“The Pennsylvania Inheritance Tax”
One question many individuals ask when planning their estate is “How will my estate and the property that comprises it be taxed upon my death?” With the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, couples with $10 million or less will be pleased to know that their estates may not incur any federal estate tax, at least through 2012, unless Congress acts sooner. The same cannot be said for Pennsylvania inheritance tax.
The federal estate tax is a tax imposed on the transfer of the “taxable estate” at a decedent’s death. While the federal estate tax generally taxes the personal representative of the estate of a decedent on the decedent’s assets, an inheritance tax, including Pennsylvania’s, taxes the beneficiaries of a will, heirs by intestacy, and transferees by operation of law and their right to receive such property. The Pennsylvania inheritance tax is imposed as a percentage of the value of the decedent’s estate transferred to a beneficiary. The tax rate imposed depends on the relationship of the beneficiary to the decedent. The rates for the Pennsylvania inheritance tax are as follows:
- 0% on transfers to a surviving spouse, to a parent from a child aged 21 or younger, or to charitable organizations;
- 4.5% on transfers to direct descendants and lineal heirs;
- 12% on transfers to siblings and cousins; and
- 15% on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax.
Property owned jointly between a husband and wife is exempt from inheritance tax. Life insurance proceeds, too, are exempt from inheritance tax. There are special rules that apply to transfers to trusts, which are based upon the decedent’s relationship to the beneficiaries of the trust.
As to Pennsylvania residents, inheritance tax is imposed with respect to all real property situated in Pennsylvania, all tangible personal property owned by the decedent in Pennsylvania, and all intangible property, including, but not limited to, bank accounts, stocks, and bonds, regardless of where it is located. For non-residents, the inheritance tax is imposed on all real property and tangible personal property located in Pennsylvania at the date of the decedent’s death.
While the federal tax uses a three-year look back period for gifts made by the decedent, there is a one-year look back period for the Pennsylvania inheritance tax. All gifts made within the year prior to the decedent’s death are subject to the inheritance tax. Pennsylvania provides a $3,000.00 per donee exemption for these gifts.
The federal tax permits the personal representative of the decedent’s estate to choose from two dates, the date of death or six months from the date of death, to determine the value of the property, which is known as alternate valuation. There is no alternate valuation for purposes of Pennsylvania inheritance tax; thus, the value of the property as of the date of death will be the value for tax purposes.
Payments for inheritance tax are due within nine months of the decedent’s date of death. If the payment is made within three months of the decedent’s death, then a five percent discount of tax due or tax paid, whichever is less, is permitted.
While Pennsylvania inheritance tax is not likely a concern upon the death of the first spouse because most, if not all, property is passed to the surviving spouse, it is important to consider the inheritance tax consequences.