Many of our clients consider gifting assets during their lifetime to provide for their loved ones. Lifetime gifts not only avoid federal estate and gift tax if the gift amount falls below the annual exclusion (currently $19,000 per recipient), but they also reduce the size of an individual’s estate, possibly minimizing future taxes.
PA’s gifting rules are different from those regulated by the federal system. If you decide to give money or property to your loved ones and pass within 12 months of making that gift, those dollar amounts or values of property may be subject to Pennsylvania Inheritance Tax, regardless of being completed gifts under the federal annual exclusion amount.
One-Year Lookback for Gifts
Pennsylvania’s inheritance tax applies to most assets owned by an individual at their time of death. Money given away during your lifetime is not included as part of your estate for inheritance tax purposes - unless it was greater than $3,000 and gifted within one year of your passing.
Inheritance tax (0% for spouses, 4.5% for lineal descendants, 12% for siblings, and 15% for other heirs) applies to any gifts exceeding $3,000 per recipient per calendar year, made within 12 months of the donor’s date of death. For example, if you give your child $100,000 in April 2024 and you pass away in November 2024, $97,000 would be subject to 4.5% inheritance tax, which amounts to $4,365.
Note: the $3,000 exemption applies per calendar year, so there is potential for $6,000 of exemptions per recipient depending on when gifts were made. For example, if an individual passed away on March 5th, 2025, and gave their grandson $4,000 in November 2024 and $5,000 in February 2025, there would be no inheritance tax due on $6,000 of the gifted funds to the grandson ($3,000 of the 2024 gift and $3,000 of the 2025 gift will be exempt). However, there would be inheritance tax applied to $3,000: $1,000 from 2024 and $2,000 from 2025.
Does This Only Apply to Monetary Gifts?
No. Any transfer of money or property for less than the full value is considered to be a gift. This includes, but is not limited to:
- Cash
- Real estate
- Adding someone as a co-owner to an account or deed
- Paying off someone else’s debt
Exceptions
Some gifts are exempt from this one-year lookback rule, including:
- Charitable gifts
- Payment of medical or educational expenses for another, if paid directly to the provider
Our Recommendations
If our clients are looking to make gifts to their loved ones, we suggest that they meet with us to discuss their plan. Planning may consist of starting early (rather than waiting), documenting your gifts, using appropriate tools (such as trusts), and considering all tax implications (income tax, inheritance tax, capital gains tax, federal estate and gift tax). Contact us at (610) 933-8069 for information regarding how we can help review or formulate your estate plan so that your goals are met and your loved ones are taken care of.
