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 Pa 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 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 Pa 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 - in 2011, the federal estate tax exemption is $1 million. There is no Federal Estate Tax for individuals who passed in 2010. 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 until a later time taxation of the assets.

The rates of Federal estate tax are much higher than are those of Pennsylvania inheritance tax. Beginning in 2011, the rate of tax is graduated and tax rates for 2011 begin at 18% on that part of the estate in excess of the exempt amount, and the rate increases to 55% on very large estates.

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.  2/11

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