At Mooney Law, we have had to address recent confusion related to the taxability of non-probate assets. In order to probe the issue further, we must first understand the basics of estate administration.

In Pennsylvania, Probate is the process by which a loved one’s assets and debts are gathered upon their passing. Assets are converted to liquid cash in order to satisfy the liabilities associated with his or her debts. The procedure can take several months if the assets are all liquid and debts clearly organized, or the procedure can last years with assets that must be sold and converted to cash and/or disputed debts.  If there are enough assets to pay all credible creditors, then the beneficiaries may receive their share of the estate as directed in a Last Will and Testament or, in its absence, according to the Intestate laws of Pennsylvania.

Conversely, non-probate assets are those assets that pass to the beneficiary independent of the probate process. Common examples include:

Accounts held jointly with rights of survivorship Transfer-On-Death accounts
Trusts Pay-On-Death accounts,
Assets gifted to the beneficiary within 1 year of the date of passing Specific beneficiary designated assets such as life insurance

Therefore, assets can go through the probate process or outside of the probate process to the beneficiary. However, the beneficiary is still responsible for paying the applicable Pennsylvania Inheritance tax and satisfying the debts of the loved one. Pennsylvania Inheritance taxes are paid based on the distributions made to beneficiaries. The tax rates are determined by the relationship of the beneficiary to the person who passed away. The applicable rates are as follows:

Beneficiary: Tax Rate:
Spouse 0%
Lineal descendants and ascendants 4.5%
Siblings 12%
Non-family and extended family      (including nieces/nephews) 15%

The most common exceptions to Pennsylvania Inheritance tax are life insurance, assets gifted to the beneficiary outside of 1 year from the date of passing, and joint ownership with rights of survivorship. First, life insurance is a non-taxable asset, regardless if it is paid to the beneficiary directly as a non-probate asset or paid to the estate and in turn to the beneficiary through the probate process. Second, assets gifted outside of 1 year of the date of passing are not taxable as these gifts outside the scope of Pennsylvania Inheritance tax. Third, accounts held jointly with rights of survivorship are partially non-taxable. If the account was made joint with rights of survivorship more than one year before the date of passing, then the amount of the account that is taxable is determined by the number of joint owners. For example, if there are 3 joint owners on an account made taxable 5 years ago, and one passes away, then 1/3 of the account is taxable. Next, the tax rate that applies is based on the beneficiary’s relationship to the decedent. Continuing the example, if the other 2/3 of the account are held by the decedent’s daughter and niece, then the decedent’s 1/3 share is split equally between the two survivors. The daughter will owe 4.5% on her half of the 1/3 of the account that she inherited and the niece will owe 15% on the half of the 1/3 of the account that she inherited.

A firm grasp on these rules can help beneficiaries reduce the taxes owed while expediting the estate administration process. Whether you have lost a loved one or want to plan for these taxes, contact Mooney Law at 717-632-4656 to schedule a consultation.

Learn more about inheritance taxes and estate planning in general during my presentation to the Early Stage Support Group on Wednesday, March 27th from 1:30-2:30 p.m. at Adams County Emergency Services Building, 23 Greenamyer Lane, Gettysburg, PA 17325.  Contact Mooney Law for more information.