If you live in Pennsylvania or if you are inheriting from someone who lived in Pennsylvania, understanding inheritance tax - what it is, the applicable tax rate, and what it is applied to - is important.
A common misconception is that assets that avoid the probate process (typically by way of trust), will also avoid PA inheritance taxes. This is incorrect. PA inheritance tax applies to both probate and non-probate assets.
Below, you will find information about inheritance tax rates, due dates, and ways to reduce and/or avoid future taxes.
PA Inheritance Tax
Inheritance tax is due for the transfer of most assets from a decedent’s estate to beneficiaries by will or to heirs by intestacy law. The tax due is calculated by a percentage rate of the value of the asset as of the decedent’s date of death. The rate paid is dependent on the relationship between the decedent and the person inheriting their assets.
The current inheritance tax rates are as follows:
- 0% - transfers to a surviving spouse, to a child under 21, or to charity
- 4.5% - transfers to lineal descendants (children and grandchildren) or parents
- 12% - transfers to siblings
- 15% - transfers to other beneficiaries (nieces, nephews, friends, etc.)
Current exemptions from inheritance tax include assets transferring to charitable organizations, life insurance proceeds, real estate in other states, and qualified agricultural property.
The inheritance tax can either be paid by the probate estate or by the person receiving the inheritance (apportionment). The method for tax payment is determined by the decedent’s will (either option can be identified within) or is paid by the probate estate if there is no will.
Which of My Assets are Subject to Inheritance Tax?
Most assets are subject to inheritance tax in PA. The most common assets owned by PA residents, transferred to beneficiaries and heirs at death, and subject to inheritance tax include:
- Bank and investment accounts
- Real estate located in PA
- Business interests
- Personal property
- Retirement accounts
- Property gifted within 12 months of death (values exceeding $3,000)
Inheritance tax applies to assets regardless of their probate or non-probate classification. So, joint accounts and retirement accounts with beneficiaries are also subject to inheritance tax.
When Is the Tax Due and How Is It Paid?
The Pennsylvania Inheritance Tax Return (Form REV-1500) is due nine months after the decedent’s date of death.
Payment of inheritance tax must be sent into the Register of Wills office of the county in which the decedent resided.
There is a 5% discount on the total tax due if the full amount of tax is prepaid within 3 months of the decedent’s passing.
Interest will begin to accrue on any unpaid taxes after the 9-month deadline.
Is There Any Way I Can Avoid This Tax?
Some strategies that may help reduce the tax burden include:
- Gifting assets
- Listing charities as beneficiaries
- Trust planning
- Life insurance
- Purchasing real estate in a non-inheritance tax state
It is important to note that the above strategies must be structured and implemented properly to not only receive a tax benefit but to also ensure that your estate plan remains in your best interest. There are methods to reduce inheritance taxes, but they may come with loss of access and control of assets.
If you’re unsure whether your current plan is working in your favor and will ultimately achieve your goals, or if you haven’t formulated an estate plan thus far, we’re here to help. Call our office at (610) 933-8069 for more information or to set up an appointment.
