Your IRA is subject to the Pennsylvania Inheritance Tax, which can prove to be a tax trap.
For example, if you leave $100,000 from your IRA to a friend, that gift is subject to the 15% Pennsylvania Inheritance Tax rate. To avoid interest and penalties on the Pennsylvania Inheritance Tax, within 9 months of your death your friend must pay the Commonwealth $15,000. If your friend does not have $15,000 of liquid assets, she may have to remove the $15,000 from the IRA. If she does, this will trigger her to recognize $15,000 of income. If she does not have the liquid assets to pay the income taxes due on the $15,000, she may have to remove the money from the IRA, which triggers even more income taxes.
You can see, your friend might end up quickly liquidating the entire IRA to pay the Inheritance and Income taxes due.
A good Estate Planning Attorney will work with you to help prevent this tax spiral.
For example, life insurance is not subject to the Pennsylvania Inheritance Tax, making it an excellent tool to make gifts to those who would otherwise be subject to the tax. If you leave the same friend $100,000 in life insurance there is no Pennsylvania Inheritance tax or income tax due. Your friend is free to enjoy the entire $100,000.
Estate planning can help move money out of the Commonwealth and IRA’s pocket and into the pockets of your heirs.
If you have questions about estate planning 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