One of the worst parts of the probate process is seeing how the probate courts will tax the assets the deceased left to their loved ones. Not only do they have to deal with the loss of someone dear to them, but the state gets to take a cut of the assets their loved one worked hard for. However, certain assets should not be taxed in Pennsylvania.
The Pennsylvania inheritance tax is only meant to tax certain assets, leaving many to be considered exempt. If you do not know what types of assets are exempt, or how to ensure certain assets are not unfairly taxed, our estate planning law firm can help.
What is Pennsylvania’s Inheritance Tax?
Pennsylvania’s inheritance tax is a tax on the value of the assets left to heirs by an estate after someone’s passing. The amount that’s taxed varies based on the familial relationship of the beneficiary to the deceased. Here are the general tax rates for different relationships between the deceased and the beneficiaries:
- 0% tax for transfers to a surviving spouse or a parent from a child aged 21 or younger.
- If someone passes while married, their assets are considered to be their partner’s assets as well. Spouses are not taxed for transitioning from a co-owner to a sole owner of an asset.
- When someone is unmarried and 21 or younger, they can still be dependent on their parent, so their assets will go to them.
- If someone is married but 21 or younger when they pass, their assets will go to their spouse, not their parents.
- 4.5% tax for transfers to direct descendants and lineal ascendants.
- Direct descendants are children and grandchildren by blood or adoption. Stepchildren are not legally considered descendants. Unknown children by blood are considered direct descendants.
- Lineal ascendants include parents, grandparents, or other legal guardians. If an aunt or uncle, for example, was someone’s legal guardian, they can plead to the court that they are the equivalent to the deceased parents, rather than extended family.
- 12% tax for transfers to siblings.
- Step-siblings are not legally considered siblings.
- 15% tax for transfers to other heirs.
- This includes aunts, uncles, and cousins. If there are no other family members, step-children and step-siblings can come into contention for inheritance.
Six Probate Assets Exempt From PA Inheritance Tax
In Pennsylvania, certain assets are exempt from the state’s inheritance tax in all circumstances, and some are only exempt when passed down to a spouse or the parent of a deceased who was 21 years or younger. These exempt assets include:
- Life Insurance Proceeds: Life insurance proceeds are not subject to inheritance tax, but only if the estate itself is not named as the beneficiary. If someone names their estate as the beneficiary, the life insurance will pass to the estate untaxed, and then be taxed through the probate process.
- Retirement Accounts: Certain retirement accounts, such as IRA, 401(k), and similar pension or retirement benefits are exempt from inheritance taxes. Certain other retirement accounts are not exempt from PA inheritance taxes. If you’re unsure if your retirement account is exempt, contact Pike Law to schedule a consultation. If the deceased died before turning age 59 ½ but was disabled, then the IRA and 401K are subject to Pennsylvania’s inheritance tax.
- Property Shared Between Spouses: Property that is jointly owned with the right of survivorship between spouses typically passes to the surviving spouse without being subject to inheritance tax. Property that was not marital property becomes marital property if one spouse is survived by the other spouse. This means that the property you would keep in a divorce would still go to your spouse if you were to pass away.
- Transfers to Government or Charitable Organizations: Transfers to governmental entities or recognized charitable organizations are usually exempt from inheritance tax. While they would be considered other heirs, their tax-exempt status overrules their status as an ‘other heir.’
- Family-Owned Business Interests: Under certain conditions, interests in family-owned businesses may be exempt from inheritance tax. Specific criteria must be met concerning the operation and ownership of the business for this exemption to apply. Proving this criteria requires filing a Qualified Family-Owned Business Exemption (QFOBE).
- Agricultural Property: Agricultural property that continues to be used in farming by qualified individuals after the owner’s death may be exempt from inheritance tax. This tax exemption is subject to certain conditions regarding its use and ownership.
These exemptions are meant to remove financial burdens on certain assets deemed to be deserving of special treatment under the law.
Contact the Estate Planning Attorney at Pike Law For Help
When creating your will or trust, it’s important to take into account what is taxable and non-taxable as well as the circumstances for each. If you prepare your estate incorrectly, there will be less than you intended left to your heirs.
Ensure that everything you have goes to the people you want it to. For material assets, doing your proper due diligence with the help and guidance of an estate planning attorney will ensure that your heirs do not have to bear the financial burden of inheritance taxes.
For more information on how to do this, contact Pike Law today. We have the experience you need to properly plan your estate.
