What is an Estate Inventory in Pennsylvania?
When a loved one passes away, the person nominated to serve as the estate’s representative is known as the executor or administrator of the estate. The representative takes on the responsibilities and legal risks associated with doing this job according to the law.
One of the legal duties of a personal representative is to file an inventory with the Register of Wills within three months of being appointed as the representative. The purpose of an estate inventory is to list all the assets of the probate estate and their fair market valuations.
The inventory filing, along with the entire estate file, is public record and easily accessible by anyone interested in viewing the estate.
What kind of problems can stem from an inaccurate Inventory?
The inventory is an important document that has legal and tax implications that should not be treated lightly. The representative has a deadline of marshalling all of the estate assets and filing the inventory within three months of taking the appointment. The inventory is used for determining the amount of the inheritance taxes and as the basis for potential income and capital gains taxes for the estate. An inventory that is incorrect runs the risk of causing tax headaches and the estate remaining open longer than necessary.
The inventory is used to report only assets which are part of the decedent’s probate estate. Assets outside of Pennsylvania and assets which pass by a beneficiary designation are excluded from the inventory. Reporting assets which are not part of the probate estate may direct the Department of Revenue to tax the asset as if it was part of the estate. This can cause a double assessment of the inheritance tax when a 1099 is issued to a beneficiary.
What are the risks to a personal representative in preparing an Inventory?
Failing to file an inventory, or filing an incorrect inventory, can trigger an audit by the Pennsylvania Department of Revenue. Audit defense is very expensive and the cost of which will likely be paid out of the personal representative’s own pocket.
Tax headaches can also result even without an audit. For example, there are multiple ways to value real estate when reporting the real estate on the inventory and inheritance tax return. But the valuation options can result in different tax implications. A piece of real estate valued using one method on the inheritance tax return can result in a later capital gains tax if the estate sells the property for a greater amount. Income taxes and capital gain taxes are one of reasons why an estate can remain open for a long time and cause the estate to incur additional expense.
Inventory which was deliberately filed incorrectly to hide assets can also trigger fiduciary liability. A personal representative always has the risk of personal liability for failing to administer the estate according to the law. A beneficiary of an estate whose share was reduced by an inaccurate inventory may initiate a legal proceeding called a surcharge action. A breach of a fiduciary duty to a beneficiary can result in penalties assessed against the personal representative. The best way to close an estate is by all beneficiaries signing a family settlement agreement and attaching an accurate inventory to the agreement.
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