One of the biggest concerns of our clients is preserving their assets for their children. We are often asked if everything left to children, grandchildren, and other loved ones is going to be subject to Pennsylvania Inheritance Tax. The answer? Not necessarily.
Although Pennsylvania does impose an inheritance tax on certain property transfers at death, not all assets are subject to this tax. Understanding which assets are exempt can open estate planning opportunities to reduce your family’s tax burden and preserve more of your legacy.
What is the Pennsylvania Inheritance Tax?
The Pennsylvania Inheritance Tax is a state-level tax imposed on the value of certain assets passed from a decedent to their beneficiaries. The tax rate depends on the relationship between the decedent and the person or entity inheriting the property.
- 0% - transfers to a surviving spouse, a child under 21, and charities
- 4.5% - transfers to lineal descendants (children and grandchildren) and parents
- 12% - transfers to siblings
- 15% - transfers to other beneficiaries (nieces, nephews, friends, etc.)
The tax applies to probate and non-probate assets, unless specifically exempted.
- Probate Assets: pass through the estate of a decedent, under court supervision, to heirs of an estate or beneficiaries under a Will.
- Non-Probate Assets: pass directly to beneficiaries, outside of the probate estate, by way of joint ownership or beneficiary designations (joint bank accounts, joint brokerage accounts, retirement accounts, etc.) or through a lifetime trust.
Assets Not Subject to Inheritance Taxes in PA
Below are some of the common assets not subject to Pennsylvania Inheritance Tax.
- Life Insurance Proceeds: Life insurance proceeds are generally exempt from PA inheritance taxes.
- Joint Property with a Spouse: Assets owned jointly by spouses will pass automatically to the surviving spouse, free of inheritance tax. Examples include joint bank accounts and real estate held as tenants by the entirety.
- Property Transferred to Spouse: Any property inherited by one spouse from another will not be subject to inheritance tax (0% tax rate for spouses). So, property owned solely by one spouse such as an IRA, 401(k), or other bank account, will transfer with no inheritance tax owed.
- Charitable Gifts: Any gifts made to qualifying charitable organizations will not be subject to inheritance taxes.
- Gifts Made More Than 1 Year Before Death: Gifts made within 12 months of passing are treated as part of the decedent’s estate for tax purposes and are subject to inheritance taxes, with an exclusion of $3,000 per recipient per calendar year. However, gifts made more than 12-months prior to a decedent’s death are not subject to inheritance tax.
- Military Decedents: Effective for estates of decedents with a date of death on or after September 6, 2022, personal property transferred from the estate of a serving military member who has died as a result of an injury or illness received while on active duty in the armed forces, a reserve component, or the National Guard, is exempt from inheritance tax.
- Farmland: If the property qualifies for the agricultural exemption, it will not be subject to inheritance tax.
- Real Property in Another State: Real estate located outside of PA is not subject to inheritance tax, even if the decedent was a PA resident (note: this property would need to be handled in accordance with the state’s laws in which it is located).
- Family Exemption: If there is no surviving spouse, there is a $3,500 exemption for children of the same household as the decedent, or if no children, for parents of the same household as the decedent.
- Property Passing from a Child (21 years or younger) to a Parent: If a child (21 years or under) predeceases a parent, no inheritance tax is due on the transfer of the asset to the parent. This applies to natural parents, adoptive parents, and stepparents.
- Property Passing from a Parent to a Child (21 years or younger): If a parent passes and their child (21 or under) inherits assets, no inheritance tax is due. This applies to natural children, adopted children, and stepchildren.
What to Consider for Your Estate Plan
It is important to make sure you are minimizing as much tax exposure as you can for your family members. Please reach out to us at (610) 933-8069 to discuss the ways to utilize life insurance for tax-advantages, if gifting is right for your estate plan, and to ensure beneficiary designations are functioning as you intend them to.
