“Death and Taxes” In Pennsylvania

By Jon Flynn

Benjamin Franklin once said, “In this world nothing is certain but death and taxes”.  This is especially true right here in Franklin’s home state of Pennsylvania.  Here in the keystone state, not only do we pay a host of taxes on everything imaginable while we are alive, we unfortunately have to pay taxes as well upon our death.  This is because Pennsylvania is one of about twelve states in the U.S. that imposes a “death” tax on our property when we die. 

Officially called the “Pennsylvania Inheritance Tax”, we can trace its roots back about 180 years, all the way back to the year 1826.  In fact Pennsylvania became the first state in the union to impose such a tax.

Because the PA Inheritance tax is primarily a “Pennsylvania” issue, it doesn’t get the national press that the federal estate tax receives.  Even though you won’t read or hear about it from the mainstream press, it still remains a meaningful estate planning concern for most Pennsylvanians.

What property is included when calculating the inheritance tax?  The obvious things of course are items like stocks, bonds, bank accounts, and real estate.  But also things you maybe wouldn’t expect to find like jewelry, antiques, furniture, and cars.

What are the tax rates?  The tax is based on the value on the date of death of a decedent's taxable assets minus allowable deductions. The tax rate is determined by the relationship of the deceased to his/her heirs as follows: (0% - spouse);  (4.5% - lineal heirs such as kids, grandkids, parents);   (12%  - brother/sister);   (15%  - collateral heirs, which is basically everybody else).

Who should be most concerned?  Everybody!  Why because if you’re not informed how the tax works, your estate may get blindsided by a large unexpected tax burden. 

Here’s an example where proper planning can prevent an avoidable mistake.  Joint property is subject to the inheritance tax, except between husband and wife.  Let’s say that an adult son jointly titles a bank or securities account with his mother, simply as a matter of convenience.  Even though she contributed nothing to the value of the account, in the event of the mother’s death the son would have to pay taxes on half of the account value.  Can you imagine having to pay inheritance taxes on your own money!   

Another common example occurs with family businesses.  If an untimely death of a business owner isn’t properly planned for it can create quite a disruption for the business.  Money has to be available to pay the tax when the owner dies and most small family businesses run on a tight budget.   If you don’t plan ahead where will the funds come from to pay the tax?  

The key is to plan ahead.  Remember, Franklin also said, “By failing to prepare, you are preparing to fail”.

Everybody situation is different and arriving at solutions can get complicated.  So always consult with financial, legal, and tax professionals before making any decisions.

 

 

 

Jon Flynn is a Certified Financial Planner ^TM and owner of Flynn Financial in Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC and of Securities America Advisors, Inc. Flynn Financial and Securities America are unaffiliated.   Mr. Flynn can be reached at 570-876-5015.