If you need to consult with an attorney or would like more information on inheritance and estate taxes, please contact the Erie County Bar Association's Lawyer Referral & Information Service.

Two types of taxes can affect the estates of Pennsylvania residents - Pennsylvania's inheritance tax and the federal estate tax. The two taxes work in very different ways. Some assets are subject to the Pennsylvania Inheritance tax but not the federal tax. The rates of tax are very different.

Pennsylvania imposes an inheritance tax on most assets of a deceased Pennsylvania resident after allowed deductions like debts, funeral expenses and costs of an estate's administration are subtracted. These administrative costs often include utility bills on the deceased person’s residence, realtor commission, executor fee, an attorney fee.

Some assets are not subject to inheritance tax. These include property owned jointly by spouses and life insurance proceeds. If a deceased person owned an asset jointly with a person other than a spouse, only one-half of the value of that asset will be subject to tax if held in the joint account for more than one year. If the deceased person was a one-third owner with two others, then only one-third of the asset is subject to inheritance tax.

Rates of Pennsylvania inheritance tax are much lower than are those of the federal estate tax. There is no tax on property which passes to a surviving spouse or is distributed to a charity. The rate of tax on estate assets passing to children or grandchildren is 4.5%. The tax rate on assets passing to parents, or grandparents is also 4.5%. The rate on assets passing to a brother or sister is 12%, and the rate of tax on property passing to cousins, friends, aunt, uncle or friends is 15% of the net estate. If a person under age 21 passes away and their parents inherit their estate, no inheritance tax is due. The Pennsylvania Inheritance Tax Return must be filed within 9 months after the person’s death.

Even though much of the estate administration takes place in the first few months after the person dies, under the Pennsylvania Probate Code, creditors of the deceased person have one year from the date the estate is advertised in the newspaper and the Erie County Legal Journal to make their claims against the estate. So even though the house might be sold, the debts paid, and the Inheritance Tax Return filed within 9 months of the person’s death, the estate cannot truly be finalized until the year passes and the executor is certain that no other claims can be made by creditors.

Because of the high exemption amounts, the federal estate tax does not involve very many estates. It effectively exempts a certain amount of a person's estate - in 2018, the federal estate tax exemption is $5.64 million. There is no federal estate tax on assets passing to surviving spouse.

If a person dies having assets valued at less than the effective exemption amount, it is not necessary to even file a federal estate tax return. If assets exceed the amount, a return must be filed. Tax is imposed only on that part of a "net estate" which exceeds the exemption amount.

So if a person has assets in excess of the exemption, but allowed deductions reduce the value of the estate below the exempt amount, a return is filed but no tax would be due.

For federal estate tax purposes, some assets are included in a person's estate that is not included in an estate for Pennsylvania inheritance tax purposes. Two examples are one-half of the property owned by the decedent and his or her spouse and the value of benefits under individual life insurance policies owned by the decedent.

While a deceased spouse's one-half share of property owned jointly is included as an asset on the federal estate tax return, a deduction is allowed for all property which passes to the surviving spouse. This delays until a later time taxation of the assets.

The rates of federal estate tax are much higher than are those of Pennsylvania inheritance tax. The rate of tax is graduated and begins at 18% on that part of the estate in excess of the exempt amount, and the rate increases to 40% on very large estates.

The federal estate tax return must also be filed within 9 months after a person's death.

Both of these taxes involve complicated returns. On each, all taxable assets must be reported, and failure to take advantage of available deductions can result in too much tax being paid. You should seek legal help in preparing these documents.

Information is current as of 2/2018.