Death Taxes: The Basics and What Could Lie Ahead

The old saw that the only certainties in life are death and taxes remains true. There are two taxes imposed on the property of an individual who dies a Pennsylvania resident.

The Pennsylvania Inheritance Tax: The tax begins with the first dollar in a decedent’s estate and includes all assets which the decedent owned or had an interest in. There are no exemptions, but Pennsylvania does not tax insurance proceeds or out of state real estate, for example, New Jersey sandcastles and Florida mansions. The Pennsylvania Tax Rate depends on the status of the recipient of the decedent’s property. The rate for the decedent’s spouse is 0%, lineal ascendants and descendants (children, grandchildren, parents, grandparents) 4.5%, decedent’s siblings 12% and all other 15%. Property passing to charities is exempt.

Unfortunately, the Pennsylvania Inheritance Tax is best thought of as a transfer tax: this means even assets that pass outside your Will such as property titled jointly with someone other than your spouse and “Pay on Death” accounts will also be taxed. In addition, Revocable Living Trusts which are quite popular in some other states, are not exempt from Pennsylvania Inheritance Tax as the Department of Revenue regards these as “Will Substitutes”.

The decedent’s estate is primarily liable for the payment of the Pennsylvania Inheritance Tax, but if there is not enough money in the estate to pay the tax, liability for the tax passes to the recipient or transferee.

Gift tax: Pennsylvania, like most states, has no gift tax. However, property worth more than $3000.00 transferred by the decedent to another within one year of the decedent’s date of death is considered as still owned by the decedent for Pennsylvania Inheritance Tax purposes.

Federal Estate Tax: This is quite complicated, but because of the exemption explained below it affects relatively few taxpayers. Unlike Pennsylvania, there are absolutely no exemptions as to property owned by the decedent. Insurance proceeds from insurance policies owned or deemed owned by the decedent are included in the decedent’s estate as are the decedent’s world wide assets. In some instances a credit for tax paid to the foreign country where a decedent’s real property is situated may be available to reduce the overall death tax burden. At the present time, each taxpayer is entitled to a lifetime exemption of $11,580,000. That is, no taxpayer is required to file a Federal Estate Tax Return or be liable for any Federal Estate Tax unless the taxpayer’s estate (including prior taxable gifts) exceeds $11,580,000. If the taxpayer is married with a surviving spouse and does not fully utilize that taxpayer’s exemption, the unused portion can be applied to the surviving spouse’s estate. Thus, properly planned, a married couple can transfer to their children or anyone free of Federal Estate Tax more than $23,000,000.

Federal Gift Tax: The Federal Estate Tax and Federal Gift Tax are administered as one. That is, lifetime transfers for which a Gift Tax Return is required are included in determining the estate’s liability for such transfer tax. A Gift Tax Return is required when any individual transfers to another individual or entity property as a gift that exceeds in any one taxable year $15,000. For this purpose, transfers within the year are cumulative. For example, transfers of $5,000 to “A” in January, $5,000 to “A” in June and $6,000 to “A” in December will require a Gift Tax Return which will show a taxable gift of $1,000. Even though a Gift Tax Return is required, there will be no Gift Tax due until an individual completely exhausts the lifetime exemption of $11,580,000.

Possible changes: There are no expected changes to the Pennsylvania Inheritance Tax regime. There must be changes to the Federal Estate Tax law because the above quoted lifetime exemptions, are required to expire as of December 31, 2025. At that point, the lifetime exemption will roll back to $5,000,000, plus an inflation adjustment for all decedents dying after December 31, 2025.

This provides a current planning opportunity for those individuals whose estates exceed $5,000,000 to make lifetime transfers in excess of that amount before January 1, 2026 and take advantage of the temporary increase in the unused lifetime exemption explained above.

Summary: We hope the foregoing answers questions you may have concerning “Death Taxes.” Most Pennsylvanians will leave an estate (that is assets – house, car, bank accounts, pension, IRA benefits) and therefore be required to file an Inheritance Tax Return. A small percentage will have estates subject to the Federal Estate Tax.

If you have any questions at all, please feel free to email or telephone the undersigned.
With best wishes for the holidays, Dick Greiner and Barbara Dillon.