The Pennsylvania Inheritance Tax has been the subject of much discussion and controversy over the years, at least among my clients and potential clients. Since there have been so many questions requiring response I thought it would be helpful to jot down some of the basic concepts and provide a brief guide to navigate the system. By the way, you should never rely merely on a summary to answer all the questions you might have. Here it is.
The Inheritance Tax follows the jurisdiction of the decedent, not the beneficiary. For Pennsylvania’s purposes, where the beneficiary of an estate resides is irrelevant. The important issue is where the decedent lived or, more specifically, where he or she considered “domicile” at the time of passing. If he/she claimed domicile in Pennsylvania both the real estate in Pennsylvania and the personal property are taxed for Pa. Inheritance Tax purposes. It is possible for a non-resident decedent’s estate to be taxed in Pennsylvania at least in part. This would be when the non-resident owns real estate in Pennsylvania.
Non-Probate Property is Still Taxed Unless Otherwise Excluded. Some taxpayers believe that property contained in a revocable living trust or property titled TOD (transfer on death) or POD (payable on death) is not taxed for Pa. Inheritance Tax purposes. This is not true. POD, TOD, and assets in a revocable living trust are all fully taxable for the Pennsylvania Inheritance Tax. Also, jointly titled assets are taxable at the proportionate share of the value (unless made joint within one year of the decedent’s death in which case they could be taxable in full).
Inheritance tax is different from income tax. Some beneficiaries worry that their inheritance will be subject to income tax. Their inheritance is subject to inheritance tax not income tax and very often the inheritance tax has been paid from the estate before the inheritance is received. Beneficiaries do not need to claim the inheritance on their income tax return.
Life insurance proceeds are not subject to inheritance tax. If, for instance, you are the beneficiary of a $100,000 basic life insurance policy the proceeds are not subject to Pa. Inheritance Tax (or income tax).
Out-Of-State Real Estate Is Not Taxed for Pa. Inheritance Tax purposes. Ironically, if the decedent owned a property in Stone Harbor, New Jersey or anywhere outside Pennsylvania, it is not taxed for Pa. Inheritance Tax purposes. On the other hand, if she owned a house in the Poconos, Pennsylvania, it is taxed for Pa. Inheritance Tax purposes.
Inheritance Tax Is Different From Estate Tax. Several states have an estate tax. This is different from an inheritance tax. Estate tax schedules typically begin for estates over a given amount – often over $1 million or more. Pennsylvania Inheritance Tax taxes from dollar one.
Pennsylvania Inheritance Tax Rates are based on relationship. Spouses are “taxed” at 0%. Children, grandchildren and parents of decedents are taxed at 4.5%. Siblings at 12% and all others at 15%. It makes a huge difference to get married.
Even though spouses are “taxed” at 0% rate, it is sometimes necessary to file an estate and submit a Pennsylvania Inheritance Tax return. It might seem ironic to tell the government you owe nothing when it should have seemed obvious from the mere fact you are claiming as spouse. In most cases we do not need to file an estate where the spouse is the sole beneficiary but occasionally it happens that we do. This occurs often when the decedent spouse owned an account or other property titled only in his or her name. If it were jointly titled it would have passed to the survivor automatically.
If you were co-owner of one or more accounts with a decedent you might receive a notice stating you owe a given amount. If so, this should be scrutinized to determine whether the information is correct. On the death of a joint owner of a bank account the bank might release information to the government regarding joint ownership. Often this information is incorrect. You might have already filed an Inheritance Tax Return and paid the tax previously or you might receive the notice at a 15% rate when you are a child of the decedent and should have been taxed at 4.5%. If you have questions get advice. Typically these are sent to joint owners of bank accounts but not brokerage or investment accounts.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.