Pennsylvania is one of the few states that still imposes an inheritance tax—a tax on the transfer of assets from a deceased individual to their beneficiaries. The rate varies depending on the relationship between the deceased and the beneficiary:
- 0% for transfers to a surviving spouse or charitable organization
- 4.5% for transfers to lineal descendants (children, grandchildren)
- 12% for transfers to siblings
- 15% for all other heirs, including nieces, nephews, and unrelated individuals
While completely avoiding inheritance tax may not be possible in many situations, thoughtful estate planning can help reduce the tax burden for your beneficiaries.
Know What’s Taxable—and What’s Not
Not all assets are treated equally when it comes to inheritance tax:
- Life insurance proceeds paid directly to a named beneficiary are not taxable under Pennsylvania law.
- Solely owned assets of the decedent are fully taxable.
- Jointly owned assets are taxed only on the decedent’s share.
- Revocable trusts do not avoid inheritance tax, but in some cases, irrevocable trusts may offer protection.
Understanding how each type of asset is treated can help you make strategic decisions about how to distribute your estate.
Use Gifting Strategies to Your Advantage
Giving assets away during your lifetime is one way to reduce the size of your taxable estate. However, gifts made within one year of your death are still subject to inheritance tax. To be effective, gifting strategies must be implemented well in advance.
Don’t Overlook Deductions and Exemptions
Pennsylvania allows several deductions that can reduce the amount of inheritance tax owed. These include:
- Final expenses and debts of the decedent
- Attorney’s fees and administrative costs
- Costs related to the sale of real estate
Proper documentation and reporting of these deductions on the inheritance tax return can result in meaningful tax savings.
The Bottom Line
Although Pennsylvania inheritance tax can’t always be avoided, smart estate planning can help limit its impact. By understanding how the tax works and using tools like life insurance, irrevocable trusts, joint ownership, and lifetime gifts, you can preserve more of your estate for the people and causes you care about.
If you’re planning your estate, it’s important to consult with a legal or financial professional who understands Pennsylvania-specific tax laws to ensure your plan is both effective and compliant.
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.