Can Estate Planning Reduce Taxes in Pennsylvania?

Many people do not know that Pennsylvania is one of the remaining six states that still charge an inheritance tax to beneficiaries who inherit property. This can lead to a bad surprise when people are navigating the process of taking possession of assets after someone has passed away. Estate planning is the best way to prevent this kind of shock and to be ready in advance for the taxes that you will need to pay.

Are Any Items Exempt From Inheritance Taxes in Pennsylvania?

Life insurance policy proceeds and real estate that is located outside of Pennsylvania are the only two items that are exempt from inheritance taxes.  You will pay inheritance tax on property in Pennsylvania even if you are a non-resident when you inherit.

This means that the annuities, retirement accounts, US Savings bonds, bank or investment accounts, personal property, and all other assets that are included in an estate will be subject to inheritance tax. As you can imagine, this can really add up over time. The amount of tax that is owed will depend on how closely related the beneficiary was to the decedent as well. This means that you could pay 0% or as much as 15%. The more distantly you are related to someone, the higher the tax that is assessed. Spouses pay 0% while grandchildren or children pay 4.5%.

How Can Estate Planning Help Reduce Your Inheritance Tax Burden?

There are various strategies that can reduce the amount of tax that you will have to pay on an inheritance. The better prepared that you are, the more likely you will be to avoid excessive costs related to the inheritance process.

  • Listing Deductions for Burial, Funeral Costs, and Debts

Because you will only have to pay tax on the property that is valued as of the date of death of the decedent, you are only required to pay inheritance tax on what you actually inherit. This means that you can reduce the inheritance that you are paid by listing deductions for funeral costs and burial fees as well as costs related to the estate like taxes and legal fees. Debts that the decedent owed can also be listed.

  • Making Outright Gifts

When you give property and other items to people as gifts in your will, you will remove these items from the scope of the inheritance tax charges. You can also withhold immediate access to gifts during your lifetime. These items can also be associated with a trust to protect them from inheritance taxes. You do have to complete your trust or gift plans a minimum of one year before your death, however.

  • Add a Joint Owner With the Right of Survivorship

When you add a joint owner with the right of survivorship to the property, and the person lives one year on the property thereafter, they are considered entitled to one-half the property. When you die, this will mean that the inheritance tax owed is only for one-half of the property. You can add more than one joint owner to reduce the taxes on the property even further. This plan can have an Achilles heel, however, because if a joint owner dies before you will owe inheritance tax on their share of the property.

What is the Best Plan of Action?

It might seem like these are all very different options to try and choose from. You will find that a trust is almost always the best way to protect most of your assets from inheritance tax after your death. This is something that needs to be set up as soon as possible, just in case something should happen to you. You cannot consider the trust finalized if you die before the trust has been in place for a year. This also offers the benefit of supplanting a last will and testament for your estate and your accounts will avoid probate if they are part of a trust.

At Antanavage Farbiarz, we take pride in helping our customers in Pennsylvania to navigate the estate planning process. You can trust us to help you reduce the inheritance burden that will fall on those who survive you and we can also ensure that the right assets are given to the right people upon your death.  We are experts in the area of wills, trusts, gifts, and other methods of reducing the taxes on your assets. For estate planning assistance and to discuss your will, call us at (610) 562-2000 or use our contact form to schedule an appointment for a consultation.