Pennsylvania’s Inheritance Tax is levied on assets passing to beneficiaries when a person passes away. The rate of tax varies depending upon who inherits the assets. Children and grandchildren are taxed at 4 1/2% while brothers and sisters pay 12% and others, including friends, nieces and nephews pay 15%. My clients will occasionally ask how to avoid this inheritance tax, especially with the higher tax rates. I tell them one of the effective ways to avoid the tax is to establish a domicile in another state that does not have an inheritance tax.

Pennsylvania is one of only a handful of states that has an inheritance tax without an exemption for smaller estates. Many of your retirement states in the South and West do not have an inheritance tax, such as South Carolina, Florida, and Nevada. For many snowbird clients, you have the opportunity to establish your residency in another state, such as Florida and South Carolina.

Even the Department of Revenue understands there may be some cases where a former Pennsylvania resident is now a resident of another state and cannot be subject to the Pennsylvania inheritance tax on most of their assets at death. The Department of Revenue establishes guidelines for determining the residency at death, often called a domicile. They want to determine where the individual had the greatest connections and where they intended to reside. Some of the factors they set forth include where the individual spent most of their time, had their active bank accounts and received most of their medical care. Other factors can include; where the deceased voted, paid local and state taxes, as well as garaged and titled their cars.

At the time of the deceased passing, the Department of Revenue asks the estate representative to complete an Affidavit of Domicile setting forth the contacts the deceased had with Pennsylvania. If the deceased did not have sufficient contacts with Pennsylvania, the liquid assets, often called personality, will not be subject to Pennsylvania Inheritance Tax. However, Pennsylvania does have the right to tax real estate located in Pennsylvania, regardless of residency.

So, for you snowbirds who spend some time in Pennsylvania and another state, such as Florida, you may want to establish your domicile in a state other than Pennsylvania if you wish to avoid the impact of the Pennsylvania Inheritance Tax.

Marshall, Parker & Weber is open and available to help you assess what documents you may need or whether your current plan is in good shape. Call us at 800-401-4552 to schedule an appointment. You can also check out our portal for complimentary blog articles, videos and webinars.
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