INHERITANCE AND ESTATE TAXES
Two types of taxes can affect the estates of Pennsylvania residents - Pennsylvania's Inheritance Tax and the Federal Estate Tax. The two taxes work in very different ways. Some assets are subject the Pennsylvania Inheritance Tax but not the federal tax. The rates of tax are very different.
Pennsylvania imposes an Inheritance Tax on most assets of a deceased Pennsylvania resident, after allowed deductions like debts, funeral expenses and costs of an estate's administration are subtracted.
Some assets are not subject to Inheritance Tax. These include property owned jointly by a husband and wife and life insurance proceeds. If a deceased person owned an asset jointly with another person, only one-half of the value of that asset will be subject to tax if held for more than one year.
Rates of Pennsylvania Inheritance Tax are much lower than are those of the Federal Estate Tax. There is no tax on property which passes to a surviving spouse or is distributed to a charity. The rate of Pennsylvania Inheritance Tax on estate assets passing to children is 4.5%. The tax rate on assets passing to parents, grandchildren or grandparents is also 4.5%. The rate on assets passing to a brother or sister is 12%, and the rate of tax on property passing to cousins, friends, aunt, uncle or friends is 15% of the net estate. The Pennsylvania Inheritance Tax Return must be filed within 9 months after the person’s death.
The Federal Estate Tax does not involve all estates. It effectively exempts a certain amount of a person's estate – for decedents dying after 2011, there is a $5 million basic exclusion amount that is adjusted annually based on inflation. A decedent’s exclusion can be further increased if the decedent had a spouse who had died first and did not utilize all of his or her exclusion amount. The decedent is then entitled to the unused amount of the spouse’s exclusion plus the decedent’s own exclusion. There is no Federal Estate Tax on assets passing to surviving spouse.
If a person dies having assets valued at less than the effective exemption amount, it is not necessary to even file a Federal Estate Tax Return. If assets exceed the amount, a return must be filed. Tax is imposed only on that part of a "net estate" which exceeds the exemption amount.
So if a person has assets in excess of the exemption, but allowed deductions reduce the value of the estate below the exempt amount, a return is filed but no tax would be due.
For Federal Estate Tax purposes, some assets are included in a person's estate that are not included in an estate for Pennsylvania Inheritance Tax purposes. Two examples are one-half of the property owned by the decedent and his or her spouse and the value of benefits under individual life insurance policies owned by the decedent.
While a deceased spouse's one-half share of property owned jointly is included as an asset on the Federal estate tax return, a deduction is allowed for all property which passes to the surviving spouse. This delays taxation of the assets until a later time.
The rates of Federal Estate Tax are much higher than are those of Pennsylvania Inheritance Tax. Beginning in 2012, the estate tax is imposed at a flat rate of 40% on transfers in excess of the annual exclusion amount.
The Federal Estate Tax return must also be filed within 9 months after a person's death.
Both of these taxes involve complicated returns. On each, all taxable assets must be reported, and failure to take advantage of available deductions can result in too much tax being paid. You should seek professional help in preparing these documents. (updated 04/14)
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