Benjamin Franklin once wrote “[i]n this world nothing can be said to be certain, except death and taxes”. If you ever doubt the truth of that sentiment, let me introduce you to Pennsylvania’s Inheritance Tax, which affords us the opportunity to experience death and taxes all at once!
Under Pennsylvania law, an inheritance tax return must be filed for every decedent who has property which is or may be subject to tax. The amount of inheritance tax due is based upon the net value of the estate (the gross assets minus certain liabilities and administrative expenses). The final tax liability is a percentage of the net taxable value of the estate, where the percentage rate depends on the relationship of the deceased to the person inheriting the asset:
- If the party inheriting the assets is the spouse of the decedent, or the parents of a decedent aged 21 or younger, the tax rate is 0%.
- If the party inheriting the assets is a direct descendant or lineal heir of the decedent (this would include generally children, grandchildren, parents, grandparents), the tax rate is 4.5%.
- If the party is a sibling of the decedent, the rate is 12%.
- All other transfers, except charitable organizations, exempt institutions and government entities exempt from tax are taxed at a rate of 15%.
A few important things to know about the inheritance tax:
- The tax is due within nine (9) months following the date of death. Failure to make timely payment of the tax can subject you to a penalty up to 25% of the tax due.
- Date of Death Value. The tax is based upon the date of death value of an asset, so even though you may not sell or otherwise dispose of an estate asset for some time after the death, you will need to establish a date of death value for inheritance tax purposes.
- Five (5%) Percent Discount. You can receive a five (5%) percent discount on your inheritance tax liability if you make the tax payment within 3 months following the date of death. I strongly encourage my clients to do this whenever there is sufficient liquidity in the estate to do so.
- One Year Lookback: There is a lookback period of one year, so any gifts made in the year leading up to the death of the decedent are included in the estate for purposes of determining inheritance tax.
Unlike the federal estate tax, which has a very large exemption before taxes become due ($12,060,000 in 2023), the PA inheritance tax has a very limited “family exemption” of $3,500 in assets which can be excluded from the inheritance tax calculation. This is only available to family members who shared a household with the deceased.
There are many other twists and turns regarding preparing and filing the Pennsylvania Inheritance Tax return. If you require any assistance with the administration of an estate, please feel free to reach out to me. I am always looking for new clients to assist.
As always, best of luck!