The Commonwealth imposes an inheritance tax. Amounts passing to a
surviving spouse are exempt from this tax, regardless of the value of
the estate. Assets passing to children, grandchildren, or parents of the
decedent are taxable at a rate of four and one half percent (4.5%) of
the fair market value as of the date of death. Assets passing to the
decedent's brothers and sisters are taxable at twelve percent (12%),
while nieces, nephews and non-relatives are taxable at a fifteen percent
(15%) rate. Amounts left to charity are exempt from inheritance tax.
Pennsylvania law allows deductions from the amount subject to
inheritance tax for items such as funeral expenses, the cost of
administering the estate, and debts owed by the decedent.
The Internal Revenue Code also imposes a federal estate tax upon
certain estates. For persons dying in 2007 or 2008, only estates in
excess of $2,000,000 are subject to federal estate tax. The exemption
will be increased to $3,500,000 in 2009 for persons dying that year.
In addition to the exemption noted above, amounts passing to a
surviving spouse are completely free from federal estate tax. This
provision in the law is known as the"marital deduction". It covers
assets left directly to a spouse as well as assets left in certain
trusts for the benefit of a spouse. Therefore, for most married couples
with estates in excess of $2,000,000, there would not be any federal
estate tax payable until the death of the second to die. However, it is
important that a husband and wife with significant assets arrange their
estate plan while both of them are alive in order to get the maximum
benefit from the tax exemptions.
Basic estate planning strategies for persons with substantial assets
would involve techniques such as lifetime gifts and splitting joint
ownership of assets in order to take maximum advantage of the
exemptions. With proper planning, a married couple could pass $4,000,000
free of federal estate tax to the next generation upon their deaths in
2007 and 2008. It also may be advisable to have large life insurance
policies owned by an irrevocable life insurance trust, which can be
written in such a manner that the proceeds are not subject to federal
estate tax in either estate. A more aggressive approach to tax avoidance
would utilize techniques such as Qualified Personal Residence Trusts and
Grantor Retained Annuity Trusts, both of which involve transferring
assets to trusts for the benefit of one's heirs (while retaining some
benefit from the trust during the lifetime). Those techniques provide
certain tax advantages.
