Pennsylvania is among the few states that have an inheritance tax. This is a tax paid by beneficiaries on inherited assets. Even if a beneficiary doesn’t live in Pennsylvania, if the person who left the inheritance did live in the state (and the property is or was located here), that tax can be owed by a beneficiary.
If you’re preparing to develop or amend your estate plan, it’s important to know how much inheritance tax your beneficiaries may have to pay based on Pennsylvania law. Let’s look at how Pennsylvania determines who may owe this tax. Depending on your circumstances, Federal Estate Tax may also be payable on your estate, in addition to the Pennsylvania inheritance tax.
Familial relationship determines the tax rate
The PA tax rate is based on the beneficiary’s relationship to the deceased as follows:
- Surviving spouses and children 21 and younger owe no inheritance tax.
- Other direct descendants (adult children and grandchildren) are taxed at 4.5% of the asset’s value.
- Siblings are taxed at 12%.
- Other heirs are taxed at 15%.
All real and tangible property inherited (like cash, homes, cars and jewelry) which was in Pennsylvania at the time of the testator’s death is taxable at the rates listed above. Intangible assets (like bank accounts and stocks) are taxable if the decedent lived in Pennsylvania, regardless of where the assets were.
There are ways to help families avoid this tax
As you do your estate planning, it’s wise to explore other ways to leave assets to family members in ways that won’t trigger the inheritance tax. This can include gifting assets while you’re still alive. Another way is by naming them as a beneficiary on a life insurance policy, which isn’t taxable as inheritance. Certain trusts might also help avoid the inheritance tax.
Many Wills specify that the inheritance tax is paid by the estate before transferring assets to beneficiaries. But if you have heirs who will need to pay inheritance tax, and your Will does not provide for the payment of the tax, you may want to let them know about the tax being due since they have nine months to pay it after you pass away. Tax payments made within 3 months of the decedent’s date of death are eligible for a discount. Our experienced estate planning attorneys can help you learn more about this and other taxes that your heirs or your estate itself could face and how to minimize or avoid them, so contact us today.