Navigating your way through state and federal tax laws can be a daunting task. There are many laws to understand and a mistake could hold devastating financial consequences. Whether simply filing an income tax return or dividing up an estate for various beneficiaries, you should consider consulting with an experienced tax attorney.
Herr Potts and Potts has valued experience in tax matters that helps when drafting estate plans. We not only have a healthy 1040 income tax practice but also file 1041 income tax returns for trusts and estates. In addition, when handling an estate, we also do Form Rev-1500 Pennsylvania Inheritance Tax Return and Federal Form 706 Federal Estate Tax Return in house. To consult with an experienced southeast Pennsylvania attorney, contact us at (610) 254-0114 or contact us online.
Understanding Pennsylvania Inheritance Tax
Knowing the tax implications associated with planning your estate is essential. Pennsylvania’s inheritance tax is levied against specific beneficiaries of an estate. Specifically, beneficiaries who were not closely related to the deceased individual (decedent). The more estranged the beneficiary is, the higher the tax rate. This is different from an estate tax which is charged against an entire estate no matter who the beneficiaries of the estate are.
Pennsylvania’s inheritance tax is triggered when:
- Property is left by a Pennsylvania resident
- Property is left by a nonresident who owned real estate or tangible personal property in Pennsylvania
Beneficiaries Affected by Pennsylvania’s Inheritance Tax
In Pennsylvania, every beneficiary of an estate may receive, or may not receive, an exemption from the inheritance tax related to the degree of their relationship with the decedent. There are various categories of exemptions and non-exemptions applicable to beneficiaries, such as:
- Surviving spouses – Transfers that are made to a surviving spouse are completely exempt from Pennsylvania’s inheritance tax.
- Minor children – If a child who is 21 years of age or younger makes a transfer to a parent, step-parent, or adoptive parent the transfer is completely exempt from the inheritance tax.
- Class A exemption – The following beneficiaries receive a $3,500 family exemption from the inheritance tax: parents, grandparents, natural descendants, adopted descendants, step-descendants, and an un-remarried spouse of a child.
- Class A1 non-exemption – Class A1 beneficiaries are not entitled to exemptions from the inheritance tax. This category includes: siblings, half-siblings, and beneficiaries who have one parent in common with the decedent, either by blood or by adoption.
- Charitable beneficiaries – Transfers made to the following organizations are completely exempt from the inheritance tax: government entities, certain exempt institutions, certain exempt charitable organizations.
- Class B non-exemption – This class includes all other beneficiaries not listed above. Class B beneficiaries are not entitled to any exemptions from the inheritance tax.
The tax rates for all classes which do not qualify for exemption from the inheritance tax are as follows:
- Beneficiaries with a Class A exemption must bear a 4.5% inheritance tax
- Class A1 beneficiaries have a 12% inheritance tax rate
- Class B beneficiaries have the highest inheritance tax rate at 15%
Expenses Deducted Before Beneficiaries Can Receive Their Inheritance
During the administration of a decedent’s estate there are certain expenses which must be paid prior to transferring inheritances to beneficiaries. These expenses include:
- Funeral expenses for the decedent
- Unpaid state and federal taxes
- Personal representative and attorney fees (must be paid in proportion to the gross size of the estate)
- Any unpaid debts of the decedent including mortgages
- Filing of any necessary tax returns
Only after these tasks are completed and a final accounting is approved by the court can beneficiaries receive their inheritance. The administration of an estate could take well over a year depending on the size of the estate. Beneficiaries should not expect to receive their share of the estate immediately. Payments received from a life insurance policy are exempt from Pennsylvania’s inheritance tax.
Additionally, there are a number of taxable real and personal properties which are not exempt from Pennsylvania’s inheritance tax. Some of these properties include:
- Stocks and Bonds
- Bank accounts
- Some forms of jointly owned property
Our firm is experienced in not only Pennsylvania inheritance taxes, but many other areas of tax law. These are some of the areas of tax law our lawyers will represent clients in:
- Filing a federal gift tax for clients utilizing each client’s federal gift tax exemption.
- Filing estate income tax return Forms 1041 on a fiscal year basis to pass along bigger income tax deductions to the beneficiaries on their K-1s.
- Preparing the Pennsylvania Inheritance Tax Return for clients where a Future Interest Compromised may need to be filed.
- Filing 1041 tax returns for a Special Needs Trust.
- Working with clients to determine that Pennsylvania’s inheritance tax should not be deferred so that future inheritance taxes could be saved.
If you are dealing with any of the tax issues above or another tax matter altogether, you should speak with an experienced attorney.
Speak with One of Our Tax Attorneys
If you wish to plan your estate but are concerned about taxes adversely affecting your chosen beneficiaries, you should speak with an experienced lawyer today. At Herr Potts and Potts our lawyers are dedicated to guiding you through a complicated tax system to reach your estate planning goals. Our southeast Pennsylvania lawyers have served the community for almost a century and would be diligent in serving you. To schedule your confidential consultation, contact us at (610) 254-0114.
Recent Tax Representation Matters:
- Filed a Federal Gift Tax for clients utilizing each client’s federal gift tax exemption.
- Filed an estate income tax return Form 1041 on a fiscal year basis to pass along bigger income tax deductions to the beneficiaries on their K-1s.
- Prepared the Pennsylvania Inheritance Tax Return for a client where a Future Interest Compromised needed to be filed.
- Filed a 1041 tax return for a Special Needs Trust.
- Worked with Client to determine that Pennsylvania Inheritance Tax should not be deferred so that future inheritance taxes could be saved.