Common misconception: The federal estate and gift tax exemption is $5.45 million for an individual, $10.9 million for a married couple. So those of us under that threshold need not be concerned about anything we pass along to our heirs being taxed.
Correction: If you are Pennsylvania resident, your estate will be subject to an inheritance tax of up to 15 percent – regardless of its value.
Consider these scenarios:
- A couple with no children plans to distribute their estate, comprised of a home and a portfolio of stock and bonds, among their siblings. They have a will, which provides for the sale of the home and sets out details on how the assets should be divided. At the death of the last of the two, there is but one surviving sibling, the woman’s brother. Pennsylvania requires the man first to secure a supportable appraisal on the home and any other non-cash assets, then exacts a tax of 12 percent on the total value of the estate.
- A year prior to her death, a widow with a terminal illness adds her daughter’s name to her checking account to provide access to needed funds while she’s alive and avoid probate and taxes after her death. At her mother’s death, the daughter learns that she must file an inheritance tax return and the entire amount in the account is subject to Pennsylvania inheritance tax.
State inheritance taxes might be the most overlooked aspect of estate planning. Yet their impact can be draconian, up to 15 percent of the estate’s value in Pennsylvania. They apply to all estate assets: real estate, personal tangible property, cash, even retirement accounts if the deceased was more than 59½ years old and qualified to make withdrawals. The sole inheritance tax deduction is for “final” expenses, such as the costs for the funeral, executor of the will, and probate administration.
The applicable tax rates:
On an estate passed to a surviving spouse: No tax
On assets distributed to direct descendants (children, grandchildren, etc.): 4.5%
For siblings: 12%
For anyone else: 15%
On assets left to a charity: No tax
There are nuances to these divisions, for example, for assets divided among a spouse and someone outside the family, only the portion distributed outside the family is subject to the Pennsylvania Inheritance Tax. And nuances to the law, such as the requirement that heirs file an inheritance tax return with the applicable county’s Office of the Register of Wills within nine months of the death, and a discount of 5 percent of the tax if it is paid within three months after the death.
Every inheritance tax return is audited, so such things as appraisals must be reasonable and all assets must be reported. The state has covered the landscape to the point that anyone opening a safe deposit box with the estate owner’s name tied to it is required to report on the contents within 21 days of turning the key.
The point is there is little to do to avoid the tax after death, so it should be addressed as part of your estate planning process – and for inheritance tax purposes, planning must be completed at least five years prior to the estate owner’s death. The strategies are similar to other estate planning tactics, including various gifting and trust options.
So now that you know about the Pennsylvania Inheritance Tax, talk to your accountant and attorney about it, so you understand how it will affect your estate and what you can do to protect your assets against it.