If Bill's intent is to rook the state of PA out of its inheritance tax presumably he asks that out-of-state lawyer if their duty to pay PA inheritance tax takes precedence over their duty to the beneficiaries.
If so, Bill just picks someone out-of-state, say his younger sister Betty as successor trustee instead.
Or since he's getting along in years he simplifies things by making her co-trustee & so everything related to the trust already goes through her.
When he dies she gets a new tax ID for the now irrevocable trust, cleans out & arranges for his house to be sold, & after receiving those proceeds transfers whatever's left in the trust to the beneficiaries, all of which likely happens before:
The first PA's tax authority knows about his death is when they receive his final personal tax return, as late as October 15 the following year.
And they never see a trust return.
My understanding is that lawyer's ethics obligations are higher than their obligations to any client. I think any decent lawyer able to set up the trust as you describe would know that they were risking disbarment. I find it highly unlikely they would take that risk for one out of state client. And if they did, I doubt it would be smart for Bill to hire them - what if the lawyer absconds with the money? They've already proven themselves unethical, and they're smart and a lawyer besides, and who would ever know, right?
If Betty gets involved, she risks the wrath of the state of PA. Although she's less capable than the lawyer, she still could run off with the money or distribute it "incorrectly" - who would ever know?
If the house is in PA (which we've established it is, I thought), it'll be subject to PA's estate/inheritance laws. So does Betty or the lawyer file an incomplete / incorrect estate / inheritance filing with the state? More fraud. Also, PA then knows about the death. You're surely not the first person to think of this idea, so it wouldn't surprise me if PA audits returns where just one paid off house is listed as an asset but no other money is. (I suppose Bill could sell his house and rent or move into a retirement home and rent.)
It wouldn't surprise me in the least if PA subscribes to the Social Security death notification list. Most funeral homes submit the death notification to Social Security within days of the person dying, and I think subscribers to that notification get notified rather quickly - it may even be daily. So they probably know Bill is dead before he's even been buried.
So now we have a choice: Bury Bill's body ourselves (probably a felony) and don't notify SS (we get Bill's continued SS then, but probably another felony), or bribe the funeral home not to report the death to SS (fraud, unlikely to go along with this).
I agree with you that they wouldn't see a federal trust return.
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Just to be clear, I have no dog in the fight. Nobody in my family lives in PA. I'm just jousting with you to help maintain my mental faculties and to help you think it through in case you're seriously considering this idea.
I'm actually a big fan of exploiting loopholes that really exist. Exploring potential loopholes is a way to find actual ones. Again, most of the time someone else has thought of a loophole before we have, and the government or private industry has put in measures to close them. Sometimes, the way they close the loophole is through a generic "fraud" law - you can't lie or cheat to gain a financial advantage, and if they catch you there are those penalties, which in the case of fraud can I believe include prison time. No thanks, not worth the risk for me, but obviously people get convicted of fraud (Bernie Madoff), and I'm sure some number get away with it.