– Intro

A major area of misinformation and misunderstandings in the estate law and estate planning areas are the taxes that are imposed upon one’s death in Pennsylvania.

Very simply, two death taxes can be imposed on the death of Pennsylvania residents – the:

  • Federal Estate Tax
  • Pennsylvania Inheritance Tax

However, and unlike the income tax, which is very descriptive in its title as it is imposed upon your income, the phrases Federal Estate Tax and Pa Inheritance Tax are misnomers in that may tend to belie the actual fact that these are taxes imposed by virtue of your death.

The issue of estate taxes or “death taxes,” which occur when a primary estate holder dies and passes wealth and property to the next generation, has become a widely debated and legislated area in recent years.

– Inheritance Tax

Pennsylvania assesses taxes on property passing to a person’s heirs at death. The Pa Inheritance Tax returns is due nine months after the date of death.

– Rates

The Pennsylvania Inheritance Tax is assessed on estate property and joint assets owned by a decedent at the time of death. The tax rate is determined by the relationship of the person receiving the property to the decedent. There is no tax on property passing to a husband or wife. The tax rates are as follows:

  1. To spouses 0%
  2. To children 4.5%
  3. To siblings 12%
  4. To anyone else 15%
  5. To charities 0%

– Notes

Life insurance proceeds are exempt from Pennsylvania inheritance tax. So, too, are the benefits from many retirement plans, but you have to weave through technical rules to make sure it’s exempt. Unfortunately, it’s safe to say that the Department of Revenue says that an IRA is subject to inheritance tax if the decedent was over age 59½ at the time of death. Two other exemptions were recently created by Act 85 of 2012. These exemptions are effective for estates of those who died after June 30, 2012. For those estates, many farms will now be exempt from inheritance tax if they pass to so-called lineal descendants or siblings. Finally, Act 52 of 2013 added an exemption for the transfer of a “qualified family-owned business” for those dying after June 30, 2013. In general terms, to meet this exemption, the business must have fewer than 50 employees and a net book value of less than $5 million and it must pass to a spouse, lineal descendants (children, grandchildren, etc.), siblings, the lineal descendants of siblings, ancestors (parents, grandparents) and siblings of ancestors.

– Schedule A

Real Estate

Fill out Schedule A if the decedent held any real estate or a partial interest in real estate on the date of death. You will need to include an appraisal of the fair market value and county tax assessment. You will also need to include copies of deeds if the deceased owned only a portion of the property.

With the top federal estate tax rate at 40 percent, failure to plan can result in the federal government taking a very large bite out of the assets transferred to a person’s family. If the holdings are not liquid, the family may even be forced to sell assets (such as a family business) in order to pay a large tax bill, which is due within 9 months of death.

The federal transfer tax system includes the Estate Tax and Gift Tax. Each person has a lifetime exemption, or “unified credit,” which is an amount that he or she can pass free from federal taxes during life, or at death.

– Federal Estate Tax

Historically, the Federal Estate Tax has begun at a wealth threshold.  If you possess less than the wealth threshold at your death, the federal estate tax will not be applicable.

If it is applicable, the tax is imposed on a percentage scale according to the amount of your wealth (i.e., potentially 47% of the value of your assets above the wealth threshold).

The current wealth threshold of the Federal Estate Tax has been changing drastically throughout the last decade. It has increased, disappeared, and reappeared in 2011.

In 2005, the threshold was $1,500,000.00; in 2006, 2007, and 2008, the threshold was $2,000,000.00; in 2009, the threshold was $3,500,000.00; and in 2010, the Federal Estate Tax was scheduled to be, and in fact was, eliminated.

However, and although the Federal Estate Tax was scheduled to return with a wealth threshold of just $1,000,000.00, in 2011, it did not. The Internal Revenue Service changed that law and “announced the 2015 estate and gift tax limits […] and the federal estate tax exemption rises to $5.43 million per person, and the annual gift exclusion amount stays at $14,000.” “IRS Announces 2015 Estate And Gift Tax Limits”

The federal estate tax exemption—that’s the amount an individual can leave to heirs without having to pay federal estate tax—will be $5.43 million in 2015, up from $5.34 million for 2014. That’s another $90,000 that can be passed on tax-free. The top federal estate tax rate is 40%.