From our “Ask a Question” Mailbag: Avoiding the Pennsylvania Inheritance Tax Through Lifetime Transfers

Most Recently Updated July 9, 2018.

“My father wants to transfer a rental property he owns in Montgomery County into my name. If he does, will this gift avoid Pennsylvania Inheritance Tax?”

Avoiding the Pennsylvania Inheritance Tax Through Lifetime Transfers

As a Montgomery County resident, at your father’s death, all assets he leaves you at death (except life insurance) will be subject to the Pennsylvania Inheritance Tax at the 4.5% children’s rate. That includes all gifts made within one year of the date of his death. So, if he transfers the rental property into your name and lives for at least one more year, at his death you will avoid Pennsylvania Inheritance Tax payment.

Depending on the facts, this might not be the best idea.

Transfer Basis

If your father transfers the real estate into your name, you will receive a Transfer Basis. This means your basis for tax purposes will be whatever his basis was on the day of transfer. If he has owned this property for some time, he may have depreciated the rental property down to zero basis. This means that, if he or you sell the property, the entire sale will be subject to Capital Gains Taxes.

Stepped Up Basis

If instead, your father keeps the property until his death and gives it to you in his will, you will receive a Stepped Up Basis. This means your tax basis will be equal to the fair market value of the property at the date of your father’s death. All Capital Gains up to that date are erased. You could sell the property at the date-of-death value and pay no Capital Gains Taxes.

You can see that depending on your father’s current basis and the value of the property, paying Capital Gains Taxes could far exceed the Pennsylvania Inheritance Tax.

More Options

Further options to consider are the chances that your father may create future debts. If he does, the property might have to be sold to pay those debts. In that case, paying a higher Capital Gains Tax is better than receiving no inheritance at all.

You father may also want to consider transferring the rental property into a protective irrevocable trust for you during his lifetime or through his Will at death. Either way, the trust could be designed to shelter the property from your future legal problems, such as divorce, bankruptcy, and creditors. A protective trust might also help your father feel more comfortable that the property will pass to his grandchildren at your death.

There are many options available to your father and many tax considerations. It would be a good idea for him to get the advice of an experienced Montgomery Estate Planning attorney before he takes any action.

More Planning Questions?

Transferring property is only a piece of the Estate Planning process. By all means, if you want to learn more, please read my more detailed article, Estate Planning Everything You Need to Know.

In Conclusion: Avoiding the Pennsylvania Inheritance Tax Through Lifetime Transfers

I hope that this article was helpful in explaining options for planning ahead. Further, I included links to even more detailed information on my website so you can learn more. Therefore, please contact me and let me know how I did. Certainly, your comments and questions are welcome!

Let our Estate Planning lawyers help walk you through what can be a confusing process. To begin with, call to speak to one of our experienced estate planning lawyers.  By all means, our lawyers are ready to answer your questions. In fact, feel free to contact our office for a free consultation. Ultimately our goal is to make the process as painless as possible!

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Tags: Estate Planning, Estate Planning Attorney, Estate Planning Lawyer, Inheritance Tax, Montgomery County, Pennsylvania