As you start thinking about your estate plan, one of your goals is likely to maximize the assets your heirs and other beneficiaries will get to keep. That means minimizing taxes – not just estate taxes that can diminish the value of your estate, but the inheritance tax that Pennsylvania levies on inherited assets.
You may think your beneficiaries won’t have to worry about that because they’re in one or more of the majority of states that don’t have this tax. However, the tax is levied based on where the assets are located – not on where the beneficiary is located.
Beneficiaries are taxed at varying rates
Here in Pennsylvania, the rate at which inheritances are taxed depends on the beneficiary’s relationship to the deceased. Here are some of the current rates:
- Zero for the surviving spouse
- 4.5% for other direct descendants (for example, grandchildren)
- 12% for siblings
- 15% for other heirs
Charitable organizations and some other institutions are exempt from paying inheritance taxes.
The taxes need to be paid within nine months of the grantor’s death. That means it’s important for those who may have to pay taxes on an inheritance to be aware of their potential tax responsibility so that they pay it in time to avoid delinquency. If it’s paid within three months of the grantor’s death, beneficiaries get 5% off the amount they owe.
A new rule regarding military members
Note that effective Sept. 6 of this year, according to the Pennsylvania Department of Revenue, “personal property that is transferred from the estate of a serving military member who has died as a result of an injury or illness received while on active duty in the armed forces, a reserve component or the National Guard, is exempt from inheritance tax.”
Of course, you’d likely prefer that none of your beneficiaries has to pay an inheritance tax. There are ways to help them avoid this tax – or at least minimize it. Gifting some assets while you’re still alive is one option. Placing an asset in joint ownership with your intended beneficiary can also allow them to avoid an inheritance tax. As you’re developing your estate plan, it may be wise to consult a tax professional in addition to having experienced legal guidance.