by Jeremy A. Wechsler, Esq.
[email protected]
I wrote a couple months ago after the election about the likelihood that there would be no cut in the federal estate tax exemption, which is currently $14 million per person. At the end of 2025, it is scheduled to “sunset” and revert to $5 million per person (it will be higher after inflation adjustments). All signs point to Congress “extending” a variety of tax cuts, including the current estate tax exemption. You never know what Congress will do, but it seems highly unlikely they would let the sunset occur.
But you can’t let your guard down because federal estate taxes aren’t the only taxes you should be concerned about.
PA Inheritance Tax: The PA Inheritance Tax is a separate tax from the federal estate tax. The two taxes work very differently. With an inheritance tax, your estate is taxed for every dollar (no exemption), and the rate changes depending on who is inheriting the asset (Spouses = 0%, Children/Grandchildren = 4.5%, Siblings = 12%, and everyone else = 15%). Life insurance proceeds are exempt, but most other assets, including retirement accounts, are taxed. Depending on your relationship to a beneficiary, the tax can add up. The tax is imposed regardless of whether you avoid probate, and whether or not assets are in trust. Joint assets are taxed on the amount the deceased individual owns (two owners would mean 50% is subject to tax).
State Inheritance Tax: A few other states besides Pennsylvania impose an inheritance or estate tax (Most states have done away with this, thankfully). Every state is different, so check in with us if you have specific questions about another state’s inheritance tax.
Federal Income Tax: Trillions have been accumulated in retirement accounts. Traditional IRA’s and 401(k)’s that are inherited by non-spousal heirs must be withdrawn 10 years after your death. Every withdrawal means your heir pays income tax. That is in addition to your heir paying PA Inheritance Tax initially on this asset. Roth accounts are exempt from income tax, so Roth conversions continue to be part of the conversation. Additionally, life insurance should be given strong consideration, because it is income tax free, inheritance tax free, and potentially estate tax free.
Step-Up-In-Basis (if you play your cards right): One advantage investors continue to enjoy is passing their property onto their heirs with a “step-up-in-basis.” For highly appreciated non-IRA assets (think real estate you purchased 40 years ago, or stocks that have grown 300% while you have held them), your heirs can wipe out all of your potential capital gains, and reset the clock at your death. But… beware of gifting real estate or stock, as your heirs do not get a step-up (and there are other complications of gifting major assets like real estate).
I will continue to keep an eye out for tax changes and use this space to keep you in the loop.