Making gifts to nieces and nephews for Pennsylvanians forces the calculation of the Pennsylvania Inheritance Tax. The tax is levied on the transfer of your assets at your death, and the rates differ depending on who is the recipient.
Lineal descendants are subject to a 4.5% tax, while non-lineal descendants (other than siblings) are taxed at 15%. That is a substantial difference! While children and step-children are lineal descendants, nieces and nephews are not. When a client wants to include a niece or nephew in their estate plan, I hope that the client has life insurance. Life insurance is one of the few assets exempt from the Pennsylvania Inheritance Tax, so a gift of life insurance to a niece or nephew avoids the 15% tax. Life insurance has the added advantage of being very easy to change beneficiaries. If that niece or nephew forgets your birthday, you can change the gift amount quickly and easily, often over the internet.
If you do not have life insurance, I would still consider using non-probate assets to make your gift. Once you name a person in your will, that person becomes part of the probate notification process and the entire probate. This can increase the time your executor must spend on your estate and the overall costs. If instead of using you will, you name the niece and nephew as beneficiary of your IRA or using a Transfer on Death designation on one of your bank or stock accounts, you then do not have to include them in the probate process. Unlike you life insurance, these transfers will be subject to the Pennsylvania Inheritance Tax, which you should take into consideration.
If you have questions about estate planning or probate in Philadelphia County, Pennsylvania, feel free to contact our office for a free consultation.
Wills, Trusts and Estates, It’s all we do!
Peter Klenk, Esq