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After a loved one passes, the entire estate has to go through the probate process. As a part of settling the estate, you must pay Pennsylvania’s inheritance tax. Unlike most states, Pennsylvania still imposes this tax, and it applies to nearly all estates. Whether you have a small or large estate, you’ll end up paying this tax. 

If you are planning your estate or preparing to inherit property, understanding how this tax works can help you avoid costly mistakes and potentially reduce your overall tax burden.

What Is Pennsylvania Inheritance Tax?

Pennsylvania’s inheritance tax is a state tax on the transfer of property after death. It applies to both probate assets and non-probate assets. A probate asset is property that is or was solely owned by the decedent, such as their bank account or home. If the property was jointly owned or a payable-on-death (POD) account, then it is considered a non-probate asset.

Federally, there is an estate tax that must be paid, but it only applies to very large estates. In Pennsylvania, the inheritance tax affects many ordinary families. The amount due depends on the value of the estate and the relationship between the decedent and the heir.

Who Is Responsible for Paying the Inheritance Tax? 

Technically, the beneficiary is responsible for paying inheritance tax. However, this isn’t precisely how it works in practice. When the executor or administrator files the tax return for the estate, they pay the taxes out of the estate before they distribute the estate’s assets. As the beneficiary, this means the tax is basically coming out of the money and assets you would be inheriting. You’re the one paying the money, but it doesn’t necessarily feel like it because the funds are coming from your inheritance.

The executor is legally obligated to file and pay this tax. If the executor fails to pay, the Pennsylvania Department of Revenue may collect the tax directly from the inheritance itself.

What Property Is Subject to Inheritance Taxes in Pennsylvania?

Most of the property someone owns when they die will be taxed by Pennsylvania’s inheritance tax. For example, business interests, real estate located in Pennsylvania, bank accounts, stocks, bonds, vehicles, jewelry, and other kinds of personal property will all be taxed. 

Some property is exempt from the inheritance tax. Pensions, retirement benefits, and life insurance that pays out to a named beneficiary are not subject to this tax. Under 72 P.S. § 9111, certain family-owned businesses and farms may also be exempt.

What Are the Current Pennsylvania Inheritance Tax Rates?

The rate you pay depends entirely on your relationship to the decedent. Even though the property involved may be the same, the inheritance tax amount will vary based solely on the relationship involved. 

• 0%: Surviving spouse and transfers from parents to children under the age of 21 
• 4.5%: Transfers to lineal heirs and direct descendants, such as children and grandchildren 
• 12%: Transfers to siblings
• 15%: Transfers to other heirs 

It’s also important to note that charities are not required to pay the inheritance tax. Some government entities are not obligated to pay it as well.

When Is the Inheritance Tax Due? 

Under 72 P.S. § 9136, the Pennsylvania inheritance tax return (Form REV-1500) must be filed within nine months of the decedent’s death. If the tax is paid within three months, heirs receive a 5% discount. However, late payments can result in interest charges and penalties.

We can look at how this might look in practice. Let’s assume Susan passes and leaves behind a $300,000 home, $100,000 in bank accounts, and $200,000 in investments. Assuming her debts have already been paid, her estate is worth $600,000. If she leaves her estate to her child, they will pay an inheritance tax of $600,000 x 4.5% = $27,000. In comparison, a sibling would have to pay $72,000 if they inherited the same amount because a sibling’s tax rate is 12%.

How To Reduce the Inheritance Tax in PA

At the Clause Law Group, we can help with your inheritance and tax planning in Pennsylvania. As a part of your tax planning process, it’s essential to consider ways to minimize inheritance taxes. The following list includes some of the most effective methods for avoiding this tax, although it is impossible to avoid it completely.

• Gifts During Your Lifetime: Pennsylvania has no gift tax. Property given more than one year before death is not subject to the inheritance tax. However, federal law charges a gift tax if you give someone more than $19,000.
• Life Insurance: Since proceeds are exempt, many families use life insurance to help cover tax bills.
• Trusts: Certain irrevocable trusts may reduce tax exposure and are a useful part of your estate planning process.
• Charitable giving: When you transfer your estate to a charity, it is always tax-free.

Update Your Estate Plan in PA

By partnering with an experienced Pennsylvania estate planning lawyer, you can learn strategies that protect your assets and reduce the tax burden on your heirs. The tax rate can be as much as 15%, so it’s essential to plan ahead and minimize the amount your descendants pay. 

At the Clause Law Group, we’re committed to ensuring the financial and legal security of your loved ones through proper estate and tax planning. Over the years, our team has built its reputation by providing top-notch legal services to residents in Wayne, Pike, Monroe, Lackawanna, and Luzerne counties. To learn more about our services, give us a call at (570) 676-5212 today.