The Voluntary Nature Of Death Taxes in Pennsylvania

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 in which 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 percent, 12 percent or 15 percent. Changes in the Pennsylvania Inheritance Tax laws have created 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 that can eliminate that tax altogether. On a $500,000 life insurance policy, this could represent a tax saving of up to $75,000. A recent change in the law provides a tax exemption for an interest in a family owned business but many pre-2013 wills are written in a way that excludes that exemption.  The tax-saving possibilities for a family-owned business are huge.  Proper planning can avoid these "voluntary" payments to the Pennsylvania Department of Revenue [See the separate article at this website about Pennsylvania Inheritance Tax].

Federal Estate Tax

Federal Estate Tax is currently imposed on estates larger than $5,340,000. 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 40 percent. Although there is no tax on the portion of an estate passing to a surviving spouse, where there is a very large estate, 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 relatively new provision in the law (sometimes referred to as "portability") that may avoid some of the negative consequences of failure to plan for a married couple. Nevertheless, properly drafted wills or trusts can often reduce potential taxes and pass more to the family.

Copyright 2014 Marc H. Jaffe

See the list of articles at this web site relating to estate and inheritance tax.