A brief guide to the Pennsylvania Inheritance Tax rules

The Pennsylvania Inheritance Tax has been the subject of much discussion and controversy over the years, at least among my clients and potential clients. Since there have been so many questions requiring response I thought it would be helpful to jot down some of the basic concepts and provide a brief guide to navigate the system. By the way, you should never rely merely on a summary to answer all the questions you might have. Here it is.

The inheritance tax follows the jurisdiction of the decedent, not the beneficiary. For Pennsylvania’s purposes, where the beneficiary of an estate resides is irrelevant. The important issue is where the decedent lived or, more specifically, where he or she considered “domicile” at the time of passing. If he/she claimed domicile in Pennsylvania both the real estate in Pennsylvania and the personal property are taxed for Pennsylvania Inheritance Tax purposes. It is possible for a non-resident decedent’s estate to be taxed in Pennsylvania at least in part. This would be when the non-resident owns real estate in Pennsylvania.

Non-probate property is still taxed unless otherwise excluded. Some taxpayers believe that property contained in a revocable living trust or property titled TOD (transfer on death) or POD (payable on death) is not taxed for Pennsylvania Inheritance Tax purposes. This is not true. POD, TOD, and assets in a revocable living trust are all fully taxable for the Pennsylvania Inheritance Tax. Also, jointly titled assets are taxable at the proportionate share of the value (unless made joint within one year of the decedent’s death in which case they could be taxable in full).

Inheritance tax is different from income tax. Some beneficiaries worry that their inheritance will be subject to income tax. Their inheritance is subject to inheritance tax not income tax and very often the inheritance tax has been paid from the estate before the inheritance is received. Beneficiaries do not need to claim the inheritance on their income tax return.

Life insurance proceeds are not subject to inheritance tax. If, for instance, you are the beneficiary of a $100,000 basic life insurance policy the proceeds are not subject to Pennsylvania Inheritance Tax (or income tax).

Out-of-state real estate Is not taxed for Pennsylvania Inheritance Tax purposes. Ironically, if the decedent owned a property in Stone Harbor, New Jersey or anywhere outside Pennsylvania, it is not taxed for Pennsylvania Inheritance Tax purposes. On the other hand, if she owned a house in the Poconos, it is taxed for Pennsylvania Inheritance Tax purposes.