Last week, I covered the myth that you need to avoid probate. One common reason people want to avoid probate is because they believe it is one way to avoid inheritance tax. Not so fast. Whether or not an asset is a probate asset has no bearing on whether or not it is subject to inheritance tax. Both probate and non-probate assets are subject to Pennsylvania inheritance tax. So while there are reasons to ensure your beneficiary designations are current to keep the assets out of probate, avoiding inheritance tax is not one. Your IRA or 401(k) will still be subject to inheritance tax.
Are there ways to transfer wealth free of inheritance tax? Sure. Life insurance is a great way to do so. But not everyone can afford or qualify for life insurance. You can also gift during your life time. However, this can create other tax concerns. Under certain circumstances, trust assets may not be subject to inheritance tax, but you might spend more money putting those assets in trust than what you would ultimately be saving. So what does all of this mean for you? Finding ways to reduce inheritance tax is important and I always work with my clients to do so. However, I am mindful of the fact that in some cases, paying inheritance tax is actually the lesser of two evils. Don’t avoid inheritance tax when it ultimately can cost you or your beneficiary more money elsewhere. Work with a qualified attorney to discuss your goals, but keep an open mind. A thoughtful estate planning attorney will take the time to understand your unique circumstances so that they are able to consider all options and recommend the best plan for you.