How to Reduce Estate Taxes in PA
For many, a crucial goal of estate planning is ensuring that their beneficiaries are cared for upon their death. Unfortunately, many assets passed from the deceased to the beneficiary are subject to various taxes, lowering the amount beneficiaries receive, especially with larger estates. However, an experienced Estate Planning Attorney can help minimize the impact of taxes on your beneficiaries.
Potential Taxes Imposed on Inheritances
Many factors determine the taxes imposed on an inheritance, such as the state the deceased lived in and the estate's value, but here are four taxes an inherited estate may be subject to.
Estate taxes are taken out of the deceased's assets before they are distributed to their beneficiaries. At present, the federal estate tax only applies to estates worth more than $12.92 million.
An inheritance tax is imposed in Pennsylvania. The Pennsylvania Department of Revenue explains, "Inheritance tax is imposed as a percentage of the value of a decedent's estate transferred to beneficiaries by will, heirs by intestacy, and transferees by operation of law. The tax rate varies depending on the relationship of the heir to the decedent."
These are the inheritance tax rates in PA:
- 0% on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
- 4.5% on transfers to direct descendants and lineal heirs;
- 12% on transfers to siblings; and
- 15% on transfers to other heirs, except charitable organizations, exempt institutions, and government entities exempt from tax.
Capital Gains Tax
When a beneficiary sells an inherited asset, they may be subject to a capital gains tax, a federal tax imposed on the sale of assets such as houses or stocks. The rate of taxation can be zero, 15%, or 20%, depending on your taxable income for the year you sell the asset. PA also imposes a capital gains tax. Both federal and state laws also have the "step-up in basis" tax rule, which may reduce the tax implications.
Income Tax
Typically, an inheritance is not subject to income taxes. The exception is assets in pre-tax (or tax-deferred) accounts, such as traditional IRAs and 401(k)s. You can roll inherited pre-tax accounts into a pre-tax account, delaying your tax obligation until you withdraw the money.
Strategies to Reduce Estate Taxes
Every estate and every situation is unique, so it's best to consult with one of the experienced Estate Planning Attorneys at Bingaman Hess. Here are a few strategies they may recommend.
Create an Irrevocable Living Trust
A living trust is a legal document that allows you to transfer ownership of your assets into a trust account and assign management to a trustee (an individual or entity) on behalf of your beneficiaries. Living trusts can be revocable or irrevocable. An irrevocable living trust cannot be changed (unless all beneficiaries agree) or revoked, giving you significantly less control. However, an irrevocable living trust has several advantages, such as minimizing estate taxes.
Set up Joint Accounts
If you set up a joint account with someone else, perhaps an adult child, they will be taxed on half of the amount in the account rather than the total amount as long as it was set up at least one year before your death.
Gift Your Assets to Your Children
You can give your children monetary gifts while you're still alive to help avoid paying inheritance tax. Currently, you can give your children an annual gift of $18,000 without reporting that gift. PA does not impose a gift tax.
Buy Life Insurance
You can convert some of your non-life insurance assets into life insurance policies because death benefits from a life insurance policy are not subject to the PA inheritance tax.
Convert Traditional IRAs to Roth IRAs
It will cost you to convert a traditional IRA to a Roth IRA; however, the income tax will be paid before you die, reducing your taxable estate.
Purchase Real Estate Outside of Pennsylvania
Pennsylvania only taxes assets located in Pennsylvania, so if you purchase a beach house or other real estate outside of PA, it won't be subject to PA's estate tax. However, it may be subject to taxes imposed in the state where the property is located.
Consider Estate Planning Before It's Too Late
Continuing to ignore or put off the inevitable will only cause undue stress and expenses for your family when (not if) you do pass away. If you don't create your estate plan today, tomorrow may be too late. Do it now while you can make those important decisions to protect your family and yourself.
Get started today by calling us at 610.374.8377 or find us online.
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