Recently, Thomas Seitz, of Wessel & Co., brought us up to date on the present estate tax rules. I will discuss the Pennsylvania death tax, called an Inheritance Tax, and describe some of the differences between the two.
The federal tax, called the estate tax, is a tax on the value of what you own when you die. It doesn’t matter to whom you leave it, with a few exceptions. Giving money to a charity is generally not taxable, and neither is money left to a spouse. Unlike Pennsylvania, however, insurance proceeds are taxable.
The inheritance tax, on the other hand, is as its name implies, a tax on the right to receive money from a decedent’s estate. The tax is generally paid out of estate assets, although unlike the federal estate tax, it’s not a tax on the assets. The most important aspect of the inheritance tax is that different heirs are charged tax on the value of the assets they receive, but at different rates, depending on their relationship to the decedent. I’ll give a few examples:
When John dies, he leaves money and property to his wife, money to his three children, some funds to his brother, and to his brother’s child, and to Herb, his bowling buddy.
Like the estate tax, the money and property that goes to the wife is tax free. It used to be taxed in some years back, but at a very low rate.
The money left to the children is taxed at a 4½ percent rate (.045 times the value of property received.)
The money John left to his brother is taxed at a 12 percent rate.
The highest rate, 15 percent, is reserved for assets going to John’s nephew, his brother’s son, and for John’s bowling buddy, Herb, who is not a blood relative.
Do the different categories make the calculations interesting? Well, not in my office. My wills contain a direction that the tax shall not be apportioned, so that the end result is very much like the estate tax: The executor pays all the taxes out of the estate assets, and divides the assets as indicated by the will.
Now, if you were writing either an estate tax or an inheritance tax, it might occur to you that some people would give away everything right before they die, and thus avoid all these taxes. What you would need is a gift tax. The federal estate tax has one. Pennsylvania simply said, “All gifts made within one year of death are presumed to be made in contemplation of death, so they have to be included on the tax return.”
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