This article is intended to provide the reader with a simple explanation of the Pennsylvania Inheritance Tax. There are many details and complexities ignored here to keep this explanation short and simple. There are many differences between Pennsylvania Inheritance Tax and Federal Estate Tax and only a few of those differences are described below. See the warning below.
Topics Discussed Below
- Measure of Taxable Transfer
- Tax Rate
- Taxable Transfers at Death
- Gifts Subject to Tax
- Joint Property
- Tax Return and Due Date
The Pennsylvania Inheritance Tax is a tax imposed on the privilege of inheriting property when someone (the "decedent") dies. All residents of Pennsylvania are subject to the Pennsylvania Inheritance Tax when they die. In addition, non- residents who own real estate or tangible personal property in Pennsylvania are also subject to this tax.
Measure of Taxable Transfer - Although Pennsylvania Inheritance Tax is not a tax on the property that passes to the heirs or beneficiaries, the tax is measured by the fair market value of that property as of the date of the decedent's death. For example, if a man dies and leaves property worth ten thousand dollars to his daughter, the tax is based on a value of ten thousand dollars. Unlike Federal Estate Tax, there is no threshold below which the tax is not imposed. Thus, someone with an estate of $100,000 generally will not be subject to Federal Estate Tax but will be subject to Pennsylvania Inheritance Tax.
Tax Rate - The rate of Pennsylvania Inheritance Tax is based upon the relationship between the decedent and the heir or beneficiary. Unlike Federal Estate Tax, the rate of Pennsylvania Inheritance Tax has nothing to do with the size of the estate. Tax on the transfer of property from a decedent to his or her surviving spouse is taxed at a zero rate; tax on a transfer to a charity is tax-exempt; generally all other transfers are taxable. Tax on the transfer from a decedent to his or her lineal descendants or ancestors - children, grandchildren, stepchildren, parents, grandparents, etc. - is taxed at the rate of 4.5 percent; tax on the transfer from a decedent to his or her siblings - brothers and sisters - is taxed at the rate of 12 percent; tax on the transfer from a decedent to anyone else - relative or not - is taxed at the rate of 15 percent [See the Table at this website for a more detailed description]. The same rates apply to a low value transfer to a child and a high value transfer to a child. For example, a transfer to a child upon her father's death of a bank account with $1,000 is taxed at 4.5 percent - that is $45. A transfer of an apartment building worth $2,500,000 from a mother to her child is also taxed at 4.5 percent - $112,500. But had the same apartment building been transferred to the decedent's sister, it would have been taxed at 12 percent - $300,000. There are special rules for transfers to trusts, based upon the decedent's relationship to the beneficiaries of the trust.
Taxable Transfers at Death - Most - but not all - transfers upon death are subject to Pennsylvania Inheritance Tax. Regarding Pennsylvania residents, the tax is imposed with respect to all the real estate they own in Pennsylvania, all the tangible personal property they own in Pennsylvania and all intangible property they own anywhere - whether or not in Pennsylvania (Items of tangible personal property are things that can be touched like furniture, jewelry, works of art, etc. but not real estate; intangible property includes such things as bank accounts, stocks, bonds, etc.). Regarding non-residents, Pennsylvania Inheritance Tax is imposed only on real estate in Pennsylvania and tangible personal property situate in Pennsylvania as of the date of death. Pennsylvania Inheritance Tax is never imposed on death benefits under a life insurance policy. Generally, the tax is imposed on retirement accounts (IRAs, 401K's, etc.) only if the decedent had the right to access the funds during his or her lifetime without any substantial penalty. Practically, this means that if the decedent were age 59 years and six months, or older, when he or she died, the retirement account is probably subject to the tax but if the decedent was under that age, the retirement account is probably not subject to the tax. Certain assets are exempt from tax. The law was changed in 2013 to exempt transfers at death of certain qualified family owned business interests (see separate article).
Gifts Subject to Tax - If the decedent gave away property during his or her life and retained no control over the property and survived at least a year after the gift, the property is not subject to Pennsylvania Inheritance Tax. There is no Pennsylvania tax on gifts as contrasted with the Federal Gift Tax. If the decedent retained some form of control over the property after the gift was made - for example - the right to take the gift back or the right to income from the gift or the use of the gift for his or her life, the gifted property will be subject to Pennsylvania Inheritance Tax, no matter how long before death the gift was made. If the decedent did not retain any control over the gift but does not survive for at least a year after the gift is made, only the first $3,000 of the gift escapes tax and the rest of the gift is subject to Pennsylvania Inheritance Tax. The tax treatment of gifts and gifted property under Federal tax law is very different.
Joint Property - If a decedent owned property jointly with another person or persons as joint tenants with rights of survivorship ("JTWROS"), the tax is based on the decedents pro rata ownership before death. In other words, if there were two joint owners - the decedent, and one other person - the decedent's share subject to tax on the transfer is one-half; if the decedent and two other persons owned the property, the decedent's share subject to tax is one-third, etc. If a decedent owned property jointly with his or her spouse alone, the transfer is not taxed. The tax treatment of jointly owned property under Federal tax law is also very different.
Deductions - Before the tax is imposed, there are a number of deductions that may be taken. These include (a) the funeral and other related charges, (b) the costs of administering the estate such as probate fees, legal and accounting fees, the executor's or administrator's commissions, appraisal fees, etc. and (c) valid debts of the decedent as of the date of death.
Tax Return and Due Date - Pennsylvania Inheritance Tax is reported on a Pennsylvania Inheritance Tax Return. There are separate forms for residents of Pennsylvania and people subject to the tax who are not Pennsylvania residents. The tax is payable upon death but need not be paid for nine months. The Tax Return is due in nine months, and the tax is considered delinquent if not paid within nine months of the date of death. A discount of five percent is given if the tax is paid within three months of the date of death. Generally, the Tax Return is filed with, and the tax is paid to the local Register of Wills as the agent for the Pennsylvania Department of Revenue.
See other Articles on this website relating to Inheritance and Estate Tax, Estate Administration, Estate Planning, Trusts and other legal matters.
Warning: This article is for informational purposes only and does not constitute legal advice. There are many details about Pennsylvania Inheritance Tax that have been omitted from this article, and one or more of those omitted details might apply to your situation. Your particular circumstances will control the applicability of Pennsylvania Inheritance Tax. You should consult an attorney to determine if and how the Pennsylvania Inheritance applies to your particular situation before acting on any information contained in this article.
Copyright 2014 Marc H. Jaffe