“Information Bits from the Boss: Samantha provides brief answers to clients frequently asked questions”
What if I want to avoid PA inheritance tax?
PA Inheritance tax is the tax that comes into play when you pass away, and assets pass to certain individuals upon your death. In PA there are a couple exceptions: Life insurance along with family farms and family businesses that meet certain qualifications can be exempt from inheritance tax. Every other asset is going to be subject to Pennsylvania inheritance tax. The rate of tax is based on your relationship to the person that passed away. Direct lineal descendants pay 4.5%, siblings pay 12%, and everyone else, including nieces and nephews, pay 15%.
Clients sometimes ask, “How do I avoid inheritance tax?”
One way to avoid to PA inheritance tax is to actually transfer that particular asset to someone else as long as you survive that transfer by one year. A client must be very careful when making transfers to avoid PA inheritance tax.
Let me give you an example when that might be problematic. If a parent transfers real estate to a child during their lives and survives the transfer by one year, there is no Pennsylvania inheritance tax, however, because the real estate transferred to the child during the parents’ lives, the child receives the parents’ basis in the real estate. If the asset is real estate or stock that has a low basis, the child receives the low basis from parents.
Example: If real estate was purchased for $20,000, but it’s now worth $100,000, and parents gift it to a child, the child receives the $20,000 basis from parents. If child sells the property at its fair market value of $100,000, then there is capital gain on the difference between $100,000 and $20,000.
If a child receives the real estate at the death of the second spouse, the child would pay 4.5% tax on the $100,00 fair market value ($4,500), but would receive a stepped-up basis in the real estate equal to the fair market value on the date of death ($100,000). If child sells the real estate, the capital gain tax would be on the difference between the fair market value of $100,000 and the stepped-up value of $100,000.
Sometimes it’s better to pay the inheritance tax to avoid the capital gains tax.
If you would like additional information please contact our office at (717) 655-2676. We do offer free initial consultations.