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Understanding the inheritance tax as you draft your estate plan

On Behalf of | Oct 26, 2021 | Estate Planning |

Pennsylvania is one of just six states that require people to pay taxes on money or property they’ve inherited. An inheritance tax is different than an estate tax, which is levied on the estate itself.

If you’re preparing to develop your estate plan, you likely want to minimize the amount of inheritance taxes your beneficiaries will be required to pay. Note that Pennsylvania levies the tax based on where the assets are located and not the state in which the beneficiary lives.

Not all beneficiaries and all property are subject to the tax

Not all inheritances will be subject to the tax. Inherited assets are only taxed if they’re above a designated percentage of the estate’s total value. The relationship of the beneficiary to the deceased person is also a factor.

Here in Pennsylvania, the current rates are the following based on the relationship to the deceased:

  • Zero if the beneficiary is the surviving spouse or one of their children (if 21 or younger)
  • 5% for other direct descendants and lineal heirs (for example, grandchildren)
  • 12% for siblings
  • 15% for other heirs

Charitable organizations and some other institutions, as well as government entities, are exempt from this tax. If you inherit some types of agricultural property (including certain farmland), that property may be exempted from inheritance taxes.

The taxes are considered due when the grantor dies and delinquent if they’re not paid within nine months. If you pay any taxes within the first three months, you receive 5% of the amount due.

As you’re working on your estate plan and determining how you wish to divide your assets among family members and others, it’s wise to consider the potential tax implications for them and make sure they’re aware of them. You can explore ways that you may be able to reduce or even eliminate their need to pay an inheritance tax with your legal and financial professionals.