By Michael Henley, CFP®, CPWA®, CRPC®, RMA®
For many families, building wealth is not just about financial security. It is about creating a lasting legacy for the next generation. But in Pennsylvania, an often-overlooked factor can take a significant bite out of what you leave behind: the State’s beloved inheritance tax. Without proper planning, your loved ones could find themselves paying more than they need to.
Inheritance Tax Rates by Beneficiary Relationship
Pennsylvania is 1 of only 6 U.S. states that impose taxes on inheritors. The state is unique in that the tax rates are tiered according to the relationship the beneficiary has with the decedent:
- 4.5% for direct lineal descendants
- 12% for siblings
- 15% for other heirs (this does not include charities as PA does not impose the inheritance tax on assets left to charity at death)
The inheritance tax return must be filed within nine months of the decedent’s passing, making proactive planning essential for avoiding last-minute financial stress.
Strategies for Maximizing Pennsylvania Inheritance Taxes
Pennsylvania beneficiaries have several proactive tax planning strategies at their disposal to reduce or eliminate inheritance taxes. By strategically structuring asset ownership, making gifts during your lifetime, and leveraging tax-advantaged accounts, families can preserve more of their estate for future generations.
Transfer Assets to Joint Ownership
One of the simplest and most effective strategies to reduce Pennsylvania inheritance tax is holding assets in joint ownership. When property or financial accounts are jointly owned with the right of survivorship, they pass directly to the surviving owner without being subject to inheritance tax in many cases. This means that when one spouse passes away, the surviving spouse automatically takes full ownership of the jointly owned assets without any tax implications. However, for non-spouse joint owners, only the portion of the asset considered to belong to the deceased owner is subject to tax depending on their relationship with the decedent.
For example, a widow has one child and owns a $1 million brokerage account. If this individual adds their child as a co-owner on the $1M account, only 50% of the value of the account is subject to PA inheritance tax at the time of their death. This strategy should be carefully considered with a CPA and estate attorney, as it can get very complex if there are multiple children and different types of assets being passed down.
Utilize Lifetime Gifting
While most gifts made within one year of death are still subject to inheritance tax, Pennsylvania allows an exception for annual gifts of $3,000 or less per recipient, which remain tax-exempt even if given within the final year of life. Gifts exceeding this amount within the one-year window will be included in the taxable estate for PA inheritance tax calculation purposes. However, gifts made more than one year before death are entirely exempt from inheritance tax, regardless of size.
Early Payment of Inheritance Tax
In Pennsylvania, beneficiaries are required to settle any inheritance tax liability within nine months of the decedent’s passing to avoid penalties and interest. The inheritance tax return must be filed within this time frame, and failure to do so may result in additional charges. However, Pennsylvania offers an incentive for early payment. If the tax is paid in full within three months of the date of death, beneficiaries receive a 5% discount on the total tax owed. This early payment discount can lead to significant savings, particularly for larger estates.
Consider Converting Pre-Tax Dollars to Roth
Traditional retirement accounts, such as IRAs and 401(k)s, are subject to Pennsylvania inheritance tax, as are Roth IRAs. However, pre-paying the income taxes on pre-tax retirement accounts like IRAs can help reduce the PA inheritance tax bite for your heirs.
If someone has a $1 million pre-tax IRA and $250,000 in a taxable brokerage account, the full $1.25 million would be subject to Pennsylvania inheritance tax at death. However, if they convert the IRA to a Roth (paying 25% tax) and use the $250,000 to cover the taxes, only $1 million is taxable at death. This move could save over $11,000 in PA inheritance taxes if the IRA is left to a child, especially beneficial if the child is in a high tax bracket or lives in a high-tax state.
Incorporate Charitable Giving Into Your Estate Plan
Leaving assets to qualified charities or tax-exempt organizations can reduce Pennsylvania inheritance tax, as these gifts are fully exempt regardless of amount. To ensure tax-free treatment, donations must be structured through the estate plan or direct beneficiary designation on financial accounts or retirement plans. For families who plan to leave assets to charity after their lifetime, it can often make a tremendous amount of sense to leave pre-tax IRA dollars to charity as the IRA dollars escape PA inheritance tax, benefitting the loved ones, and a charity being a non-profit is not subject to income taxes on the IRA dollars received the way that children or family members would be.
Strategies like donor-advised funds (DAFs) or charitable remainder trusts (CRTs) can further optimize tax benefits while maintaining flexibility. However, donations made by heirs “in memory” of the deceased after their passing do not qualify for inheritance tax exemptions. Proper planning ensures your charitable legacy is preserved in the most tax-efficient way.
Leverage Life Insurance
Unlike real estate, retirement accounts, or brokerage accounts, life insurance proceeds are entirely exempt from Pennsylvania inheritance tax, making them a highly effective tool for preserving wealth. For families seeking to pass down assets without tax implications, a strategically structured life insurance policy can provide beneficiaries with a guaranteed, tax-free inheritance. Incorporating life insurance into an estate plan ensures financial security for heirs while minimizing the impact of state inheritance taxes.
Expert Guidance to Minimize Pennsylvania Inheritance Tax
At Brandywine Oak Private Wealth, we take a proactive approach to your Family Wealth Plan. Through our private tax advisory service, our seasoned team of tax professionals collaborates with your wealth advisor to implement tax-saving strategies, file returns, and handle IRS correspondence on your behalf.
We continuously monitor tax law changes to help you stay ahead of potential liabilities, ensuring your estate passes to your heirs as intended, not diminished by unnecessary taxation.
For guidance with inheritance tax planning, call (484) 785-0050, email contact@brandywineoak.com, or schedule a consultation online.
If you want to hear from families who trust us with their financial future, visit our client testimonials page and learn how we help them make the most of their wealth
About Michael
Michael Henley is the Founder and CEO of Brandywine Oak Private Wealth, a private wealth management and registered independent advisory firm headquartered in Kennett Square, PA. Over the course of his 20-year career, Michael has been dedicated to helping wealthy individuals and families plan and manage all aspects of their finances and investments. With a passion for helping others look behind the curtain and understand the complex world of finance, he develops close relationships with clients as he helps them progress toward their financial goals. Michael loves to provide clarity and alleviate financial anxiety, help prevent families from overpaying in taxes, and give wealthy families permission to enjoy their life savings. He says, “No work is more gratifying than giving families outcomes to what matters most to them.”
Michael holds the CERTIFIED FINANCIAL PLANNER®, Certified Private Wealth Advisor®, Chartered Retirement Planning Counselor℠, and Retirement Management Advisor® designations. Residing in Chadds Ford, PA, with his two children, he enjoys outdoor activities, particularly maintaining trails on his property, hiking with his dogs, and being an actively engaged dad, always taking his kids everywhere. Michael’s latest hobby is tennis and he recently started ice skating to join his daughter Savannah. He can also be found moving logs to the firepit with his son Maverick on the tractor. Michael serves on the board of United Way of Southern Chester County and loves mentoring younger advisors. Great mentors helped him succeed, and he’s convinced that every leader needs to both have mentors and be a mentor. To learn more about Michael, connect with him on LinkedIn.
Brandywine Oak Private Wealth is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
