On January 1, 2020, a new change to Pennsylvania’s Inheritance Tax Law became effective for decedents who pass away as of that date and leave assets to children under the age of twenty-one (21). Under the new law, inheritances from parents to children under the age of 21 will now be taxed at a zero percent rate, effectively passing inheritance tax-free.
Pennsylvania is one of six states that assesses an inheritance tax on the transfer of assets from a decedent to his or her heirs. Pennsylvania’s Inheritance Tax is applied to a decedent’s probate and nonprobate property, including real property based in Pennsylvania, cash accounts, IRAs, 401ks, and joint property. Out of state real property and life insurance proceeds are exempt from Pennsylvania Inheritance Tax.
The rate of Inheritance Tax depends on the relationship between the decedent and the recipient of the property. Under Pennsylvania’s prior Inheritance Tax law, transfers to all descendants, including children, stepchildren, and grandchildren, were taxed at a 4.5% rate. Now, with the new Inheritance Tax law becoming effective, transfers from a parent or stepparent to a child (including an adoptive child) or stepchild who is under the age of 21 on the date of the parent or stepparent’s death will be taxed at a zero percent rate. It is important to note that this new law only applies to transfers from a parent or stepparent to a child under the age of 21; transfers to all other descendants (including from grandparents to grandchildren under the age of 21) will continue to be taxed at the 4.5% rate.
As for other Inheritance Tax rates, they remain unchanged, so: transfers from a decedent to his or her surviving spouse are taxed at a zero percent rate, while transfers to siblings are taxed at 12%. Transfers to all other individuals are taxed at a rate of 15%. Finally, any distributions left to a charity are exempt from Pennsylvania Inheritance Tax.