How Can Estate Planning Help Minimize Tax Liabilities for Your Heirs?

What Are the Goals of Estate Planning?

An estate plan is a way to prepare for uncertain future events, including disability, incapacity, and death. The goals of estate planning include protecting assets, designating beneficiaries, directing the distribution of assets, naming guardians for living dependents, preparing for incapacity or disability, avoiding probate, and minimizing estate taxes. Pennsylvania is one of the few remaining U.S. states that still charges an inheritance tax on inherited property. Estate planning is the best way to prepare in advance to reduce the inheritance tax burden on your heirs. 

How Can Estate Planning Help Reduce Inheritance Taxes in Pennsylvania?

A strategic estate plan is essential for minimizing the tax burden on a Pennsylvania estate. When a person dies without a valid will, his or her estate is distributed according to the laws of intestate succession under the Pennsylvania Consolidated Statutes, Title 20, Chapter 21, Intestate Succession. A last will and testament and other estate planning documents will allow you to control who will inherit your assets after your death and how those assets will be distributed, which can significantly impact tax liability. 

Will Your Heirs Have to Pay Federal Estate Taxes?

Federal estate tax is only imposed on estates above a certain value, as stated by the IRS. The threshold for filing has steadily increased from one year to the next. As of 2024, it is more than $13,000,000.

 To calculate the value of an estate, the fair market value of all included assets is totaled to arrive at “gross estate” value. These items may consist of cash, real estate, securities, annuities, trusts, business interests, and other assets. Certain deductions may be allowed to arrive at a “taxable estate” amount. These deductions may include:

• Mortgages
• Other debts
• Estate administration expenses
• Qualified charities
• Property that passes to a surviving spouse                                                                                              

The value of lifetime taxable gifts (beginning with 1977) is added to the taxable estate figure, and federal estate tax is computed on that amount. This tax is reduced by the available unified credit. 

Most estates do not require the filing of a federal estate tax return. The filing threshold has increased significantly over the years from $5,000,000 in 2011 to $13,610 in 2024. 

What are Pennsylvania Inheritance Tax Rates?

Pennsylvania inheritance tax rates range from zero to 4.5% to 15%, depending on the relationship of the beneficiary to the deceased, as covered in the Pennsylvania Statutes, Title 72, § 9116. Inheritance tax. For example:

• The rate is 4.5% when a property is transferred to the father, mother, grandfather, or grandmother of the deceased or the wife or widow or husband or widower of a child of the deceased.

• When property passes from a decedent who died on or after January 1, 1995, to or for the use of a husband or wife, the tax rate is zero. 
• The tax rate is also zero when property is passed from a parent, adoptive parent, or stepparent to a child aged 21 or younger or vice versa. 
• Property passing to a sibling is taxed at the rate of 12%.
• For all others, the inheritance tax rate is 15%.

What Factors Can Impact Estate Tax Liability in Pennsylvania?

Several factors can affect inheritance tax rates on Pennsylvania estates, including the following:

• Relationship of the beneficiary to the deceased: The state inheritance tax rate depends on the closeness of the familial relationship. The closer the relationship, the lower the rate. For example, parents and grandparents are taxed at 4.5%, siblings are taxed at 12%, and beneficiaries with no familial relationship are taxed at 15%. 
• Type of assets: Certain assets are not subject to state inheritance tax, such as life insurance benefits and IRAs or 401(k)s of non-disabled individuals who died before reaching the minimum retirement age of 59 ½. 
• Expenses and debts: Financial liabilities can help reduce the taxable amount of an estate. These may include debts incurred by the decedent before death, costs of estate administration, attorney fees, fiduciary fees, and funeral and burial expenses. 
• Charitable contributions: Gifts to charitable organizations are exempt from inheritance tax under state law, provided the gift to charity is set forth in the will, a trust, or a beneficiary designation. 
• Location of the property: In the case of a resident or non-resident decedent, all real property and tangible personal property located in Pennsylvania at the time of death is subject to inheritance tax. 
• Residency of decedent: If the deceased was a resident of Pennsylvania, all intangible property is taxable under inheritance laws, regardless of where it is located. Intangible property includes bank accounts, loans, stocks, bonds, and receivables. 
• Jointly owned property: Property that a husband and wife jointly own with the right of survivorship is exempt from inheritance tax, provided the joint ownership was created more than one year before the decedent’s death. 
• Trust transfers: Transfer of assets in trust for the sole use of a surviving spouse are not taxable in the estate of the current decedent. However, they are included in the estate of the surviving spouse when he or she dies. 

Can an Experienced Estate Planning Attorney Help Minimize Inheritance Taxes?

At Peak Legal Group, we offer a wide range of superior estate planning services. We understand that you have worked hard to acquire your property and assets, and we provide sound legal guidance to help protect those assets for future generations. Our experienced Pennsylvania estate planning attorneys can help you devise strategies to minimize tax liabilities for your heirs. Contact us today at (610) 989-7064 for skilled representation in estate planning matters.