The Pennsylvania inheritance tax is a tax on the net value of property transfers from a decedent’s estate to the beneficiaries. It is different from the federal and Pennsylvania estate taxes, which are based on the value of the estate and are paid from the assets of the estate. Normally the inheritance tax return is filed, and the inheritance taxes are paid by the executor or administrator of the estate.
Exemptions and Tax Rates
The Pennsylvania state inheritance tax is calculated as a percentage of the net value of the assets transferred, with different rates applying based on the relationship of the heir to the decedent.
According to the Pennsylvania Department of Revenue, property owned jointly between husband and wife is exempt from the inheritance tax, and property inherited from a spouse, or property inherited by a parent of a child 21 years of age or younger is taxed at a rate of 0 percent.
Lineal heirs, including grandparents, parents, children (natural, adopted and step-children), grandchildren, and great grandchildren, are subject to a 4.5% inheritance tax. There is a family exemption of $3,500 that can be claimed by the surviving spouse, or a child or parent of the decedent who is a member of the same household as the decedent.
Brothers and sisters, and half brothers and sisters are taxed at a rate of 12%. Other heirs, including aunts and uncles, nieces and nephews, cousins, and friends, called collateral heirs, are taxed at 15%. Property transfers to charitable organizations, exempt institutions, and government entities are exempt from the inheritance tax.
Property Subject to the Pennsylvania Inheritance Tax
When the decedent was a resident of Pennsylvania, all real property and tangible personal property located in Pennsylvania is subject to the inheritance tax. Tangible personal property includes cash, automobiles, furniture, antiques, jewelry, etc. All intangible property of a Pennsylvania resident, such as bank accounts, stocks, bonds, and interests in a closely held business, is also taxable regardless of where it is located.
When the decedent was not a resident of Pennsylvania, only the real and tangible personal property located in Pennsylvania at the time of the decedent’s death is taxable. The inheritance tax does not apply on intangible personal property of a non-resident.
Property owned jointly between husband and wife is exempt from the inheritance tax, but property owned jointly between the decedent and some other person, with right of survivorship, is taxable to the extent of the decedent’s fractional interest in the joint property. This jointly owned property could include bank accounts, securities, real estate, etc. The fractional interest is calculated as the total value of the joint property divided by the number of joint owners at the time of the decedent’s death. If the decedent created the joint interest within a year of his or her death, the full value of the property would be taxable.
Life insurance proceeds are not subject to the Pennsylvania inheritance tax. IRA’s and 401(k) plans are not taxable when the decedent was under the age of 59 ½ at the time of death. But if the decedent was disabled at the time of death, IRA’s and 401(k)’s are taxable regardless of the decedent’s age. Robert Clofine, an elder law and estate planning attorney, points out that it’s safe to say that an IRA would be subject to inheritance tax if the decedent was over age 59 ½ at the time of death.
Unless registered in the names of husband and wife, safe deposit boxes are sealed upon the decedent’s death. A joint owner can enter the safe deposit box only to remove a will and/or burial instructions, but must do so in the presence of a bank employee. Nothing else can be removed from the safe deposit box until an inventory is done by an authorized person. It may be possible for a bank official to do this, so the bank should be contacted to arrange for an inventory.
Deductions
According to the Pennsylvania Department of Revenue, certain deductions can be claimed against the assets in the decedent’s estate. These are not deductions against the inheritance tax itself, but rather deductions in determining the net value of the estate.
These deductions include the decedent’s debts and liabilities; funeral and burial expenses including the cost of a burial lot, tombstone, or grave marker; expenses of administering the estate; executors’ and administrators’ commissions; and attorney fees.
A Pennsylvania inheritance tax return has to be filed if the will is probated. So if there are taxable assets in the estate – assets held individually or payable to the estate – an inheritance tax return has to be filed, even if everything will pass to the surviving spouse.
The person responsible for filing the return is the executor named in the will, or if there is no will, by the person approved as administrator by the Register of Wills after filing a petition. If no executor or administrator is named, then the beneficiaries of any taxable property transfers would be responsible for filing the return. The applicable forms are available for downloading on the Pennsylvania Department of Revenue website at www.revenue.state.pa.us/revenue.
Inheritance taxes must be paid within nine months of the date of the decedent’s death. There is a 5% discount if the taxes are paid within three months. Inheritance taxes are normally paid by the administrator or executor of the estate out of the assets of the estate, before property is distributed to the beneficiaries. If the inherited assets are controlled by a trust, the tax is paid out of the trust principal. If there are assets not controlled by the decedent’s will, for example, assets held jointly with the right of survivorship, it is the beneficiary’s responsibility to pay the inheritance tax on the asset received.
Sources:
CCH Financial Planning Toolkit – Pennsylvania Estate Taxes: www.finance.cch.com
Pennsylvania Department of Revenue – Inheritance Tax: www.revenue.state.pa.us
Robert Clofine’s Elder Law and Estate Planning Page – Pennsylvania Inheritance Tax: www.estateattorney.com
York County – Inheritance Tax Questions: www.york-county.org
Reference:
- CCH Financial Planning Toolkit – Pennsylvania Estate Taxes: www.finance.cch.com
