The Pennsylvania Department of Revenue, which administers the tax laws and other revenue programs, recently released the May 2013 tax collection totals.  Pennsylvania collected approximately $2 billion in total tax revenue in May 2013, and the PA Inheritance Tax accounted for approximately $100 million, bringing the PA Inheritance Tax yearly total to $770.1 million.

The PA Inheritance Tax accounts for a significant amount of revenue for the Commonwealth and is paid from the estate of a decedent (the deceased individual) as part of its administration by its Personal Representative (Executor or Administrator).  While Personal Representatives are fiduciaries (individuals held to the highest legal standards of loyalty and care when administering an estate), many are completely unfamiliar with the PA Inheritance Tax, how property is to be taxed, or how to begin preparing the tax return.  Recently, a Personal Representative in Pennsylvania was shocked to realize the Pennsylvania Department of Revenue was entitled to $55,000.00 for the Pennsylvania Inheritance Tax assessed on her brother’s estate. Hiring an experienced PA estates attorney would prevent such surprise and would ensure that the Inheritance Tax return is properly prepared, accurately calculated and timely filed.

The Estate of David McCallister

The Estate of David McCallister is a perfect example of the significance and impact that the Inheritance Tax may have on an estate being administered in Pennsylvania.  Nancy Patricella, a Pennsylvania resident, was named the Personal Representative for the estate of her late brother, David McCallister, whose Last Will and Testament left 40% of his estate to his wife and 60% to be split amongst his six nieces and nephews.  While administering the estate, Ms. Patricella was stunned to learn that $55,000.00 of the estate was to pay the Pennsylvania Inheritance Tax calculated on the property left to his nieces and nephews.  Ms. Patricella stated that she felt “blindsided” by such an amount and was completely unaware that not only does Pennsylvania have an inheritance tax, but the tax rate for assets left to nieces and nephews is an incredible 15%.  The counsel of an experienced PA estates attorney could have been tremendously useful in this regard.

What is the PA Inheritance Tax?

While Pennsylvania does not impose an estate tax due after the death of an individual, PA is one of only seven states that imposes an inheritance tax upon individuals receiving assets from a decedent living in Pennsylvania or a non-resident decedent who owned real estate or tangible property in Pennsylvania.  The Pennsylvania Inheritance Tax is assessed on almost all property owned by an individual at the time of death and has differing tax rates depending on the recipient’s relationship to the decedent.  The PA Inheritance Tax rates for 2013 are as follows:

  • Assets to Legally Married Spouses and Charities  = 0%
  • Assets to Children, Grandchildren, and Direct Descendants = 4.5%
  • Assets to Siblings = 12%
  • Assets to Others (Includes Nieces/Nephews, Cousins, Friends, etc.) = 15%

What Must be Filed and When?

The PA Inheritance Tax return, or the REV-1500, must be filed and the necessary taxes must be paid by the Personal Representative within nine months from the date of death to avoid a penalty of 25% of the tax due or $1,000 (whichever is less) from being assessed on the estate. The Pennsylvania Department of Revenue provides the REV-1500 and a 27-page REV-1500 instructional guide for anyone to access.  Personal Representatives are encouraged to review these documents as soon as possible with a knowledgeable PA estates attorney, as a 5% tax discount will be applied if an estimated tax payment is made within three months of the date of death.

Even if the required tax return is timely filed, it must be properly completed as well.  When completing the return, it is important to attach copies of any referenced documents, including copies of the Will, expense and bank statements, and property appraisals.  As with any tax return, audits are a real possibility if an estate’s tax return is improperly completed.  The tax return is a complex document and preparing an error-free return can be difficult and confusing without the help of a lawyer.   It is wise for any Personal Representative in Pennsylvania to speak with a qualified PA estates attorney before attempting to file the REV-1500 in order to avoid penalties and to ensure proper and timely completion.

What Property is Taxable?

All real property located in PA and all personal property of a PA resident is taxable under the Inheritance Tax.  This includes cash, cars, furniture, antiques, jewelry, etc., located in Pennsylvania at the time of death as well as intangible property, including stocks, bonds, bank accounts, and certain retirement benefits, IRA accounts, and annuities, regardless of location.  Jointly owned property is taxable (except between husband and wife) to the extent of the decedent’s interest in the joint property, including real estate, securities, and bank accounts.  For example, if a house in PA is owned equally between brother and sister (both residents of PA) for 10 years and then brother dies, his 50% interest in the property is part of his taxable estate.  However, if the decedent created the joint interest in the property within one year of his or her death, the full value of the property is taxable.

In the case of a non-resident, only the real property and tangible personal property located in Pennsylvania at the time of death is taxable.

How is the PA Inheritance Tax Amount Determined?

In order to determine the amount due under the PA Inheritance Tax, a Personal Representative must first ascertain the value of each of the decedent’s assets as of the date of death.  With real estate, the value is typically determined by having an appraisal performed, while bank account values are obtained directly from the financial institutions.  A Personal Representative’s failure to identify and value every asset of the estate will not only create an inaccurate tax return and potential liability as the fiduciary, but may also create problems after the estate is distributed to the heirs.

Furthermore, the PA Inheritance Tax is not imposed on the gross value of an estate, as deductions may be made before taxes are assessed.  A knowledgeable PA estates attorney can advise Personal Representatives on what deductions are allowed (including debts which are owed, funeral expenses, certain estate costs, and possibly a $3,500 “family exemption”) and how to calculate the total tax due.

Once the estate is valued and deductions are taken, the Personal Representative must look to whom the assets are passing to, either through the decedent’s Will or through Pennsylvania’s Intestacy Laws (if there is no Will). As stated above, the PA Inheritance Tax rate depends on the relationship of the beneficiary to the decedent.

Conclusion

Ms. Patricella  was ultimately forced to pay the necessary taxes on her brother’s estate, and similar situations are far too common.  It is imperative for any Personal Representative in Pennsylvania to immediately contact an experienced PA estates attorney to not only discuss how to prepare the PA Inheritance Tax return, calculate the taxes due, and timely submit all the necessary information, but also to avoid potential penalties, audits, asset distribution problems, and personal liability as the fiduciary.