Pennsylvania Inheritance Tax Marital Exemption

By Daniel B. Evans
Copyright © 1995 Daniel B. Evans. All rights reserved.

By Act 21 of 1995, Pennsylvania finally joined the federal government and most other states in exempting transfers to a surviving husband or wife from death taxes.

Pennsylvania began phasing out the inheritance tax on transfers to a surviving husband or wife with the enactment of Act 48 of 1994, but the exemption was supposed to be adopted in stages over four years. Beginning July 1, 1994, transfers to a husband or wife were subject to Pennsylvania inheritance tax of only 3%, instead of the 6% that had previously applied. In 1996 and 1997, the tax was to have been reduced to 2% and 1%, and then eliminated in 1998. However, the legislature has accelerated the reduction, and the zero tax rate will apply retroactively to all deaths in 1995.

Beginning January 1, 1995, there is no tax on transfers to a surviving spouse. There is also not tax on transfers to a trust for the surviving spouse if the trust is for the sole benefit of the spouse during the spouse’s lifetime (unless the executor elects for the inheritance tax to apply to the trust). However, the full value of the trust will be taxed on the death of the spouse.

When an estate passes into a trust and the surviving spouse is a beneficiary of a trust but not the sole beneficiary (or the spouse is the sole beneficiary but the executor elects to have the trust taxed), the interests of the surviving spouse and the remaindermen (usually children or other relatives) must be valued separately, and the inheritance tax applied to the value of the interests other than the interests of the surviving spouse. For example, the actuarial value of a life interest in a trust might be 85% for a fifty-five year old widower, so that 85% of the value of the trust would be free of tax and the remaining 15% of the trust would be taxed at 6%.

Before the 1995 amendments of the inheritance tax laws, the rules regarding the taxation of a trust after the death of the surviving spouse could have caused problems for wills and estates that pour over into revocable trusts or irrevocable life insurance trusts, because non-taxable assets (like life insurance) might have been mixed with taxable assets in a trust for the sole benefit of the surviving spouse and would have become taxable upon the death of the spouse. The flexible election provisions of the new law should allow families to avoid unnecessary taxes as long as the correct tax decisions are made after the death of a husband or wife.