Let’s Talk About Pennsylvania’s Inheritance Tax

What is the PA Inheritance Tax?

It is a tax on property that you own within Pennsylvania at the time of your death. If you’re a resident of PA, most of your property, except for out-of-state real estate, will be subject to this tax. The tax is due by your estate in the nine months following your death.

Are there excluded assets?

Not really. Life insurance is the most prominent excluded asset, and farmland may be an excluded asset, but generally, most assets are included. That includes real estate, cash, retirement accounts, annuities, CDs, jewelry, vehicles, and much more.

What are the rates?

  • 0% for Spouses/Charities
  • 4.5% for Children/Grandchildren (and parents)
  • 12% for Siblings
  • 15% for Everyone Else

If my daughter lives in CA and I live in PA, does she have to pay inheritance tax?

Yes. The tax is based on where YOU live/where YOUR property is located at your death.

If I own a shore home in NJ, do my kids have to pay PA Inheritance Tax on that?

No. The tax is only paid on property you own in PA.

Are there any ways my family can minimize the taxes paid on my estate?

Once you’re gone, no. But there are a few things you can do to minimize taxes:

  • Purchase life insurance, which is excluded from inheritance tax
  • Strategically gift while you’re living (but you must live one year from the time the gift is made for the taxes to be excluded)
  • Get a good Executor, who in turn will hire a good, tax-savvy lawyer who will take as many deductions as possible

Strategies I don’t recommend:

  • Using joint accounts – Yes, they may save some money on inheritance tax, but do you really want an additional owner on your account? If you put someone else on the account, you are at the mercy of their creditors, spouses, lawsuits, etc.
  • Gifting without getting advice from an attorney – Make sure you check with an attorney to ensure the gifts you are making comply with tax and Medicaid laws.

I don’t think the Inheritance Tax Law is fair—what can I do about it?

Petition your local representative and State Senator. The tax does not appear to be disappearing anytime soon. But I wouldn’t lose sleep over it—most people pay between 0-4.5%. Remember the Federal estate tax used to be over 45% on assets above a half million. Try to keep it in perspective. Oh, and one final thing—your family is paying it, not you.

What’s your best tip for dealing with inheritance tax?

I have two…

  1. Make sure you have enough “liquidity” in your estate to pay the tax. By that, I mean cash, life insurance, etc. You don’t want your family relying on retirement accounts or the sale of real estate to pay the tax.
  2. If you can get life insurance, take advantage of it. You can “arbitrage” your estate, meaning your estate will be worth more, and you could be minimizing the amount of inheritance tax your heirs pay.
Posted in Tax