When Pennsylvanians are crafting their estate plans, a frequently asked question is, “What kind of tax implications will my death have on my assets?” The Pennsylvania inheritance tax applies regardless of the size of the decedent’s estate, unlike the federal tax that only impacts estates valued at $11.18 million or higher. This tax is imposed on the beneficiary’s entitlement to inherit property, and the tax amount due is contingent on the value of the property and the beneficiary’s relationship to the deceased.
The Structure of Pennsylvania Inheritance Tax Rates
Pennsylvania’s inheritance tax structure traditionally consists of three distinct rates:
- Assets inherited by lineal heirs, such as children, stepchildren, and grandchildren, are taxed at a rate of 4.5%.
- Collateral beneficiaries like siblings are taxed at a rate of 12%.
- Other heirs, including nieces and nephews, are taxed at a rate of 15%.
However, there are exceptions to the Pennsylvania inheritance tax. The tax does not apply to the decedent’s surviving spouse, government entities, charitable organizations, and parents, stepparents, and adoptive parents who inherit from a deceased child who was 21 years or younger.
Eligibility of Properties for Inheritance Tax in Pennsylvania
All tangible properties of the decedent, such as cash, furniture, automobiles, jewelry, antiques, and more, located within Pennsylvania at the time of the decedent’s death, are subject to inheritance tax. Irrespective of their location at the time of the decedent’s death, all intangible properties of a deceased resident, such as bonds, stocks, loans receivable, bank accounts, and more, are subject to inheritance tax.
For non-residents of Pennsylvania, all their tangible and intangible properties located within the state are subject to inheritance tax upon their death. If the intangible property of a non-resident is not located within the state, it is exempt from inheritance tax.
Tactics to Reduce the Pennsylvania Inheritance Tax
While the Pennsylvania inheritance tax is inevitable for many, there exist strategies to lessen its impact. These include:
- Establishing joint accounts with those you wish to benefit. Pennsylvania will only tax the portion of assets owned by the decedent, not the total amount.
- Gifting your assets to your children. This strategy should be employed judiciously and after consulting with a tax attorney or accountant.
- Purchasing additional life insurance. The death benefit paid out on a life insurance policy is not subject to the Pennsylvania inheritance tax.
- Using life insurance to provide money to beneficiaries who are taxed at the highest tax rates.
- Purchasing real estate outside of Pennsylvania. Pennsylvania only taxes assets located within the state.
- Paying the Pennsylvania inheritance tax early. If you pay the tax within 3 months from the date of death, you are entitled to a 5% discount.
- Converting your IRA to a Roth IRA. This reduces your PA taxable estate for inheritance tax purposes.
While these strategies can aid in reducing the Pennsylvania inheritance tax, they should be employed with caution and after consulting with a tax attorney or accountant. It’s also crucial to remember that any changes you make to beneficiary designations or joint ownership of accounts could significantly alter your overall plan.
Conclusion
The Pennsylvania inheritance tax is a significant consideration for estate planning. Understanding the tax rates, the properties it applies to, and the strategies to minimize its impact can help in effective estate planning. It’s important to consult with a tax attorney or accountant before making any decisions that could significantly impact your estate or your beneficiaries. Remember, the goal is not just to minimize taxes, but also to ensure that your estate is distributed according to your wishes.