Short answer: You cannot avoid Pennsylvania inheritance tax entirely in most cases, but you can reduce it. The most common legal ways are leaving assets to a surviving spouse (taxed at 0%), using life insurance (exempt), making gifts more than one year before death, naming charities, using exemptions for family farms and small family businesses, and paying the tax within three months of death to receive a 5% discount.
Pennsylvania taxes what each beneficiary receives, at 0% for spouses, 4.5% for children and other lineal heirs, 12% for siblings and 15% for others. That means planning around who receives what matters as much as the size of the estate. Estimate the tax with our free PA inheritance tax calculator.
1. Use the 0% rate for spouses
Everything that passes to a surviving spouse is taxed at 0%, including property owned jointly by spouses. For married couples, planning often focuses on the second death, when assets pass to children at 4.5%.
2. Life insurance is exempt
Life insurance proceeds are not subject to Pennsylvania inheritance tax, no matter who receives them. For families expecting a large tax bill, for example on a farm or mineral interests, a policy can provide cash to pay the tax without selling property.
3. Make gifts more than one year before death
Pennsylvania has no gift tax. Gifts made more than one year before death are generally not subject to inheritance tax. Gifts made within one year of death are taxed to the extent they exceed $3,000 per recipient. Large gifts have other consequences, such as loss of a step-up in income tax basis and Medicaid look-back rules, so get advice first.
4. Leave assets to charity
Transfers to qualifying charities and government entities are exempt. A charitable bequest reduces the taxable estate while supporting causes you care about.
5. Use the family farm and family business exemptions
- Qualified family farms passing to family members can be exempt if the farming continues for a required period after death.
- Qualified family-owned businesses with fewer than 50 employees and a net book value below $5 million can be exempt when transferred to family members who keep the business going for seven years.
Both exemptions have strict conditions and filing requirements, so plan ahead.
6. Understand how retirement accounts are taxed
Retirement accounts are often taxable, but there is an important exception: accounts are generally exempt if the person who died was under age 59½ or otherwise could not withdraw the money without penalty.
7. Be careful with joint accounts
Adding a child to a bank account does not make it tax-free. When property is owned jointly by people other than spouses, the decedent’s share is taxable. Accounts made joint within one year of death can be fully taxable. Joint ownership can also expose the money to the other owner’s creditors.
8. Pay early for the 5% discount
Inheritance tax is due nine months after death. If it is paid within three months, the estate receives a 5% discount on the amount paid. Estates can make an estimated payment early even before the return is filed. Our executor checklist and deadline calculator shows these dates.
9. Claim every deduction
Funeral costs, debts, administration expenses, attorney and executor fees, and certain other costs reduce the taxable estate. A careful return can lower the tax substantially.
What does not avoid PA inheritance tax
- A revocable living trust. It avoids probate, but trust assets are still subject to inheritance tax. See how to avoid probate in Pennsylvania.
- Beneficiary designations and transfer on death accounts. They avoid probate, not tax.
- Adding a child to your deed shortly before death. Gifts within a year of death are pulled back into the estate.
Mineral rights and inheritance tax
Oil and gas interests are taxable and must be valued as of the date of death. In Washington County and southwestern Pennsylvania, these interests can be worth more than families expect. Planning tools such as lifetime gifts, family LLCs and life insurance can help. See our guide to estate planning for mineral rights owners.
Frequently asked questions
Is there a way to avoid inheritance tax in Pennsylvania completely?
Only in some situations, such as when everything passes to a surviving spouse or to charity, or is exempt. For most estates the goal is to reduce, not eliminate, the tax.
Does a trust avoid Pennsylvania inheritance tax?
A revocable living trust does not. Some irrevocable trusts funded more than one year before death, where the person kept no interest, can reduce the tax. These require careful drafting.
Do I pay inheritance tax on a house in Pennsylvania?
Yes, unless it passes to a surviving spouse or is otherwise exempt. A house passing to a child is generally taxed at 4.5%.
Does Pennsylvania have an estate tax too?
No. Pennsylvania has an inheritance tax but no separate estate tax. See does Pennsylvania have an estate tax.
Want to reduce the tax your family will owe? Heather N. Kostrub builds estate plans for families in Washington County and the Pittsburgh area. Call (304) 982-1586.