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(reposted from other board based upon recommendation of a reply there, saying there's much more traffic here - mods, feel free to remove the other post if warranted)

Please forgive if I get any terminologies wrong here - I've been basically giving myself crash courses on trusts, inheritance laws, etc in the last few days. I've been through a probate process for the inheritance funds I got from my father when he passed away, but this is a different beast (new experience) altogether. We definitely plan on hiring legal professionals to assist us in this process, but want to be educated a bit before we start having those meetings.

My wife's father passed away last July, and we have only recently received a letter explaining that she need to sign paperwork among with a copy of birth certificate and send it in (to prove she is at least 32, a condition for the "irrevocable" trust funds to be distributed to her). She is also asked if she wants the funds to be delivered "in-kind", or to be sold for cash.

There are two trusts btw - set up by both of her grandparents. The irrevocable trusts "terminated" as per terms (hope I'm using the correct terminologies here), and is to be split up among her, and her two brothers.

We have some rough ideas of what we want to do with the funds - we want to set up two accounts (might be a new "trust" account, or something non-trust, we don't know yet, we need more education on this matter) - one is probably going to be "Special Needs" trust for our 9-year-old daughter who has PDD-NOS (on the autism spectrum). The other daughter, now 7 years old, we want to set up something in her name so that it pays for a good college for her, and also can be used by her as a down payment for her future house.

We also want a small part of the distributions to pay for two badly needed home improvement projects around our house, and also to pay down some of our mortgage, enough so that we can refi for a much lower rate today with at least 70% LTV. After those, we do not expect to have any money left over for ourselves.

Now, the big ????? for me are what exactly our tax implications are going to be here? At first, I thought we would be subject to 4.5% tax as per Pennsylvania inheritance tax laws, because her grandparents both passed away in the state of PA. Then I realized, technically, it was her father that passed away recently, in the state of MD, so I'm not sure PA inheritance tax law applies here? Then one of her brothers advised us that we should estimate our tax hit is going to be 20%.

So, approximately 20%, 4.5%, or 0% of the distribution amount.. which one would we be subject to?

And if we are going to get a tax bill, what are our strategies on reducing the tax hit? Does setting up accounts in our children's name (perhaps irrevocable type, if that helps with reducing taxes?) help reduce our tax hit?

I would probably have more questions to come but right now our biggest question is how big of a tax hit we have to expect (hopefully it's not 20% of the entire balance, that would be a lot of money lost to government!).

Thanks in advance for any advice that is shared here!
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