When it comes to estate planning, many individuals are intimidated 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, will pass free of any federal or state inheritance tax.  The problem with leaving the entirety of your estate outright to your spouse can be that the surviving spouse will inherit an estate that is either too large to be gifted, or otherwise reduced, prior to death.

At the present time, many typical estate-related issues regarding federal estate tax consequences have been alleviated, albeit for a short period of time.  Congress has provided a two-year window, namely, the years of 2011 and 2012, where the federal exemption limit is $5 Million per individual, a significant increase from prior years.  What this basically means is that the first $5 Million of your estate not passing to your spouse would be exempted from federal taxes.

Additionally, the concept of "portability" was likewise introduced.  Portability allows a surviving spouse to take advantage of any unused portion of the estate tax exemption of their late spouse.  Basically, what that means is that if a husband dies first and does not utilize any of his $5 Million exemption, then $10 Million would be available to his surviving wife before any federal tax consequences would take effect.  Obviously, this places many estates outside the range of federal taxation rates, which are still in the 35% bracket.

Additionally, the gift tax exemption has been increased, and unified with the exemption limits, so that each individual now has a lifetime exemption of $5 Million per person.

These rules will remain in effect for the years of 2011 and 2012.  Unless Congress takes further action, the exemption rate, and the gift tax rate, will drop back down to $1 Million.  It is predicted that there will be some form of compromise so that either the $5 Million limit will remain, or this figure will be reduced to somewhere below that level, perhaps in the range of $3.5 Million.

With this obvious state of flux, individuals whose estates are in excess of $1Million should pay  particular attention to the changing rules, as their estates may fall back into federal taxing limits, especially after the completion of the 2012 elections.

Individuals should be aware that included in their federal estate will be any cash, stocks, bonds, retirement or 401K plan proceeds, annuities, and, most importantly, life insurance proceeds.

Pennsylvania Inheritance Tax

The tax rates imposed by the Commonwealth of Pennsylvania are far below those of the federal rates, but planning considerations are of importance for estates below the federal limit, and only subjected to this state tax.

Once again, any assets passing between a husband and wife will be exempt from Pennsylvania inheritance tax imposition.

Following bequests to a spouse, the State taxes children at the tax rate of 4.5% of the net estate, 12% for other family 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 amount, so that estates of any size left to a non-spouse will be responsible for payment of 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.

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 is important.

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