What Is A Will Substitute For Pennsylvania Realty Transfer Tax Purposes? The Pennsylvania Supreme Court Provides Some Guidance In Miller V. Commonwealth

A recent decision by the Pennsylvania Supreme Court highlights the need for estate planners to consider issues that go beyond estate and gift tax planning when developing and implementing a client's estate plan. In Miller v. Commonwealth, 43 MAP 2011 (2013), the Pennsylvania Supreme Court ruled that an irrevocable trust was not a "will substitute" for purposes of meeting the "living trust" exclusion from the Pennsylvania Realty Transfer Tax. Pennsylvania's Realty Transfer Tax is typically imposed at a rate of 2% of the value of the real estate transferred.

The "living trust" exclusion from the transfer tax provides an exemption for a transfer to "any trust, other than a business trust, intended as a will substitute by the settlor which becomes effective during the lifetime of the settlor, but from which trust distributions cannot be made to any beneficiaries other than the settlor prior to the death of the settlor."

In Miller v. Commonwealth, Mrs. Miller created a trust to hold legal title to Mrs. Miller's house and farm until the death of her husband. She intended for the trust to be a will substitute.

The Court made clear that the intent to create a will substitute must be reflected in the written terms of the trust, and not on Mrs. Miller's subjective intent. The Court reasoned that Mrs. Miller's trust was not a will substitute because (1) the trust terminates and the principal was to be distributed at...