PLANNING AHEAD: Different types of taxes can be confusing [Column]

When I am reviewing taxes for an estate client sometimes I hear the comment “you told me the rate is 4.5%. Why is this different?” The rate for inheritance under the Pennsylvania inheritance tax for children, grandchildren and other “lineal” descendants is 4.5%. If the beneficiary is a brother or sister of the decedent it is 12%. If it is a more distant relative or a friend it is 15%. Still those are only some of the issues that arise.

Some property such as life insurance proceeds is not taxable for inheritance tax purposes. Inheritance tax for a spouse is at 0%. Out of state real estate is not subject to Pennsylvania inheritance tax but Pennsylvania real estate, even if owned by a non-resident, is. Vacation property in Pennsylvania owned by a Pennsylvania resident is taxable for Pennsylvania inheritance tax purposes.

This is just regarding Pennsylvania inheritance tax. There are other taxes that might become relevant by other jurisdictions or for other reasons and these need to be taken into account also both in the normal course of business and sometimes relating to inheritance.

A beneficiary who inherits an IRA that was owned by a Pennsylvania resident can receive the IRA in a “trustee to trustee transfer” and the IRA becomes what is referred to as a “beneficiary IRA” for the new owner but the IRA value is still subject to Pennsylvania inheritance tax unless received by a spouse or unless the decedent was under the age of 59½ at the time of passing or fits another category such as disability.

If the beneficiary cashes in a traditional IRA there will be deferred federal taxes to pay.

If a Pennsylvania decedent leaves real estate located out of state such as a house on the beach in New Jersey or Delaware does any out of state tax apply?  Reference would have to be had to the laws of that jurisdiction but if you are a close surviving relative likely not, although it might depend on the value.

It is not difficult to see that these interrelated concepts might become complicated.

What about federal taxes? One thing to keep in mind is that inheritance is not income for purposes of federal income tax or state income tax.

How about federal estate and gift tax? For the year 2023 the Federal Estate and Gift Tax will not tax estates for individuals that are under $12.92 million. With portability where the decedent was married the unused balance can be carried over for the decedent’s spouse who also had the $12.92 million exemption from tax. It is estimated that fewer than 0.1% of Americans are subject to the tax and, of these, they pay only on the excess above the $12.92 million amount. Spouses have an unlimited marital deduction. So the federal estate tax is unlikely to affect you.

What about gift tax? The federal estate and gift tax are rolled in together which is why taxpayers are told to file a gift tax return if they gift more than the “annual exclusionary amount” which is currently $17,000 per recipient for 2023. The government only considers the amount per recipient over $17,000 in determining whether your estate has reached the $12.92 million exemption on death. Even this is easy to overcome. If you during life are husband and wife and each give to each of your children $17,000 ($34,000) per year and also to each of your grandchildren and so on it is easy to see how this could add up even to avoid the necessity of filing a Gift Tax Return. There may be other reasons to file such a return, however, such as if you and your recipient want to know the “basis” of the gift at the time of transfer. Gift tax rules apply not only to cash or cash equivalents but also residences, business ownerships and other assets and this information could be significant. An experienced accountant or financial planner in this area might help.

Of critical importance to those facing nursing home care, the federal gift tax exclusion of $17,000 has absolutely nothing to do with Medicaid gifting rules. A structured Medicaid gifting program might indicate either more or less than the gift tax exclusion and disqualification from Medicaid does not relate to gift tax rules. However, mistakes in gifting here if done without specialized qualified assistance can have significant results in terms of Medicaid penalties.

Janet Colliton, Esq. is a Certified Elder Law Attorney recognized by the American Bar Association and Pennsylvania Supreme Court and limits her practice to elder law, retirement, special needs, estate planning and estate administration with offices at 790 East Market St., Suite 250, West Chester, 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.

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