The impact of fiscal cliff negotiations on Pennsylvania estate plans

May 03, 2013

The impact of fiscal cliff negotiations on Pennsylvania estate plans

Article provided by Katherman, Heim & Perry
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Estate planning is a complex legal process. One reason this area of law is so complex is the fact that laws surrounding it are constantly changing. Just this year, legal, tax and financial professionals were carefully watching how Congress would choose to handle the estate tax during the fiscal cliff negotiations.

Congress' decision would impact estate plans throughout the nation. If Congressional leaders had chosen to leave the estate tax laws untouched, it would have resulted in a dramatic decrease in tax free transfers and an increase in the tax rate. Those changes would have resulted in higher taxes on estate plans.

How Congress responded

Instead of allowing this law to sunset, Congress essentially chose to make the current law permanent.

This law specifically impacts the estate tax. The estate tax is a fee that is applied to property that is transferred after someone dies. It can apply to the transfer of real estate, insurance, trusts, business interests and other assets.

The amount taxed is determined by calculating the fair market value of all applicable assets and subtracting certain deductions. Deductions that can apply include mortgages and other debts as well as donations to charities.

The current law allows a basic exclusion of five million dollars per person. This amount is adjusted for inflation, and is reportedly set at $5,250,000 for 2013. If an estate is worth more than five million dollars, an estate tax will likely apply. There is one notable exception: spouses that are U.S. citizens have an unlimited exclusion amount. This means the entire estate can be transferred to a spouse without penalty.

How this response impacts Pennsylvania estates

The above law is federal. As a result, it applies to Pennsylvania estates. It is important to keep in mind that estate taxes are applied at both the federal and state levels. In addition to the federal taxes, state taxes can apply.

In Pennsylvania, this tax is referred to as an inheritance tax and is applied as a percentage of the total value of the estate. A 4.5 percent tax is applied to direct descendants, such as children and a 12 percent tax is applied to transfers to siblings. Transfers to other relatives, friends or non-exempt organizations are taxed at 15 percent. Similar to federal law, transfers between spouses are exempt.

Estate laws often change, making it important to regularly review estate plans. If you have an estate plan, or would like to develop one, contact an experienced estate planning attorney to better ensure an estate plan reflects your wishes.