To someone unfamiliar with the probate system, an estate tax and an inheritance tax might sound like the same thing. This not the case, however, and there are several differences you should understand whether you are creating your estate plan, guiding someone else’s estate through the probate process or have been named as a beneficiary in a loved one’s will.
For Pennsylvanians, the first important distinction is that the estate tax is imposed by the federal government, while the state levies the inheritance tax. Not every estate or heir is subject to these taxes, and with insight from a seasoned attorney, you might be able to reduce or eliminate exposure that reduces what your beneficiaries receive and can keep.
Under federal law, when the total value of an estate exceeds the statutory exemption amount, tax is applied to the overage. In most cases, no estate tax is paid however, because the current exemption amount is $13.61 million for an individual. This amount is effectively doubled for someone who is married if they create an appropriate estate plan.
Even if you believe that your estate will not surpass the exemption amount, you should be aware that at the end of 2025, the current law is scheduled to sunset and the individual exemption will drop to about $7 million if Congress does not act. The maximum estate tax is 40 percent, so you should be careful even if you’re not sure whether it would be imposed in your case. This tax is taken directly from the estate before assets are distributed to heirs.
While Pennsylvania residents are of course subject to the federal estate tax, the state does not impose one of its own. However, there is a Pennsylvania inheritance tax that might be applied depending on the relationship between a given heir and the decedent. The specific provisions are as follows:
- Bequests to surviving spouses and children 21 years of age or younger: No inheritance tax
- Bequests to lineal heirs (grandchildren and children over 21): Inheritance tax of 4.5 percent
- Bequests to siblings: Inheritance tax of 12 percent
- Bequests to others: Inheritance tax of 15 percent
- Bequests to charitable organizations and other exempt institutions: No inheritance tax
Unlike the estate tax, the inheritance tax is imposed on the individual beneficiaries after estate assets have been distributed, rather than estate itself.
Depending on your situation and goals, careful estate planning might be necessary to reduce estate and inheritance taxes, or avoid them entirely. Trusts, charitable donations and other strategies are some potential alternatives to transferring money through an estate.
Abernethy & Hagerman, LLC in Allison Park develops personalized estate plans for Western Pennsylvania clients, with a focus on minimizing tax exposure. Please call 412-486-6624 or contact us online for an appointment to discuss your specific estate planning needs. We assist individuals and families throughout the area, including Hampton Township, McCandless Township, Wexford, Gibsonia, Franklin Park, Bakerstown and West View.