Avoiding the inheritance tax

There are several potential ways to avoid or minimize the burden of Pennsylvania's inheritance tax on a given estate, but all of them are specific to a certain set of conditions. Some of the most prevalent current strategies include establishing trusts, giving to tax-exempt entities and carefully choosing heirs.

Trusts are usually the tools that afford the highest level of control over estate assets. These alternative wealth-management structures largely bypass inheritance taxes in various ways, by separating control and ownership, for example. 

Another way to reduce the inheritance tax could be to make donations to not-for-profit or government organizations. As the Financial Times reports, tax-free giving gives a level of control over where funds go that tax payments do not. This would likely be most advantageous if one expected one's heirs to make a similar contribution, increasing the value of the donation by avoiding the significant percentage loss caused by intermediate ownership of the assets. 

The state penalty does not typically apply to spouses or parents of minor children. Therefore, a common strategy is to leave most assets to a wife or husband. Children, siblings and non-related heirs should expect to pay some of this penalty if the deceased does not form a complete trust plan ahead of time. The Montgomery County website sets the following rates for inheritance tax, divided by group:

  • Spouses and parents of children below 21 years of age: No tax applies to the estate
  • Direct descendants: 4.5 percent
  • Siblings: 12 percent
  • All others, excluding tax-exempt parties: 15 percent

The Montgomery County page tangentially discusses a few common complications, including asset type, multi-state holdings and final tax return preparation. This illustrates the point that very few estates are as simple as they may appear. Therefore, careful planning is often necessary to direct assets in a way that benefits everyone involved.

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