Only two things are certain in life, death and taxes, but depending on your situation your estate may or may not need to pay inheritance or estate taxes. These types of taxes and their impact on wealth need to be looked at when a family or individual does estate and financial planning. These taxes can be a very big issue to some and not an issue to others, depending on their finances, wealth and how they’re structured.
This is imposed by the state as a share of the value of a decedent’s estate when it’s transferred to others by will, intestacy (there is no will) and operation of law. The rate varies on the relationship of the person to the deceased:
- 0% – To a surviving spouse or to a parent of a child 21 or younger
- 4.5% – To direct descendants and lineal heirs
- 12% – To siblings
- 15% – To other heirs, except charitable organizations, exempt institutions and government entities exempt from tax
Inheritance tax doesn’t apply to property owned jointly by spouses. Certain agricultural land and other related property are exempt from Pennsylvania inheritance tax if the property is transferred to eligible recipients.
There are ways to organize a person’s or couple’s wealth to avoid inheritance tax if it appears it may apply in the future. Depending on the goals of the parties and the tolerance of potential costs of different approaches, steps could be taken to possibly lessen or eliminate an expected inheritance tax.
Typically life insurance is not subject to any tax, but again, your particular circumstances and the way a will was written and beneficiaries designated should be carefully reviewed.
For most estates this federal tax doesn’t apply because they have to be of relatively high value. The estate tax is on your right to transfer property at your death.
There needs to be an accounting of all that’s owned at the date of death. How much property in the estate is worth is determined by its fair market value. The total for all this property is the “Gross Estate” which can cover cash, investments, real property, insurance, trusts, annuities, business ownership interests and other assets.
There can be deductions to the Gross Estate (and in some situations reductions in value) to come up with the “Taxable Estate.”
Deductions can include mortgages, debts, estate administration costs and property passing to surviving spouses or qualified charities. After this net is calculated the value of lifetime taxable gifts (beginning with those made in 1977) is added and the tax is computed but it’s then reduced by the available unified credit.
Relatively simple estates that most people leave don’t require the filing of a federal estate tax return. It would be required for estates with combined gross assets and prior taxable gifts exceeding $5.49 million for this year. For those whose estates may approach this figure, financial and estate planning, properly executed, may be able to bring the value below the applicable amount without running afoul of applicable tax laws, rules and regulations.
Where do you go from here?
JF Koelle & Associates offers financial, retirement and tax planning as ways to help our clients reach their goals and lessen the chance of future financial hardships. If you have any questions or want some help with inheritance or estate taxes, give us a call at (215) 659-5000.