We all hope to be able to provide our children with a nest egg when we die. While building wealth is at the forefront of many people’s minds, it does come at a cost. While the Commonwealth does not have a separate estate tax for residents, decedents who have large estates will be required to pay the federal estate tax.
In this blog, our Harrisburg estate administration attorneys discuss strategies to avoid paying estate taxes on your property upon death.
What is an Estate Tax?
An estate is any property that an individual owns upon death. An estate tax is a decedent’s right to transfer property to heirs. In most states, there is an estate tax at both the federal and state level.
That is not the case in The Keystone State. No matter the size of a person’s estate, there is no estate tax in Pennsylvania. Not everybody is off the hook. As of 2024, individuals whose estates are over $13.61 million will be required to pay a federal estate tax.
Strategies to Avoid or Reduce Estate Taxes
If you are subject to the federal estate tax, an estate administration attorney may suggest the following options:
Setting Up a Trust
Many people consider placing their assets in a trust. When you place your property into a trust (known as “funding the trust”), you are removing the assets from your taxable estate.
Trusts may be either revocable (terms or trustee(s) can be changed, assets can be removed, and they can be terminated) or irrevocable (terms cannot be changed). However, revocable trusts become irrevocable when a person passes away.
Three types of trusts that will help you avoid or reduce your amount of estate taxes include:
Qualified Terminable Interest Property (QTIP) Trust
A QTIP trust is intended to provide for a surviving spouse. It helps to reduce tax liability since estate taxes are not paid until the second spouse dies. This type of trust is typically used in second marriages to help safeguard a person’s inheritance for children from a prior marriage. A QTIP is irrevocable, so the terms cannot be changed once they are established.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust, or ILIT, holds a life insurance policy. In creating an ILIT, individuals remove their life insurance policies from their taxable estate. The ILIT is the primary beneficiary of the life insurance policy, taking the policy out of your name. This is a viable option to avoid estate taxes if you are only over the federal limit due to the value of your life insurance policy.
Qualified Personal Residence Trust (QPRT)
In a Qualified Personal Residence Trust or QPRT, the grantor or creator of the trust can move up to two residences into the trust. In establishing a QPRT, the property is transferred to the trust for a set period. After which, the property will be dispersed to the beneficiaries.
A QPRT does not typically eliminate estate taxes, but it does help to reduce them. Estate taxes will be calculated based on the property value when it was transferred to the trust, not when the property was transferred to the beneficiaries. The trust essentially “freezes” the value of the property, decreasing the value of the property for tax purposes. However, the IRS will not recognize a QPRT if the grantor does not outlive the trust period.
Gifting Family Members
Each year, the IRS sets a limit for the amount that an individual can give to family members. Known as the gift tax exclusion, as of 2024, the amount is set at $18,000 per recipient. A married couple can gift that amount to each recipient without having to file a gift tax return. There is no limit on the number of recipients that can be gifted.
Gifting takes the money out of your taxable estate. However, in Pennsylvania, if you give a gift to a family member within a year of your death, the recipient will still have to pay an inheritance tax. When trying to make the best choice, it is always wise to consult with an experienced Harrisburg estate administration attorney.
Speak with A Harrisburg Estate Administration Attorney Today
Determining how to protect your lifelong savings can be a tedious process. Whether you are just beginning the process or would like to incorporate more advanced tax planning into your estate, we are here to assist you. To schedule your initial consultation, contact us online or call 717-231-5219.