By: Jose Roman
When someone passes away, their assets and property are typically passed on to their heirs or beneficiaries. While this process can be straightforward, it can also be complicated by the presence of inheritance taxes. In Pennsylvania, the inheritance tax is a state-level tax that is imposed on the transfer of certain assets from a decedent to their heirs or beneficiaries. In this blog post, we’ll discuss what the Pennsylvania inheritance tax is, who is subject to it, and how it can be planned for.
What is the Pennsylvania Inheritance Tax?
The Pennsylvania inheritance tax is a tax that is imposed on the transfer of certain assets from a decedent to their heirs or beneficiaries. The tax is calculated based on the value of the assets transferred and the relationship of the heir or beneficiary to the decedent. The tax rate can vary from 0% to 15%, depending on the relationship of the heir or beneficiary to the decedent.
Who is Subject to the Pennsylvania Inheritance Tax?
In Pennsylvania, the inheritance tax is imposed on the transfer of assets from a decedent to their heirs or beneficiaries. The tax applies to both Pennsylvania residents and non-residents who own assets in Pennsylvania at the time of their death.
How is the Pennsylvania Inheritance Tax Calculated?
The Pennsylvania inheritance tax is calculated based on the value of the assets transferred and the relationship of the heir or beneficiary to the decedent. The tax rate can vary from 0% to 15%, depending on the relationship of the heir or beneficiary to the decedent. The tax rates are as follows:
Spouses: 0%
Lineal descendants (children, grandchildren, etc.): 4.5%
Siblings: 12%
Other heirs or beneficiaries: 15%
The value of the assets transferred is determined as of the date of death. Certain deductions are allowed when calculating the value of the assets, including funeral expenses, debts, and administration expenses. There is also a 5% discount available if payment is made no later than 3 months from the date of death of the decedent.
How Can the Pennsylvania Inheritance Tax be Planned for?
While the Pennsylvania inheritance tax can be a significant burden for heirs and beneficiaries, there are steps that can be taken to plan for the tax and minimize its impact. The following are some, but not all, of the strategies for planning for the Pennsylvania inheritance tax:
Make Gifts During Your Lifetime
Create a Trust
Another way to reduce the value of your estate and therefore reduce the Pennsylvania inheritance tax is to create a trust. A trust can be used to transfer assets to your heirs or beneficiaries while you are still alive, which can help reduce the value of your estate. Additionally, certain types of trusts can provide tax benefits that can help reduce the impact of the Pennsylvania inheritance tax. Careful consideration should be used when using trusts for estate and inheritance tax planning, specifically because transfers in trust may trigger gift taxes as mentioned above. It is strongly suggested you contact an estate planning attorney when utilizing trusts in your estate plan.
Utilize Life Insurance
Life insurance can be a useful tool for planning for the Pennsylvania inheritance tax. By purchasing life insurance and naming your heirs or beneficiaries as the beneficiaries of the policy, you can provide them with a source of funds to pay the inheritance tax. Additionally, life insurance proceeds are generally not subject to income tax and is exempt from inheritance tax, so your heirs or beneficiaries will receive the full benefit of the policy. Care must be taken if your estate is potentially subject to the federal estate tax, as the amount of the policy is included in an estate for estate tax calculation purposes, even if the policy would not be subject to income or inheritance tax. If this is a concern for your estate certain trusts can be used to avoid having the life insurance policy included in your estate.
Conclusion
The Pennsylvania inheritance tax can be a significant burden for heirs and beneficiaries, but with proper planning, its impact can be minimized. By making gifts during your lifetime, creating a trust, utilizing life insurance, and other estate planning strategies, you can reduce the value of your estate and minimize the amount of Pennsylvania inheritance tax that will be owed. It’s important to work with an experienced estate planning attorney to develop a plan that meets your specific needs and goals.
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