Many pet owners would not hesitate to say they love their animals as much as the people in their lives. But a Pennsylvania court recently made it clear that while pets are not people, they must still pay taxes.
A recent decision by the Chester County Orphans' Court Division in Lesley G. King Estate clarified that Pennsylvania inheritance taxes must be paid on trusts established to care for animals after their owner dies and at what rate. The debate between the estate's executors and the state turned, in part on use of the word "person" for Pennsylvania inheritance tax purposes.
The Animal Farm
Lesley G. King died on May 14, 2016, leaving an estate valued at nearly $410,000. Her will established a trust to care for her two horses, two dogs, two cats and a flock of chickens for the rest of their lives. Under the terms of the trust, the trustee was to use the income and principal for the maintenance and welfare of the animals. Upon the death of the last of the animals, the trust would terminate and any remaining principle and income would be distributed equally to King's three siblings and their children.
When the executors filed the estate's Pennsylvania inheritance tax return in 2017, the Pennsylvania Department of Revenue assessed a 15 percent inheritance tax against the entire estate for a total tax bill of more than $61,000. But the executors argued that a zero percent tax rate applied because transfers for the benefit of animals are not subject to Pennsylvania inheritance tax.
The executors appealed the department's assessment to the Chester County Orphans' Court, arguing that transfers to animals upon death are not subject to Pennsylvania inheritance tax because animals are not "persons" under the law.
State Inheritance Tax Rates
The Commonwealth of Pennsylvania does not have an estate tax; however, it does assess an inheritance tax on the value of assets transferred to beneficiaries upon the death of a decedent. For the purposes of inheritance tax, a transfer of property occurs in Pennsylvania when a decedent passes any ownership, interest, income, possession or enjoyment of property in trust. A transferee is any person to whom a transfer is made.
The inheritance tax is imposed as a percentage of the value of the decedent's estate, and the tax rate depends upon the relationship of the transferee to the decedent. Pennsylvania inheritance tax rates are as follows:
Zero percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
4.5 percent on transfers to direct descendants and lineal heirs;
12 percent on transfers to siblings; and
15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax.
Animals Are Not Persons -- But Must Still Pay Taxes
In this case, the Department of Revenue argued that every transfer from a decedent is subject to some inheritance tax, except for those specifically exempted by statute -- including the United States, the Commonwealth of Pennsylvania and political subdivisions of the Pennsylvania, as well as religious, charitable, scientific or educational organizations. Trusts for the benefit of others are not included in the list of the exempted transferees.
The executors relied on Section 9201 of the Taxation and Fiscal Affairs statute, which defines "transferee" as "any person to whom a transfer is made." Thus, the executors countered that a transferee must be a person in order to be subject to inheritance tax and horses, dogs and chickens are not persons. They cited a Westmoreland County decision, Shrock Estate,, in which the court held that a trust established to benefit a decedent's horses was not subject to inheritance tax, reasoning that to have a taxable transfer there must be both a transferor and a transferee. In the absence of a "person" listed as a transferee, there was no statutory transferee subject to inheritance tax.
As the court in King Estate noted, the Westmoreland County decision is not binding and no appellate case has addressed this issue.
The court relied instead on Section 9111 of the Taxation and Fiscal Affairs statute for guidance, ultimately determining that while the decedent's animals and the trust for their benefit are not "persons," they are not specifically included in the list of exempted transferees within the statute and are therefore subject to a 15 percent inheritance tax totaling $61,000.
That's a lot of animal food!
With creative planning, King might have been able to avoid the whopping inheritance tax by transferring funds to a similar irrevocable trust during her lifetime for the benefit of her animals, provided that she made the transfer more than one year from the date of her death in order to avoid inclusion of the assets in her taxable estate for Pennsylvania inheritance tax purposes.