Whenever I am helping my Pennsylvania clients with estate planning, or working with the executor of a Pennsylvania estate, I am given the opportunity to explain how the Pennsylvania Inheritance Tax works.
First, let’s break the tax down to its roots. The Pennsylvania Inheritance Tax is a Transfer Tax. It is different from the other taxes which you might pay regularly, like income tax, real estate tax or sales tax. A transfer tax is a tax levied when an asset is transferred from one owner to another. In this case, the transfer tax is taxing the transfer from the deceased to the beneficiary. You have paid transfer taxes in the past if you have ever bought a house or a vehicle with a title. To get the deed or title transferred you paid a fee to the state or county…a transfer tax.
The Pennsylvania Inheritance Tax is a transfer tax on the transfer of assets from the deceased Pennsylvanian (or someone with Pennsylvania real estate) to the new owner. It does not matter if the transfer is through a Will, by beneficiary designation, through a revocable living trust or payable on death account. The tax is triggered when one person dies who owned or controlled an asset and the asset then passed to someone else, typically called the beneficiary.
Form REV-1500: If the deceased was a Pennsylvania resident, the executor must file a PA Form Rev-1500 on or before nine months after the date of death. If the tax is paid within this nine-month period, there will be no interest due, but if the payment arrives after nine months the Pennsylvania Department of Revenue will charge interest and may levy a penalty.
Form Rev-1737: If the deceased was a non-Pennsylvania resident but owned real estate in Pennsylvania, the executor need file a PA Form Rev-1737 on or before nine months after the date of death. If the tax is paid within this nine-month period, there will be no interest due, but if the payment arrives after nine months the Pennsylvania Department of Revenue will charge interest and may levy a penalty.
Unlike most other states, the Pennsylvania Inheritance Tax rates are not the same for every beneficiary. The rate that you will pay depends upon your relationship to the person who died.
You can see why the LGBT community was concerned about marriage for tax purposes, as a gift to a spouse is taxed at 0% but a person with whom you have lived with for decades is taxed at 15%. This same tax problem faces same-sex couples that may have been living together and even raising children together. Getting married might have some costs, but it has tax savings also!
The Pennsylvania Inheritance Tax is not levied on all assets. Certain assets are exempt:
Family Farm Exemption: If the deceased’s farm falls into a specific category, the land can pass free of the Pennsylvania Inheritance Tax:
Life Insurance Exemption: Life insurance payments on the life of the deceased are exempt from the Pennsylvania Inheritance Tax. It does not matter if they pass to the estate or directly to the beneficiary.
The Pennsylvania Inheritance Tax is levied on the fair market value of the deceased’s assets, but the gross number can be reduced in two ways:
Deductions for Estate Expenses: The Pennsylvania Department of Revenue allows you to deduct expenses that were incurred while administrating the estate. Typical examples include the executor’s fees, the probate lawyer’s fees, filing fees at the Register of Wills and funeral expenses.
Deductions for Debts of the Descendant: The Pennsylvania Department of Revenue also allows deductions for the deceased’s debts that the executor subsequently paid. Typical examples are credit card bills, mortgages and income tax payments to the IRS or the Department of Revenue.
The Probate Attorney typically prepares the Inheritance Tax Return. An accountant can prepare the return but many accountants are unfamiliar with the return. A typical arrangement for an estate is that the accountant prepares the deceased’s final income tax returns while the probate lawyer files the inheritance and estate tax returns.
A good understanding of estate and inheritance tax returns by the Probate Lawyer will reduce the overall cost to the estate. An experienced probate team will be assembling and gathering the data necessary for the return at the same time assets are being gathered from the banks or property is being sold.
If you have any questions about Pennsylvania Inheritance Tax or any other estate planning topics, feel free to contact us to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate planning techniques clearly and concisely. We make it easy for you to understand estate planning so you can make the best decisions for yourself and your family.