Benjamin Franklin, who uttered the famous maxim about death and taxes, would certainly be aghast at the confiscation of wealth that is our current estate tax system. The first estate tax was enacted in the 1860s as a modest levy to help pay the costs of the Civil War. Since then, there has been a federal estate tax in all but nine years and the current federal estate tax levy approaches 50% of the estate value. Throughout our history, the imposition of a federal estate tax has been a contentious political and social policy issue and certainly remains so today.
There are some benefits to our current estate tax system, however. The step-up in basis for assets transferred via the estate process can eliminate significant unrealized capital gains for your heirs, especially for smaller estates not subject to estate tax. In addition, effective death tax planning can reduce the financial impact of both estate and inheritance tax that would be levied on your estate.
Complicating the death tax issue is the income tax liability embedded in retirement investment vehicles like 401(k) plans, IRAs and annuities. Income tax liability due at death of the account owner can have a devastating impact on the after-tax value transferred to your heirs. Thorough estate planning, to include beneficiary designation planning, could reduce the impact of income taxes associated with estate transfer.
Pennsylvania imposes an inheritance tax on its residents. The inheritance tax has some unique characteristics that require specific planning techniques to limit its financial impact on your estate.
There is no shortage of death tax reduction planning strategies, but they require the guidance of competent legal and wealth advisors to implement. We strongly encourage you to seek out professional counsel to discuss your estate situation.
