Pennsylvania Inheritance Tax Trap

Pennsylvania Inheritance Tax Trap

Estate Planning Practitioners and clients should be aware that there is an inheritance tax trap in Pennsylvania. In most states, it is common to set aside a certain amount for the spouse and the children in one trust on the first to die. This is known as a bypass trust and done for a variety of reasons, but usually to take advantage of the federal estate tax exemption on the first to die.

In Pennsylvania, a trust like this will cause an immediate inheritance tax because a portion of the money is going to children who are taxed at a rate of 4.5%. Accordingly, if you are moving to PA from another state, it is highly likely that you should to redo your estate plan.

4 thoughts on “Pennsylvania Inheritance Tax Trap

  1. Kevin, this is a very good tip and particularly important as the federal estate tax rears up again in 2011.

    To add a point for your readers, there is a way around the tax trap Kevin describes. If it is consistent with the clients' planning goals, the bypass trust can be set up to last for the lifetime of the surviving spouse and pay income to no one other than the surviving spouse during his or her life. This will allow for the deferral of the PA inheritance tax until the death of the surviving spouse.

    Jeffrey A. Marshall, CELA*
    Attorney at Law
    Marshall, Parker & Associates
    49 E. 4th St., Suite 200
    Williamsport, PA 17701
    570-321-9008
    visit my blog at http://marshallelder.blogspot.com

    websites:
    http://www.paelderlaw.com
    http://www.pagaslaw.net

    *Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court; Licensed to practice law in the Commonwealth of Pennsylvania.

  2. Is it possible that a beneficiary of an estate (one of 3) can be in the form of a TRUST rather than as an individual? And is that trust distribution through the estate taxable to the PA Trust?? at the 4.5% rate like a PA inheritance?
    Or do any "trust rules" apply that give the Trust exemption from this tax?
    Kindly advise.
    Davidf@pbiworld.com

  3. David,

    I am a bit confused by your post. Practically anyone or anything can be the beneficiary of an estate, including a trust.

    How that trust gets taxed will depend upon who the beneficiary is. If the beneficiary is ONLY the spouse, there will be no inheritance tax. If the beneficiary is only children, then there will be a 4.5% tax.

    If the beneficiaries of a trust are a combination of different people in different inheritance tax brackets, you must work with the PA division of tax to negotiate the amount of the tax based upon how much you expect each party to receive.

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