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If you are the executor of a Pennsylvania estate, you are responsible for filing all required tax returns. This will likely include the deceased’s last personal income tax return, both Pennsylvania and federal for all income from January first through the date of death. These are Forms 1040 and PA-40. If after the date of death the estate had income, for example from a bank account, stocks or rent, the estate will also need to file a federal and states income tax return. These are Forms 1041 and PA-41. Beyond income tax, you will also file a Pennsylvania Inheritance Tax Return (Form 1500) and you might have to file a Federal Estate Tax Return (Form 706).

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.