How to Plan for Estate Tax After Death

Benjamin Franklin once said that nothing is certain but death and taxes. The two inevitabilities are joined together in the estate tax. Although certain estates are subject to an estate or inheritance tax, there are strategies to minimize and possibly eliminate these liabilities. Lower estate and inheritance taxes, in turn, mean more assets that will pass on to your heirs. Cooper Schall & Levy’s estate planning attorneys take a look.

What Are the Federal and Pennsylvania Tax Rates?

There is a federal estate tax and a Pennsylvania inheritance tax. They work in different ways. 

According to the IRS, at the federal level, an estate tax applies when “the gross estate of the decedent [the person who died], increased by the decedent’s adjusted taxable gifts and specific gift tax exemption, is valued at more than the filing threshold for the year of the decedent’s death.” The filing threshold currently sits at $13,610,000 for individuals who die in 2024. What this means is that most estates may not reach the necessary value for the federal estate tax to apply.

The Pennsylvania inheritance tax (which is not technically an estate tax) works differently. The actual rates that are levied will depend on several factors:

  • An heir’s relationship to the deceased. A closer familial relationship corresponds to a lower tax rate. Direct descendants such as children, grandchildren, and parents are taxed at 4.5%. Siblings are taxed at 12%, and heirs with no familial relationship are taxed at 15%.
  • Size of the estate. The value of the decedent’s estate may affect the tax rate. In general, larger estates face higher tax rates.
  • Property location. Where real estate is located – inside or outside the state – can affect the inheritance tax.
  • Nature of assets. Retirement accounts and other types of assets may be exempt.
  • Debts and liabilities. Losses and expenses, including debts, may reduce the taxable amount of an estate and therefore save money.
  • Last will and testament. If the decedent executed a valid will outlining his or her wishes, with beneficial tax strategies included, this could affect the rate.
  • Jointly owned assets. Property that is owned jointly, with the right of survivorship, is not subject to an inheritance tax.
  • Exemptions. Assets that pass to charitable organizations, non-profits, or the government are exempt from the Pennsylvania inheritance tax.

Ways to Minimize or Eliminate the Estate and Inheritance Tax

In light of the above, there are a few ways to reduce or even eliminate what you may owe the federal or Pennsylvania government:

Pennsylvania:

  • Increase the amount of inheritances given to direct descendants. As mentioned above, inheritances given to more direct heirs are taxed at a lower rate. This fact should play a role in your estate planning strategy.
  • Understand which assets may be exempt. Certain assets are not subject to an estate tax, and it’s important to know which ones they are. This can affect strategies pertaining to estate planning, retirement planning, and savings.
  • Title property jointly. Since jointly owned property is not subject to a Pennsylvania inheritance tax, consider titling property jointly with the right of survivorship. An experienced estate planning lawyer can assist with this process.
  • Take advantage of exemptions. Many individuals plan to make sizable donations to charities and nonprofit organizations of their choice. Doing so can render the asset exempt from the inheritance tax.

Federal:

  • Making gifts. The annual gift tax exclusion for 2024 is $18,000, meaning you can give up to $18,000 each year without incurring gift tax liabilities. Gifting can reduce the taxable value of your estate, but there are rules and lifetime exemptions that may apply.
  • Fund a 529 or custodial account. If you have children or grandchildren, consider a 529 (education) or custodial account. Funding one of these accounts can also reduce the taxable size of your estate.
  • Charitable giving. As with the Pennsylvania inheritance tax, charitable giving is another way to reduce your estate’s tax liability. There are numerous options that you should consider as you explore your charitable giving.
  • Establish a trust. There are various types of trusts, and these can be used to reduce your overall estate tax liability. While everyone should consider creating a trust, high-net-worth individuals should particularly do so.

Talk To An Experienced Estate Tax Attorney

The best way to get started with creating a customized estate plan is to speak with one of our knowledgeable attorneys. We can explore various options with you to reduce or potentially eliminate your estate tax liability and to more generally plan for what happens to your property and assets after death. Call Cooper Schall & Levy today.