When a person’s estate has significant value, it can be subjected to state and federal estate taxes after his or her death. If you have a high-value estate, estate taxes, inheritance taxes, and gift taxes can decrease the number of assets your loved ones receive after you pass away. Effective estate tax planning can help you protect your assets and ensure they are distributed to your heirs.
The estate planning attorneys at Jones, Gregg, Creehan & Gerace LLP have extensive experience using estate tax planning strategies to reduce our clients’ exposure taxes. You will receive experienced, knowledgeable legal counsel when you work with our law firm. Whether you need to create an estate plan for the first time or update your estate plan, we are here to help.
Pennsylvania Doesn’t Have an Estate Tax
An estate tax is a specific tax on a recently deceased individual’s estate. The tax is taken after the individual has passed away before the money and assets are distributed to his or her heirs. Estate taxes are sometimes called “death taxes.” Pennsylvania is one of 38 states that does not impose an estate tax.
Regardless of the size of the estate, it will not owe any amount of estate tax to the state of Pennsylvania before the money is dispersed to heirs. However, inheritance taxes and federal estate taxes may apply. When an out-of-state heir inherits real and tangible property located in Pennsylvania, he or she will owe taxes.
Federal Estate Tax
The federal estate tax is a tax on the transfer of wealth to one or more heroes when a person dies. Although Pennsylvania doesn’t impose an estate tax, an estate may still be subjected to the federal estate tax. However, the federal estate tax only kicks in when an individual’s estate is valued at $13.61 million or more. The exemption amount for married couples is double that of individuals, $27.22 million.
If the estate’s total value is less than the exemption amount, the estate will not have to pay federal estate tax. When an estate exceeds the exemption amount, it could be subject to tax rates as high as 40 percent. Depending on the value of your estate, it could end up paying millions of dollars in federal estate taxes. Without careful estate planning, you could lose a significant amount of money that could have been distributed to your heirs.
The exemption amount for the federal estate tax will decrease in 2025, according to the Tax Cuts and Jobs Act of 2017. Unless Congress passes new legislation, the exemption amount for federal estate taxes will return to approximately $5.5 million per individual. The amount will be adjusted for inflation. This change will significantly impact estate tax planning, subjecting many more estates to the federal estate tax. It’s important for individuals, business owners, and families to work with an estate planning attorney who can pursue strategies to decrease or eliminate the amount of tax owed.
Pennsylvania Imposes an Inheritance Tax
Although Pennsylvania does not impose an estate tax, Pennsylvania does impose an inheritance tax. The percentage of inheritance tax depends on the relationship between the individual who passed away and the heir who will inherit the money. For example, there’s no inheritance tax applied to a surviving spouse. Similarly, children who inherit money from a parent when they are 21 or younger do not have to pay an inheritance tax.
However, a 4.5 percent inheritance tax will be applied to transfers to direct descendants and other lineal errors, such as grandchildren. Pennsylvania imposes a 12 percent inheritance tax on transfers to siblings and a 15 percent inheritance tax on transfers to any other heir except charitable organizations.
Strategies for Minimizing Estate Taxes in Pennsylvania
Several essential strategies can minimize your estate tax liability. One strategy is to create joint accounts with the beneficiaries before you pass away. When you pass away, the money or assets in the joint account will transfer automatically by law to your beneficiary. The assets will transfer outside of the probate process and generally are not included as part of your estate for federal estate taxes.
Purchase Comprehensive Life Insurance Policies
Did you know that the benefit paid out on a life insurance policy isn’t subjected to estate taxes or inheritance taxes? Consider converting some of your non-life insurance assets into life insurance policies to reduce your overall tax amount. Also, consider purchasing long-term care insurance, usually with a life insurance rider. Doing so can help you avoid using the long-term care policy and allow you to pass it on to your children tax-free.
Minimize or Avoid Estate Taxes Through Trusts
An attorney can help you decide whether using a trust could be an effective way to avoid paying estate taxes. Revocable living trusts are popular for many reasons, but they cannot help you avoid paying state taxes. Creating an irrevocable trust can help you limit the value of your estate to ensure it is under the exemption amount for federal estate taxes. Once you transfer an asset into an irrevocable trust, the asset will be owned by the trust. Doing so can help you decrease your tax liability. The downside to creating an irrevocable trust is losing direct control of your assets. However, you can name yourself a beneficiary, allowing you to receive and use the assets the trust owns according to the trust agreement.
Discuss Your Estate Plan with a Skilled Attorney in Pittsburgh
You’ve worked hard to acquire the assets included in your estate. The attorneys at Jones, Gregg, Creehan & Gerace LLP can help you ensure your loved ones receive as much of your hard-earned assets as possible after your passing. We will work with you to protect your assets and preserve your loved ones’ financial safety and integrity. Contact Jones, Gregg, Creehan & Gerace LLP to schedule an initial consultation.