rather obvious meaning that the Executrix had the obligation to file tax returns and secure the payment of all taxes arising from the Decedent’s death.” The Superior Court explained that a directive to pay taxes “does not necessarily mean that the Executrix was to take money from the residual estate to pay taxes on property passing by survivorship.”

Now, in Bavol, the Pennsylvania Superior Court considered the questions raised on appeal concerning the application of the tax clause in decedent’s Will with regard to the responsibility to pay the inheritance tax due on non-probate assets.  James Vincent Bavol died testate, having executed a will that generally provided a specific bequest to his friend, and the distribution of his residuary estate to four charities.  In addition to the probate transfers, Bavol named two cousins the beneficiaries of retirement accounts that passed as non-probate assets.  The executor paid the inheritance tax of the non-probate transfers from the residuary estate.   The Pennsylvania Attorney General, representing the interests of the charities named in Bavol’s will, objected to the estate paying the inheritance tax on the non-probate assets arguing that the will did not provide for this payment, and thus, such payments were contrary to law and diminished the ultimate distributions to the charities.  The applicable tax clause from Bavol’s will stated:

All estate, inheritance and other death taxes, together with interest and penalties payable thereon, with respect to property or interests passing under my will or any codicil thereto, shall be paid out of the principal of my residuary estate without apportionment.

The trial court agreed with the Attorney General and sustained its objection.  The trial court opined that the language in the will did not provide for the payment of inheritance taxes from the residuary estate.  The Superior Court, relying on the reasoning in Jones and Allen, and ultimately distinguishing the case from the facts in Jones and Allen, agreed with the trial court and affirmed its decision to sustain the Attorney General’s objections.  The Superior Court determined the tax clause in Bavol’s will did not displace the presumption set forth in §9144(f).  To the contrary, the Superior Court found that the tax clause in Bavol’s will was "specific, unambiguous and open to no other interpretation."  Thus, the cousins that received the non-probate transfers had pay to the inheritance tax on these transfers individually, not the estate.  

If you have questions about wills, trusts, estate planning, estate administration, or estate litigation, the attorneys at Houston Harbaugh can assist. Contact Matthew J. Lautman at 412-288-5017 lautmanmj@hh-law.com or Rebecca A. Winge at 412-288-2257 wingera@hh-law.com for more information.