by Peter Klenk, Esq.

The Pennsylvania Inheritance Tax is a transfer tax. The tax is not an income tax, sales tax or real estate tax, it is a flat rate tax on the value of all assets transferred at death. If you have ever bought or sold real estate or an automobile you have paid a transfer tax. If a transfer is deemed a taxable event, then at the date of transfer the tax is collected. When you die you transfer everything… cash, real estate, jewelry, 401k, clothes, etc., and the Commonwealth deems these transfers taxable events just like the transfer of a deed or an auto title. Unlike the Federal Estate Tax, there is no social engineering behind the tax. It is simply a revenue-raising vehicle and as such has no minimum threshold. If a parent transfers one or a million dollars to a child at death it is subject to the same, flat rate.

The rate paid depends on the relationship of the beneficiary to the decedent, but the categories placed on these rates can be misleading. The rates are these:

• Spousal Rate: For those dying after 1/1/95, the rate is 0%.
• Lineal Rate: At first glance, this would be Grandparents and children, 4.5%.
• Sibling Rate: Brothers and sisters of the deceased, 12%.
• Charitable Bequests: Charitable gifts are tax-exempt.
• Collateral Rate: Everyone that does not fit into the above, 15%.

At first glance it would seem that a son-in-law or a daughter-in-law would fall into the “Collateral” rate subject to the highest tax rate of 15%. This is a common error, as they actual fall into the “Lineal” rate of only 4.5%. The “Lineal” Rate has been expanded over the years to include many persons that at first impression are not “Lineal” in a biological sense. It would be helpful if some other heading could be placed on this category, as the word “Lineal” often leads to confusion for those who do not regularly complete Inheritance Tax Returns.

The “Lineal” Rate of 4.5% includes the following people:

1. Grandfather and Grandmother of the deceased.
2. Father and Mother of the deceased.
3. Children of the deceased (includes adopted children, step children and even the deceased’s biological children if adopted by others).
4. Un-remarried wife and husband or widower of a child (daughter or son-in-law).
5. All lineal descendants of the decedent (grandchildren, great-grandchildren, etc. even if adopted by others and include adopted lineals and step-descendants).

Note that the word “Children” encompasses not only the biological children, but also biological children if others have adopted them, adopted children and stepchildren.

Therefore a bequest to the husband or wife of a deceased child (son-in-law or daughter-in-law) is taxed in the “Lineal” Rate of 4.5% as long as he or she has not remarried. If they have remarried then they fall into the “Collateral” Rate of 15%.

A suggestion I often make to parents who are thinking of making a gift to a son-in-law or daughter-in-law of a deceased child, is that the gift be placed in trust. In this way the in-law can be trustee and have ready access to the gift, but if he or she should die before spending the gift the gift-giver is assured that the remaining money pass to the grandchildren. The trust also protects the money should the daughter or son-in-law later remarry. With the trust the remaining money passes to the grandchildren, not the new husband or wife.

If you have any more questions, please feel free to contact me!