There can be some confusion about the taxes that can come into play when assets are being transferred after someone’s death. You may have heard of the existence of an estate tax, and you may assume that an inheritance tax and an estate tax are the same thing.
In reality, this is not the case. These are two different forms of taxation.
Estate Tax
An estate tax would be applied on the entire taxable portion of the estate in question. We have a federal estate tax that is applicable in all 50 states, and there are a number of states in the union that impose state-level estate taxes.
We practice in the state of Pennsylvania, and there is no state-level estate tax in our state.
The federal estate tax exclusion is $5.43 million in 2015. It would be applied to asset transfers that exceed this amount. The value of the estate itself would be reduced before it is transferred to the heirs; each individual heir would not be required to pay a tax in a direct manner.
Inheritance Tax
Things are different with an inheritance tax. This type of tax is not levied on the entire nonexempt portion of the estate. It is in fact levied on transfers to each individual inheritor who is not exempt.
Fortunately, there is no federal inheritance tax. However, there are six states in the union that impose state-level inheritance taxes. As luck would have it, Pennsylvania is one of them. The other five states are Nebraska, Iowa, New Jersey, Maryland, and Kentucky.
The existence of the inheritance tax in Pennsylvania is the bad news, but the good news is that your spouse and your minor children would be entirely exempt from the tax. Transfers to charitable organizations would also be exempt from the Pennsylvania inheritance tax.
Transfers to others are subject to the inheritance tax, but Class A beneficiaries receive a $3500 exemption. These beneficiaries would be your descendents, your parents, and your grandparents.
Tax Efficiency
With the proper planning, you can position your assets with tax efficiency in mind. There are various different steps that can be taken to mitigate your exposure so that your family can receive a maximum store of resources after you pass away.
Personalized attention is the key to a well constructed estate plan. Each situation is different, and you can construct a custom crafted estate plan that ideally suits your needs if you work with a licensed professional.
Our firm can help if you would like to take action. We offer free consultations, and we would be glad to become apprised of your situation, answer your questions, and make the appropriate recommendations.
If you would like to schedule an appointment, send us a message through our contact page: Bucks County PA Estate Planning Attorneys.
Marianne Flood, Estate Planning Attorney
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