An important part of the estate planning process in Pennsylvania is preparing to minimize any liabilities your estate may face upon your death. You can take steps to settle debts and avoid probate, but one expense that may seem inevitable is taxes.
Fortunately, there is a way for you to minimize your estate tax liability. Careful planning might even allow you to avoid it altogether.
Estate tax portability
The federal government sets an estate tax exemption every year that opens the door for your estate to avoid being subject to taxes. Per the Internal Revenue Service, the exemption amount for 2020 is $11.58 million (increasing to $11.7 million in 2021). Estate tax portability allows your spouse to claim your unused exemption amount and combine it with their own. With a little bit of savvy, you can preserve your entire exemption and effectively double that of your spouse (protecting as much as $23.16 million from taxes).
To do this, you need to take advantage of another tax benefit: the unlimited marital deduction. By leaving your entire estate to your spouse upon your death, you not only make that transfer free from taxes (thanks to the unlimited marital deduction), but you also preserve your estate tax exemption. All your spouse must then do is file an estate tax return within nine months of your death claiming portability.
Estate-related taxes in Pennsylvania
The state of Pennsylvania does not impose a local estate tax on its residents. There is, however, an inheritance tax (which your beneficiaries would owe after receiving their interest in your estate). Assets left to your spouse to any minor children are not subject to the inheritance tax. A 4.5% rate applies to any amount left to your adult lineal descendants.