A testamentary gift by a wife to a trust created by the husband and wife, and the transfers for the benefit of the surviving husband within the trust, both qualified for the 0% inheritance tax rate as transfers “for the use of” the surviving spouse. In re: Estate of Anne Mae Crum, ___ A.4th ___, 223 C.D. 2023 (Pa. Cmwlth. 3/12/2025).
DBE Commentary:
The result in the case would seem to be so obvious that it is difficult to understand the position of the Department of Revenue, or the rationale of the Orphans’ Court of Cumberland County that ruled in its favor. The key to the problem may lie in the definition of “sole use trust” and the illogic of that definition.
Husband and wife created a joint trust with husband as sole trustee, and were each entitled to half of the income while they were both living. Following the death of the wife, the husband remained the sole trustee, had the right to receive all of the income, could pay income and principal to himself or others, and could revoke or amend the trust. The husband reported the wife’s half of the trust on the inheritance tax return, along with the value of a testamentary gift to the trust under the wife’s will, and applied the spousal inheritance tax rate of 0% to both transfers. The Department of Revenue (DOR) disagreed, and assessed tax at 15%. Husband appealed to the Board of Appeals, which upheld the DOR, and then appealed to the Orphans’ Court, which also upheld the DOR. The husband then appealed to the Commonwealth Court, which reversed.
Reading the Commonwealth Court’s opinion, it is difficult to understand the position of the DOR, much less agree with it.
For example, the court stated that the DOR claimed that there “was no inter-spousal transfer … because the Trust was the owner.” But that is true of every revocable trust with assets that continue to be held in trust for a beneficiary, and yet the inheritance tax is always calculated based on the tax rate that applies to the beneficiary of a trust. Taking the argument of the DOR to its illogical conclusion, every transfer to a trust would be subject to a transfer tax of 15%, which is clearly not the law and never has been.
The DOR also argued that the tax rate applicable to surviving spouse applies only to “outright transfer between a husband and wife and is entirely inapplicable to the transfer of assets in trust where the beneficiary happens to be the surviving spouse,” even though the statute, 72 P.S. § 9116(a)(1.1) states clearly refers to transfers of property passing “to or for the use of a husband or wife.” (The phrase “for the use of” a person is traditionally used to refer to a transfer in trust for the benefit of a person.)
This is speculation, but it is possible that the DOR chose to take what seem like unsustainable positions because of the problems it may have created for itself through the narrow definition of “sole use trust.” As originally enacted, 72 P.S. § 9112 allowed a trust for the “sole use” of the surviving spouse to escape all tax at the first death, and be taxed only at the second death, but provided no definition of “sole use.” A definition of “sole use” was added by the Act of December 23, 2003, P.L. 250, No. 46 (apparently to reverse the result in In re Estate of Goldman, 781 A. 2d 259 (Pa. Cmwlth. 2001), and that definition in 72 P.S. § 9102 specifically states that a trust is not a “sole use” trust unless “no person, including the transferee, possesses an inter vivos power of appointment over the property.” So if the interests of a deceased spouse pass to a trust in which the surviving spouse is entitled to all of the income and can withdraw all of the principal at any time, that trust is not a sole use trust and, because powers of appointment or withdrawal are not subject to inheritance tax, the trust will not be taxable at the death of the surviving spouse. In order to prevent that result, the DOR argued that the interests of the deceased spouse were subject to inheritance tax at 15%, and lost.
So this decision may create a big inheritance tax loophole, and the DOR may seek a legislative solution (although an appeal to the Supreme Court is also possible).