Some people suggest that estate and inheritance taxes are, at least in part, "voluntary" taxes - that is, in many instances the taxes could have been avoided or eliminated with proper tax planning. They are voluntary in the sense that people voluntarily choose not to plan and thus, by default, voluntarily choose to pay the taxes. Certainly, in many situations, these taxes cannot be completely avoided. However, there are many situations where the taxes could be significantly reduced or at least postponed through proper estate planning.
Pennsylvania Inheritance Tax
Pennsylvania Inheritance Tax is imposed on most estates of Pennsylvania residents other than the portion of an estate passing to a surviving spouse or a charity. The tax can be 4.5%, 12% or 15%. Changes in the Pennsylvania Inheritance Tax laws have created new opportunities for postponing these taxes and, under certain circumstances, eliminating significant taxes that otherwise would have to be paid. For example, life insurance payments are not subject to Pennsylvania Inheritance Tax upon the death of the insured spouse. The proceeds are often paid to the surviving spouse. Unfortunately, when the surviving spouse later dies, any cash remaining from the proceeds and any other investments purchased with those proceeds are taxable. Changes in the law now make it possible to include provisions in wills which can eliminate that tax altogether. On a $500,000 life insurance policy, this could represent a tax saving of up to $75,000. Proper planning can avoid this "voluntary" payment to the Pennsylvania Department of Revenue. [See the separate article at this web site about Pennsylvania Inheritance Tax.]
Federal Estate Tax
Federal Estate Tax is currently imposed on estates that are larger than $5,000,000. A person's estate includes the value of his or her home, the investments, the life insurance, usually the retirement plans and all the person's other assets. The tax rate above the threshold is currently 35%. Although there is no tax on the portion of an estate passing to a surviving spouse, a will that passes everything to the surviving spouse could cost a married couple many dollars in extra tax upon the death of the surviving spouse - taxes that could have been saved with proper planning. There is a temporary provision in the law (sometimes referred to as "portability") that may avoid some of the negative consequences of failure to plan. Nevertheless, properly drafted wills or trusts can often reduce potential taxes and pass more to the family.
Copyright 2011 Marc H. Jaffe and Fromhold Jaffe & Adams
See the list of articles at this web site relating to estate and inheritance tax.
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