Nobody enjoys paying taxes. Fortunately, you can use some estate planning strategies to lower future taxes for your heirs and other beneficiaries. This consideration is crucial in Pennsylvania, one of the few states with an inheritance tax.
If you are wealthy, you may want to start reducing the size of your estate by gifting money to charities or family members. You can give a tax-free maximum of $17,000 annually to unlimited recipients. Transferring assets while you are still alive eliminates the need for the beneficiaries to pay an inheritance tax after you’ve passed away.
As part of your estate planning strategy, you can create an irrevocable trust and transfer surplus assets to it. Your designated trustee is your appointed fiduciary representative who owns and manages the assets according to your initial written directives. You lose control of the money, but you lower the value of your estate, which may significantly reduce your final tax payment.
Pennsylvania has three categories of heirs, each with a different tax rate. Lineal heirs, including stepchildren and grandchildren, pay 4.5%. Siblings pay 12%, and nieces and nephews pay a 15% tax on their inheritance. Money bestowed on irrevocable trust beneficiaries is not taxed unless they are payments, like interest or dividends, from income-producing investments. In that case, they must declare it when filing their tax returns.
Federal estate tax
The executor of your will pays a federal estate tax from the estate’s funds, which can be as high as 40% of your estate’s value. Fortunately, estates worth less than $12.92 million in 2023 do not have to pay the tax. This exemption is one great reason to move assets into an irrevocable trust. Decreasing your estate’s value minimizes federal estate taxes, which leaves more money to pass on to your loved ones.
Estate planning is always a good idea, so that you can pass on as much of your wealth as possible without paying unnecessary taxes. Meet with an experienced estate planning attorney to discuss ways to lessen the estate’s tax burden.