Avoiding or minimizing Pennsylvania inheritance tax requires careful estate planning and knowledge of the laws applicable to your specific state. Pennsylvania imposes an inheritance tax on the transfer of assets after death, with rates varying depending on the relationship of the heir to the decedent. Spouses and charities have a 0% tax rate, children and grandchildren, or lineal descendants are 4.5%, siblings 12% and all other relatives and non-relatives are taxed at a rate of 15%.
Understanding these taxable rates can help you make an educated decision about what beneficiaries are to receive what assets and in what shares. Assets such as life insurance are not taxable, while most other assets held solely by the decedent are fully taxable. Assets that are held jointly by the decedent and another are only taxed on the share of the decedent, rather than the entire value. Utilizing joint assets and life insurance in your estate plan can assist you in minimizing inheritance tax. In certain situations, irrevocable trusts can also be an estate planning tool to avoid inheritance tax, but revocable trusts do not.
Other ways to minimize inheritance tax are to make allowable gifts during your lifetime. Gifts however given within one year of death are subject to inheritance tax. It is also possible to utilize allowable exemptions and deductions on an inheritance tax return in order to minimize the amount of inheritance tax owed. Things such as a decedent’s final debts and liabilities are tax deductions for an estate, as well as attorney’s fees, administrative costs and closing costs for the sale of real property.
While it is often difficult to avoid Pennsylvania inheritance tax entirely, careful planning can significantly reduce the impact on your estate and beneficiaries.
If you have any questions about the topic discussed in this article, or any estate planning matter, please give us a call at Bononi & Company 724-832-2499.