Benjamin Franklin said, “In this world, nothing is certain except death and taxes.” While we can’t avoid death, maybe we can avoid some taxes.
For large estates, the federal government charges an Estate Tax, which is levied on the total value of the deceased person’s estate and is paid out of the estate before any distributions are made to beneficiaries. The threshold is quite high, so most people will not see this tax. In 2017, the net value of the estate had to exceed $5.49 Million. In 2018 the threshold has more than doubled to $11.18 Million.
A handful of states, however, including Pennsylvania and New Jersey, also levy an Inheritance Tax, which is paid by the beneficiaries themselves. In New Jersey, it is on a sliding scale, based on the amount of inheritance. In Pennsylvania, however, with the exception of the surviving spouse, heirs cannot escape this tax. Children (including stepchildren and adopted children) pay 4.5%. Siblings pay 12%. All others pay 15%. This tax is payable within 9 months of the decedent’s death. If paid within 3 months, a 5% discount is given on taxes due.
While the tax cannot be avoided, there are some ways to decrease the taxes you will pay, whether to the federal government or to the state.
Make a Will
This may seem obvious, but without a will, additional fees and taxes may be levied. Be absolutely clear about who your heirs are in your will.
Give It Away
Each taxpayer may give $15,000 per year to anyone, tax free. A married couple, therefore, could give $30,000 to each child, grandchild, friend, or family member they wish. Any gifts distributed prior to 3 years before death, per the federal government, and 1 year before death, per the state, will not be considered in the calculation of the estate. By distributing your estate now, you will prevent your heirs from paying taxes on it later.
Take out Life Insurance
Life insurance on the life of the deceased person is exempt from PA taxes, as are the proceeds of the life insurance policy. You can list individual members of your family or your estate as the beneficiary of your policy.
Buy Out-of-State Property
If you have a beach house in Florida, your heirs can inherit that property without paying a PA inheritance tax. However, if your property is in New Jersey or Maryland, which also have inheritance taxes, your heirs may have to pay, so check the state’s tax codes.
Other Possible Ways to Decrease Taxes
If the value of your estate is above the federal government’s Estate Tax threshold, there are many other ways to protect your assets. But all Pennsylvanians should be preparing their estates to decrease the taxes their heirs will pay. We invite you to come in and discuss how you can preserve as much money for your family as possible.