As of Jan. 1, 2014, the federal estate tax rules changed such that only individuals with assets in excess of $5.34 million are now subject to this tax at death. A married couple’s federally taxable estate now begins when assets exceed $10.68 million. Those figures are much higher than the $1.0 million level that the estate tax was slated to revert to without new federal legislation in 2013. As a result of this significant increase, if your estate is less than $5.34 million, you may think that you are exempt from paying taxes on the assets you leave to your heirs. This may be true relative to federal tax rules, but such is not the case at the state level.
Each state has the ability to impose its own inheritance tax for assets domiciled in their state. Pennsylvania’s inheritance tax varies from 0 percent to 15 percent, depending on to whom the assets are bequeathed. Pennsylvania’s tax rates are as follows1:
- 0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger, charitable organizations and other exempt institutions
- 4.5 percent on transfers to direct descendants and lineal heirs
- 12 percent on transfers to siblings
- 15 percent on all other transfers
So, if you are among the 99.8 percent of the population with assets below the federal threshold of $5.34 million, your estate could be taxed by as much as 15 percent at the time of your death. That equates to $150,000 on a $1.0 million estate.
There are various ways to minimize this tax burden, such as gifting during your lifetime or to charities upon death. Most of us don’t want to give away all of our assets in an effort to save taxes. Investing in a life insurance policy that would indemnify your estate of these costs when you’re gone may be a great alternative approach. This financial planning strategy can be easily implemented by paying pennies on the dollar in annual premiums for a guaranteed benefit at the time of your death2. Investing in such a manner helps to ensure that your heirs receive the hard earned assets you intended to give, despite the bite taken by the state’s inheritance tax.
2 assumes financial stability in the issuing life insurance company
Deborah Graver, CFP®, CLU®, AIF® is Senior Vice President of Advanced Planning and Chief Compliance Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at firstname.lastname@example.org. Deborah can also be reached for comment at 412-227-3200.