McClellan Legal LLC Estate Planning & Tax Assessment Blog

Sunday, April 15, 2018

How to Minimize the Tax Burden on Your Estate

One of the most common goals of my estate planning clients is to minimize the tax burden on their estate.  There are two potential taxing authorities that we consider when minimizing your estate tax burden: the federal government and your state government.  To minimize the tax burden, it’s important to understand how your estate is taxed.

From a federal perspective, very few estates are taxable because the taxable threshold is over $11 million per individual.  Therefore, you must leave an estate worth more than $11 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 $11 million threshold, tax free.  Further, via “portability”, the federal government allows a surviving spouse to share any unused portion of the other spouse’s $11 million exemption amount.  In effect, a married couple can shelter over $22 million from federal estate tax.   If your 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 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.

Therefore, your children are certainly going to face PA inheritance tax.  It may benefit your children to consider making annual gifts to reduce the size of your state (e.g., currently you can gift $15,000 per person per year tax-free).  If you would like to pass an inheritance to your young children or future generations, you may want to consider fronting 5 years of annual gifts into a 529 plan for each child or grandchild. 

One way to minimize the tax on your PA estate is reconsider providing an inheritance to people in the 12% or 15% tax categories (e.g., siblings, nieces, nephews, etc.).  Life insurance is not usually subject to inheritance tax is PA.  Therefore, if you want to leave an inheritance to someone in the higher tax rate categories, it may make sense to leave them tax-free life insurance instead of other assets.

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.).  We can help devise plans to ensure that the beneficiaries of your retirement accounts can stretch the withdrawals to minimize the income tax burden.   If you have any questions regarding estate planning or estate tax planning, please call our office to schedule a meeting.

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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.

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

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