Pennsylvania estate taxes: Tips to reduce financial obligations

Putting together an estate plan allows property owners a greater level of control over their estates. Not only does it provide an opportunity to determine where property is transferred, but it also allows the owner to review what type of taxes and other financial obligations may apply.

In some situations, legal tools are available that can help a property owner reduce these obligations. Before determining which tools may apply, it is helpful to take steps to understand what type of taxes will impact the estate.

Step 1: Know what you owe

As discussed in a recent piece by US News, the first step involves reviewing the estate and determining what tax will apply. Estate taxes are defined by the Internal Revenue Service (IRS) as the tax on the transfer of an estate. This can apply at two levels:

  • Federal estate tax. Estates are taxed on the federal level. The amount changes depending on the year in question. In 2017, estates are subject to federal estate taxes if the value exceeds $5,490,000.
  • State estate tax. In Pennsylvania, an inheritance tax is applied as a percentage of the transfer and varies depending on the relationship of the person inheriting the property to the property owner.

Since the state tax changes based on the relationship of the beneficiary, Pennsylvania’s tax is a bit more complicated than the federal tax. Transfers to a surviving spouse or parent, if the child is 21 or younger, are not taxed at all. However, transfers to direct descendants, like children and grandchildren, are taxed at 4.5 percent. Transfers to siblings at 12 percent and transfers to other beneficiaries at 15 percent.

It is important to note that transfers to most charitable organizations are not taxed.

This inheritance tax must be paid within nine months of the date of death. However, a five percent discount can apply if the tax is paid within three months.

Step 2: Consider gifting

Gifting is the process of giving gifts to children, grandchildren or other loved ones. This can be a valuable way to reduce the taxable portion of the estate, especially important for those who have an estate that would be subject to the taxes outlined above.

Those who move forward with gifting have to follow proper protocol to avoid unintended tax consequences. Everyone is generally allowed to gift a certain amount before a gifting tax applies. This amount is typically set at $14,000 annually per individual. Thus, a couple could potentially gift up to $28,000 every year before this tax would kick in.

If, for example, a couple wishes to pass assets one to their children or grandchildren this could provide an opportunity to do so and avoid the 4.5 percent inheritance tax.

Step 3: Make use of trusts

A trust is a legal document that results in the transfer of property from the owner to a trustee. The trustee is tasked with holding the property for the benefit of the beneficiaries. The exact purpose of the trust will depend on the language used in the documents put together to create the trust.

If structured wisely, trusts can further reduce estate tax obligations.

Step 4: Seek legal counsel

These proactive steps can help reduce an estate’s financial obligations, but the can often be complicated. Determining the right amount to gift without triggering tax obligations and setting up a trust with the needed language are steps that are often best taken with the guidance of experienced legal counsel. An estate planning attorney can help with this, better ensuring your wishes are met.