PA Inheritance Tax – How to Manage Tax Benefits

What is Pa Inheritance Tax?

The Pa Inheritance Tax is the state tax which is imposed on the transfer of assets to a beneficiary after the owner of the Estate dies. The Pa Inheritance Tax applies regardless of the size of the Estate.

How to Minimize Inheritance Tax Regarding an Estate.

There are certain Tax benefits and strategies for minimizing tax. Joint ownership with the right of survivorship would allow a surviving spouse to be exempt from Inheritance Tax. Also, charitable bequests to a qualified organization are exempt from Inheritance Tax.

A common plan is to create Trusts that can help reduce tax. More specifically, creating an Irrevocable Trust, which would remove the asset from the grantor’s Estate, which would help reduce Estate Tax liability.

However, the IRS rule regarding the Step-Up basis, could affect Irrevocable Trusts. While an Irrevocable Trust may help reduce Inheritance/Estate Tax, it may not avoid Capital Gains Tax, which is income tax imposed on the profit made from the sale of an asset.

Difference Between Revocable and Irrevocable Trusts

Revocable Trusts are Trusts that can be modified or revoked by the grantor, this can be done at any point during the Grantor’s lifetime. While Irrevocable Trusts are not able to be modified or revoked without the consent of the Beneficiaries, after being established.

Typically, assets within a Revocable Trust are still considered part of the Grantor’s taxable Estate, while in Irrevocable Trusts, assets are removed from the Grantor’s taxable Estate.

What is the “Step-up” Basis?

The “Step-up” basis is a tax benefit which adjusts the value of an asset to what the fair market value of that asset is, at the date of the owner’s death. The benefits of the “Step-up” basis adjustment is that it can greatly reduce the Capital Gains Tax owed, if the asset would happen to be sold at a later date by the inheritor.

However, some assets are not subject to the “Step-up” basis, including bank accounts, cash, certificates of deposit, IRAs, Pensions, and 401ks. So, when an heir inherits one of the assets not subject to the “Step-up” basis, they retain the original owners cost basis.

Work With a Professional Inheritance Tax Attorney

If you are looking to create a Trust or want to be sure your assets are properly tilted to provide greater overall tax benefits for your heirs, contacting an Attorney with knowledge in Estate Planning and current Tax benefits would be in your best interest.

Contact us at 717-299-7342 to schedule a convenient appointment to discuss your estate planning needs at our Lancaster, Willow Street, or Ephrata office.  

DISCLAIMER: This article is meant to be general in nature and in no way is intended for legal advice or guidance. In order to obtain legal guidance, advice, or representation schedule a consultation to discuss your specific case.