Avoiding or reducing Pennsylvania inheritance tax requires careful estate planning and an understanding of the laws that apply to your situation. Pennsylvania imposes an inheritance tax on assets transferred after death, with the tax rate depending on the beneficiary’s relationship to the person who died.
Pennsylvania Inheritance Tax Rates
Pennsylvania inheritance tax rates vary based on who receives the assets:
- Spouses and charities: 0%
- Children, grandchildren, and other lineal descendants: 4.5%
- Siblings: 12%
- Other relatives and non-relatives: 15%
Understanding these tax rates can help you make informed decisions about which beneficiaries receive certain assets and how those assets are divided.
Consider How Assets Are Owned
Not all assets are treated the same for Pennsylvania inheritance tax purposes. Life insurance is not taxable, while most assets owned solely by the decedent are fully taxable.
Assets owned jointly by the decedent and another person are taxed only on the decedent’s share rather than the entire value of the asset. Because of this, incorporating joint assets and life insurance into an estate plan can help minimize inheritance tax.
In certain situations, irrevocable trusts may also be used as an estate planning tool to avoid inheritance tax. Revocable trusts, however, do not avoid the tax.
Make Allowable Lifetime Gifts
Another way to potentially minimize inheritance tax is through allowable gifts made during your lifetime. However, gifts made within one year of death are subject to inheritance tax.
Careful consideration of when gifts are made can therefore be an important part of estate planning.
Use Available Exemptions and Deductions
Allowable exemptions and deductions on an inheritance tax return may also help reduce the amount of inheritance tax owed.
Potential deductions for an estate include:
- The decedent’s final debts and liabilities
- Attorney’s fees
- Administrative costs
- Closing costs associated with the sale of real property
Taking advantage of allowable deductions can help reduce the estate’s inheritance tax obligation.
Planning Ahead for Pennsylvania Inheritance Tax
Although it may be difficult to avoid Pennsylvania inheritance tax entirely, careful estate planning can significantly reduce its impact on your estate and beneficiaries.
If you have questions about Pennsylvania inheritance tax or any estate planning matter, please contact Bononi & Company at 724-832-2499.