A common source of confusion in estate planning is the difference between estate and inheritance tax. Many people assume these are two different names for the same thing, and this assumption can be a costly mistake.
Estate tax is a tax on your right to transfer property upon your death. Very few estates are subject to federal estate tax, and, since the passage of the federal Tax Cuts and Jobs Act in 2017, that number is even smaller. As of 2018, estates smaller than $11,180,000 are exempt from tax. Pennsylvania does not impose a state estate tax separate from the federal tax.
Inheritance tax, as opposed to estate tax, is effectively a tax on your beneficiaries' right to inherit your property upon your death. It does not matter whether the asset passes through a will, which must go through probate, or through a trust, payable-on-death account, or other non-probate transfer.
The amount of tax depends primarily upon the beneficiaries' degree of relationship to you. The tax rates range from 0% to 15%:
There is a "look back" period for gifts made by the deceased within the year prior to his or her death. Any gifts made during that period are subject to Pennsylvania inheritance tax, but each recipient can exempt the first $3,000 in value of those gifts from taxation.
Inheritance tax is due upon the death of the decedent, but payments due are not considered delinquent until nine months after the death. After nine months, interest will be charged and penalties may be incurred. There is an incentive to pay inheritance tax promptly: if the tax is paid within 90 days of the death, a 5% discount on the amount due is applied.
If the deceased was a Pennsylvania resident, the Personal Representative will need to file Pennsylvania inheritance tax form REV-1500. If the deceased was not a Pennsylvania resident, but owned real estate in Pennsylvania, form REV-1737-A will need to be filed. These documents are complex and unfamiliar to most people; an attorney's help can be invaluable in completing them in a timely fashion and without errors. Seeking the advice of an experienced Pennsylvania probate attorney can help you avoid delays and costly mistakes, as well as the risk of an audit triggered by an inaccurate return.
It is important to remember that the inheritance tax is levied on the amount of inheritance due to each beneficiary, not the amount of the estate itself. There are a number of assets that are exempt from Pennsylvania inheritance tax. Family farms are excluded from inheritance tax if they meet certain requirements. Life insurance benefits are likewise exempt from Pennsylvania inheritance tax, whether they are paid directly to a beneficiary or to the estate of the deceased. Property owned jointly between a husband and wife is also excluded from inheritance tax.
The "taxable estate"is what the total of assets subject to inheritance tax are called. Certain expenses can be deducted from the taxable estate, including:
LaMonica Law Firm LLC represents clients in Lackawanna, Luzerne, and the surrounding NEPA communities in estate and inheritance tax issues. Attorney Carlo LaMonica is experienced in helping clients plan to minimize the amount of inheritance tax that will be due, as well as in preparing and filing Pennsylvania inheritance tax returns.
We have two office locations conveniently located in the Minooka area of Scranton and on Market Street in Kingston. LaMonica Law Firm works with clients throughout NEPA, including Lackawanna, Luzerne, Wayne, Wyoming, and Susquehanna Counties.
Contact us today to get the conversation started. We look forward to working with you.
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