Simple Planning Can Mean Significant Savings
In Pennsylvania, virtually all assets passed on after death are subject to state inheritance taxes. The following rates apply:
- 0 percent on transfers to a surviving spouse
- 4.5 percent on transfers to direct descendants and lineal heirs
- 12 percent on transfers to siblings
- 15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax
However, life insurance is not subject to Pennsylvania inheritance tax, which allows for some relatively simple planning that can provide for meaningful savings. Further, similar opportunities apply for individuals in second marriages.
For example, one spouse has a $500,000 life insurance policy and names the other as the primary beneficiary. Often the surviving spouse will need the proceeds to maintain their standard of living for many years. But in some cases, the surviving spouse could have sufficient assets and not need the life policy proceeds. If the surviving spouse receives the death benefit and later passes the amount to their children or stepchildren, the Pennsylvania inheritance tax would apply at the rate of 4.5 or 15 percent: $22,500 for the children, $75,000 for the stepchildren.
If the spouse of the insured will not need the life insurance proceeds to maintain their standard of living, the insured could name the children and stepchildren as primary beneficiaries, whereupon the proceeds would not be subject to the state inheritance tax.
Now let’s assume the uninsured spouse dies first and the insured spouse names their children as primary beneficiaries. But these children already have sufficient assets, will inherit significant assets from their parents’ estate, or otherwise don’t need the insurance proceeds. By naming the grandchildren as primary beneficiaries of the $500,000 policy, the untaxed insurance proceeds and any investment gains on that money would grow in their names, not in the policyholder’s children’s names where they would be subject to the inheritance tax when passed along at their deaths.
Similar planning opportunities are available when passing on assets to adult children who plan to pass them on to their children. That could result in the inheritance tax being applied once at the death of the original p0licyholder and again at their children’s deaths. Careful planning could prevent the application of the 4.5 or 15 percent tax twice.
Consider the case of a blended family where the client was planning to leave a vacation home to a stepchild via a will. By changing the property to joint ownership with the spouse, the vacation home would pass to the child at 4.5 percent inheritance tax as opposed to 15 percent had the planning not been done: a savings of $52,750 on a $500,000 property.
Beneficiary planning is an integral part of estate planning, as life insurance, IRAs and annuities do not pass through a will but directly to the named beneficiaries. However, this type of planning, which involves financial planning, tax planning and estate planning, can be complex; it requires a significant level of coordination among your financial advisor, CPA and attorney. At HBKS® Wealth Advisors, we routinely orchestrate this activity with our partners at HBK CPAs & Consultants and skilled estate planning attorneys to provide for the most beneficial outcomes for our clients and their heirs.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does
not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like
investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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