What You Need To Know About Estate Tax Planning

attorney and client discussing estate tax planning

When a loved one dies, you may become a beneficiary to assets of their estate that hold significant value. While these are meant to be things passed along with good intentions, in reality, they can hold large tax values that you as the beneficiary must take on. This is why it’s crucial to understand estate tax planning in Pennsylvania, preferably with the help of an estate tax planning lawyer.

What is Pennsylvania Inheritance Tax?

Any estate tax planning attorney knows that for the average Pennsylvania family, the Federal Estate Tax is not an issue when becoming a beneficiary of a loved one’s estate due to its high exclusion. In 2021, each U.S. citizen has an exemption of $11,700,000 against the Federal estate tax and the Federal gift tax.

But as far as the Pennsylvania Inheritance Tax, “it is imposed as a percentage of the value of a decedent’s estate transferred to beneficiaries by will, heirs by intestacy, and transferees by operation of law.”

Who Pays Inheritance Tax in Pennsylvania?

Inheritance tax is paid when a Pennsylvania resident who owns property dies. It is also paid when a resident from another state with property in Pennsylvania passes away. The tax needs to be filed within nine months of the date of the death.

The individual named as the personal representative in the deceased’s will or the administrator of the estate files the inheritance tax return at the Register of Wills in the area where the deceased died or owned the property.

Depending on the instructions mentioned in the will, either the recipient of the property or the estate will pay the inheritance tax.

What Are the Rates of Inheritance Tax in Pennsylvania?

The rates for inheritance tax in Pennsylvania as determined by the Department of Revenue are:

  • 0% on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
  • 4.5% on transfers to direct descendants and lineal heirs;
  • 12% on transfers to siblings; and
  • 15% on transfers to other heirs, except charitable organizations, exempt institutions, and government entities exempt from tax.
  • Property owned jointly between spouses is exempt from inheritance tax.

Other inheritance tax exemptions for those who have passed after June 30, 2012, include some types of farmland and other agricultural property. They are exempt so long as the property is transferred to eligible recipients.

How long do I have to pay Pennsylvania Inheritance Taxes?

Pennsylvania inheritance tax payments are due upon the death of the descendent. If the payments are not made within nine months after the passing of the descendant, the payments become delinquent. However, if they are made within three months of the deceased passing, a 5% discount may be granted. An estate tax planning lawyer will be able to help you learn more about this.

Can Proper Estate Tax Planning Help Me Avoid Inheritance Tax Payments?

While you must meet with an estate planning and tax planning attorney to verify your rights, there are some cases where you can avoid or minimize inheritance tax payments to your potential beneficiaries and heirs.

1. Create joint accounts with the beneficiaries before passing

In Pennsylvania, tax is levied only on the percentage of assets owned by the deceased, not the entire amount. This can be helpful if you have only one child, as only one-half of the jointly-owned assets will be taxed. But if you have more than one child, you and all your children become the joint owners of the account. So, if you have three children, only 1/4th of the account will be subject to the inheritance tax.

Yes, estate tax planning is complicated. That’s why it is recommended to discuss your situation with an experienced estate tax planning attorney before making any decisions.

2. Gift the assets

Any assets gifted more than 12 months before death are exempt from inheritance tax payments. As knowledgeable estate tax planning lawyers, we can tell you that there’s no limit to the amount that can be gifted every year.

In fact, you might even want to consider trust planning. By contributing assets to certain kinds of trusts (such as irrevocable trusts), you may be able to potentially avoid inheritance tax payments.

However, there are exceptions to this. Only a qualified and experienced estate tax planning lawyer will know about this aspect of estate planning. They’ll help you ensure that your trust plan is sound and drafted appropriately.

3. Get extra life insurance to adapt your assets.

Did you know that the death benefit paid out on a life insurance policy isn’t subject to inheritance tax payments? You should certainly consider converting your non-life insurance assets into life insurance to reduce the tax amount.

You can also think about buying a long-term care (LTC) insurance policy, which comes with a life insurance rider. By doing so, you can avoid using up the LTC policy, and pass it on tax-free to your children.

Make sure to speak with a skilled estate tax planning attorney about this for better clarity.

4. Get real estate outside of Pennsylvania–but be mindful of the other states’ tax laws.

Real estate property and tangible personal property located in Pennsylvania at the time of the death of the owner is subject to inheritance tax payments. Conversely, if they’re located outside Pennsylvania, they may be exempt from inheritance tax.

However, you need to be wary of taxes in the other states as they may be higher than Pennsylvania rates. Also, avoid mentioning the real estate in an entity such as an LLC as Pennsylvania reserves the right to tax businesses.

A well-practiced estate tax planning lawyer will be in the best position to advise you on this and prepare an estate plan that’s in your best interest.

5. Pay the inheritance tax early.

This one’s already mentioned but worth mentioning again. By paying the inheritance tax within three months of the date of the death, you can receive a 5% discount on the amount.

Make sure you work with a proven estate tax planning lawyer to know your estate tax planning options.

Questions on PA Inheritance Tax Laws? Call MVSK Law.

You worked hard to acquire and build everything you value. But you also don’t want to burden your loved ones with inheritance taxes upon your passing. Our experienced estate tax planning attorneys can help you preserve your assets and your legacy while preserving your loved ones’ financial integrity. Call or contact us at (570) 348-0776 and schedule an appointment with Mazzoni Valvano Szewczyk and Karam. We can walk you through, step by step, all the legal options available to you.

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