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McClellan Legal LLC Estate Planning & Tax Assessment Blog

Wednesday, June 22, 2016

Planning for Estate and Inheritance Taxes in Pennsylvania

Planning for Estate and Inheritance Taxes in PA

One of the most common goals of my estate planning clients is to minimize the tax burden on their estate.  No one should pay more taxes than legally obligated.  There are two potential taxing authorities that we consider when minimizing your estate tax burden: the federal government and your state government. 

From a federal perspective, very few estates are taxable because the taxable threshold is over $5 million per individual.  Therefore, you must leave an estate worth more than $5 million (currently $5.45 million) before the federal imposes an estate tax.  Further, if you are married, the federal government provides some very favorable tax savings tools: marital deduction and portability.  The marital deduction rule allows a surviving spouse to inherit any amount, even over the $5 million threshold, tax free.  Further, via “portability”, the federal government allows a surviving spouse to share any unused portion of the other spouse’s $5 million exemption amount.  In effect, a married couple can shelter over $10 million from federal estate tax.  Under the current estate laws, only 0.2% of the population will pay federal tax laws if properly planned.  If you estate is large enough to be taxable, the federal estate tax rate is 40% on every dollar over the threshold.

Unlike the federal government, Pennsylvania estates will almost always pay estate tax (called inheritance tax in PA) by at least the surviving spouse because in most situations Pennsylvania taxes provides no exemption (or at best a very small exemption).  Inheritance tax is imposed as a percentage of the value of an estate that is transferred to specific beneficiaries.  The rates for Pennsylvania inheritance tax are as follows:

  • 0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
  • 4.5 percent on transfers to direct descendants and lineal heirs;
  • 12 percent on transfers to siblings; and
  • 15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax.

Even though most of my clients are not federally taxable, we often recommend basic tax planning due to factors beyond our control.  For example, the $5 million exemption may drop to a much smaller value, which would make many more estates vulnerable to federal tax.  If the federal government were to take away the “portability” rule, we can draft language using a spouse’s right to disclaim property as a tool to reduce the estate.   Further, if you are resident of Pennsylvania, we will certainly have a tax planning conversation no matter the size of your estate.  If you have any questions regarding estate planning or estate tax planning, please call our office to schedule a meeting.

While not technically an estate tax or an inheritance tax, your children or other beneficiaries are most likely to feel a tax burden when withdrawing money from an inherited retirement account (e.g., a 401k, IRA, etc.).  Therefore, it is important to identify who, how, and when a beneficiary will receive your retirement accounts. 




McClellan Legal LLC is located in Kennett Square and serves clients throughout the areas of Avondale, Chadds Ford, Coatesville, Downingtown, Landenberg, Oxford, Phoenixville, Pottstown, West Chester, & West Grove. We also serve the following towns in Lancaster County: Lancaster, Lititz, Strasburg,Millersville, Ephrata, Leola, Manheim, New Holland, Willow Street, Quarryville, Elizabethtown and Mountville.



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113 South Broad Street, Kennett Square, PA 19348
| Phone: 610-444-5552

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