Pennsylvania has a complex inheritance tax law which taxes almost all assets when a loved one passes away. The tax captures not only assets which are in the estate, but also assets which pass with a beneficiary designation upon death. One of the few exceptions to the inheritance tax is life insurance. But is life insurance always inheritance tax-free? How should inheritance taxes be handled when filing the inheritance tax return?
Life insurance is generally not subject to Pennsylvania inheritance taxes, but there are some very important exceptions.
- A policy where the person whose life was insured was someone other than the decedent. Life insurance owned by the decedent on the life of another is included in the tax.
- A life insurance policy with a cash surrender value should be partially reported. The cash surrender value is subject to inheritance tax.
- Insurance policies which are considered hybrids with an annuity. These types of policies can be partly exempt as life insurance and partly taxed as an annuity product.
How much inheritance tax is owed if the tax applies?
The amount of the tax varies depending on the relationship of the one who passed away to the person receiving the inheritance. In Pennsylvania, the inheritance tax rates are:
- 0% for a surviving spouse or to a parent from a child aged 21 or younger
- 4.5% to lineal heirs such as children, grandchildren, parents, etc.
- 12% to siblings
- 15% to all other heirs
It is very important to keep beneficiary designations for life insurance policies updated with alternative beneficiaries in place. I recommend my clients regularly review their estate plans, especially after major life events such as marriage or divorce. Outdated beneficiary designations can lead to family disputes or an undesired distribution of the assets in the estate.
As a probate attorney to estate executors, I help settle estates efficiently and reduce stress. If you know someone faced with a probate process or roadblocks to a property sale, please have them contact us for a free evaluation at:
Phone: (215) 918-4242
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