When it comes to estate planning, many individuals are turned off by the seeming complexity of the subject. Here are a few pieces of information that may simplify the process for you.

Federal Estate Tax
As a starting point, you should be aware that any assets that are either titled jointly with your spouse or are left by Will to them will pass free of any federal or state inheritance tax. The problem with leaving the entirety of your estate outright to your spouse is that it may create problems for the second spouse to die if the size of the estate is too large to be gifted, or otherwise reduced prior to death. Additionally, significant "bypass" provisions may be underutilized if all property is held jointly.

At the present time, the federal government has established a figure of $2 Million as the exempt figure for estates of individuals who die during the year 2008. For the year 2009, that figure rises to $3.5 Million; for the year 2009, there will be no federal inheritance tax; and that figure then reverts to $675,000 in the year 2011.

As you can see, the nature of the exemption is in a state of flux. It is expected that, following the upcoming presidential elections, the figures described above will change. This will have an obvious impact on individuals, depending on the size of your estate. You should be aware that you can shelter the dollar figure exemptions through careful estate planning. Typically, a credit-shelter trust is formed, to utilize the maximum exemption permitted. It is most important for individuals to be wary of federal inheritance tax consequences, as the tax rate for bequests left above the exempted amount is well over 40%.

Individuals should also be aware that, included in their federal estate will be any cash, stocks, bonds, retirement or 401K plan proceeds, annuities, and, most importantly, insurance proceeds. Oftentimes, the inclusion of all of these items will place an estate into the federal estate tax category.

Pennsylvania Inheritance Tax
The State of Pennsylvania is less onerous as far as income tax rates are concerned, but planning considerations should be considered with estates that will be below the federal limit, and only subjected to the state tax. Once again, any assets left between a husband and wife will be Pennsylvania inheritance tax-exempt.

Following bequests to a spouse, the State taxes children at the tax rate of 4.5% of the net estate, 12% for other non-sibling relatives, and 15% for other individuals to whom bequests are made. An exception to this would be funds left to charity, for which there is no Pennsylvania or, for that matter, federal tax imposed. Pennsylvania has no exemption figure, so that estates of any size left to a non-spouse will be charged with state inheritance tax.

Pennsylvania has an additional distinguishing feature, in that life insurance proceeds are not considered a part of an individual's estate, for purposes of taxation. Consult us for strategies that can be employed in order to reduce the amount of state inheritance tax owed.

Probate
Very briefly, probate is the process by which a Will is formally admitted into the Pennsylvania inheritance tax system. This allows the executor of the estate to act on its behalf through the issuance of letters testamentary, commonly referred to as "Short Certificates." Individuals should be aware that both federal and state tax obligations must be completed within nine months from the date of an individual's death. It is for this reason that acting on the admission of a Will into probate within a reasonable period of time following an individual's death should be considered.

Please call or e-mail us with your specific questions!