Estate Planning

Pennsylvania Inheritance Tax: What Pittsburgh Families Need to Know

---

Pennsylvania is one of only six states that still imposes an inheritance tax. Most families find out about it when they are already dealing with a death — which is exactly the wrong time to learn that a significant portion of what they are inheriting is owed to the Commonwealth within nine months.

This is not an obscure tax that only affects the wealthy. It applies to most estates, at rates that vary sharply depending on who is receiving the assets. Understanding how it works — and planning around it before it becomes someone else’s problem — is one of the more concrete things an estate plan can accomplish.

How Pennsylvania Inheritance Tax Works

Pennsylvania inheritance tax is imposed on the transfer of assets from a deceased person to their beneficiaries. The estate almost always pays it before distribution, even though technically the tax falls on the recipient. It applies to real estate, bank and investment accounts, closely held business interests, vehicles, and most other assets owned at death.

It is separate from federal estate tax, which most families do not owe. Pennsylvania inheritance tax is not like that — it hits at much lower thresholds and applies broadly. If you own property in Pennsylvania, this tax applies to your estate regardless of where you live.

Pennsylvania Inheritance Tax Rates by Relationship

The rate depends entirely on who receives the assets:

0% — Surviving spouse and charities
Everything passing to a spouse is exempt. This is the most significant planning lever available to married couples.

0% — Children under 21 receiving from a parent
A parent-to-child transfer is exempt if the child is under 21. Once they turn 21, the 4.5% rate applies.

4.5% — Direct descendants and ancestors
Children 21 and older, grandchildren, and parents pay 4.5%. For most Pittsburgh families, this is the rate that drives the planning conversation.

12% — Siblings
This rate surprises people. Brothers and sisters are not treated like children under Pennsylvania law. A $500,000 transfer to a sibling generates $60,000 in tax. We have seen families make significant planning mistakes by assuming siblings would be taxed similarly to children.

15% — Everyone else
Nieces, nephews, cousins, longtime unmarried partners — all pay 15%. An unmarried partner of 20 years has no special status under Pennsylvania inheritance tax law. That is a planning problem with a planning solution, but only if it is addressed before death.

The Nine-Month Deadline and the Discount You Should Not Miss

The inheritance tax return is due nine months after death, filed with the Pennsylvania Department of Revenue. Pennsylvania offers a 5% discount on tax paid within three months of death.

On a taxable estate of $1 million passing to children, the tax at 4.5% is $45,000. Paying within three months saves $2,250. For larger estates the discount scales accordingly. It is not a reason to rush decisions that should not be rushed, but it is worth factoring into the administration timeline from the beginning — not three months in when the window has already closed.

Executors who are not aware of this discount often miss it simply because no one told them to look for it.

What Assets Are Subject to the Tax

Most assets owned at death are subject to Pennsylvania inheritance tax. The list includes things people expect — real estate, bank accounts, investment accounts — and things that catch families off guard:

• Closely held business interests, valued at fair market value
• Gifts made within one year of death — Pennsylvania pulls these back into the taxable estate
• Life insurance payable to the estate itself (not to named beneficiaries)

Assets that generally pass outside the inheritance tax:

• Life insurance with a named beneficiary other than the estate
• Retirement accounts payable to named beneficiaries — though income tax typically applies to distributions
• Assets passing automatically by joint tenancy with right of survivorship

The one-year gift rule matters more than most people realize. Families who try to reduce the estate in the final months of a parent’s life often find those transfers pulled back in. Planning needs to happen years in advance, not weeks.

Real Estate in Pittsburgh Estates

This is where we see the most significant — and most avoidable — problems.

A family home in Squirrel Hill, Fox Chapel, or Mt. Lebanon that was purchased decades ago may have appreciated substantially. For inheritance tax purposes, it is valued at fair market value on the date of death, not what was paid for it. A property worth $900,000 passing to adult children generates $40,500 in inheritance tax due within nine months — whether or not the heirs have the cash to pay it and whether or not they intend to sell.

That tax bill does not wait for the house to sell. It does not adjust because the market is slow. Executors who do not plan for this find themselves in a difficult position, sometimes forced to sell property faster than they should to generate the funds to pay the tax.

Ownership structure, title, and coordination with the estate plan all affect how this plays out. The time to address it is not during estate administration. It is years before.

Closely Held Business Interests

Business interests present a different set of problems. Unlike a publicly traded stock, a closely held LLC or partnership interest has no obvious market price. It must be valued — and how it is valued determines how much tax is owed.

Valuation discounts for lack of control and lack of marketability can legitimately reduce the taxable value of a business interest. Family limited partnerships and family LLCs, when properly structured and administered, can make these discounts available. The Pennsylvania Department of Revenue scrutinizes these positions, and a defensible appraisal from a qualified professional is not optional — it is essential.

Families that transfer business interests at death without having addressed valuation during life often pay more tax than they should, or spend significant money and time fighting the Department of Revenue over a number that could have been established in advance.

Planning Strategies That Actually Work

Pennsylvania inheritance tax cannot be eliminated for most estates, but it can be reduced through planning that is done early enough to matter.

Maximize the spousal exemption. Assets left to a surviving spouse are fully exempt. Many estate plans are structured to take full advantage of this before assets pass to children at 4.5%.

Use life insurance strategically. Life insurance paid directly to named beneficiaries passes free of Pennsylvania inheritance tax. It can also provide heirs with liquid funds to pay the tax on illiquid assets — real estate and business interests that cannot easily be converted to cash on a nine-month deadline.

Irrevocable life insurance trusts. An ILIT holds the policy outside the taxable estate, keeping the death benefit available to cover inheritance tax obligations without being taxed itself. This requires planning well before death.

Long-term gifting. Because Pennsylvania pulls back gifts made within one year of death, gifting programs need to start early. They also need to be coordinated with the Medicaid five-year lookback period for clients who may eventually need nursing home care — a consideration that affects a large number of Pittsburgh families.

Medicaid asset protection trusts. For clients planning ahead for long-term care, a properly structured irrevocable trust can remove assets from both Medicaid countable resources and the Pennsylvania inheritance tax base. The five-year lookback means this planning needs to begin well before care is needed. Waiting until a health crisis is too late.

Entity structures for business interests. Family limited partnerships and family LLCs create valuation discounts that reduce the inheritance tax value of business interests transferred to heirs. They require careful drafting, ongoing administration, and coordination with existing estate and business documents. Done correctly they are one of the most effective wealth transfer tools available to Pittsburgh business-owning families.

The Federal Estate Tax Complication

Most Pennsylvania families do not currently owe federal estate tax — the exemption is high. However, the current exemption levels are scheduled to drop significantly after 2025 unless Congress acts. Families with larger estates should be watching this closely.

The strategies that reduce Pennsylvania inheritance tax do not always reduce federal estate tax, and vice versa. Keeping assets in a revocable trust preserves the stepped-up basis at death — potentially saving heirs significant capital gains tax — but does not remove assets from the Pennsylvania inheritance tax base. An irrevocable trust removes assets from the inheritance tax base but may affect the stepped-up basis depending on structure.

These are not theoretical distinctions. They produce real dollar differences that should be modeled against specific assets and family circumstances, not assumed.

What Executors Need to Know Before They Start

If you are serving as executor of a Pennsylvania estate, Pennsylvania inheritance tax is one of your primary legal obligations. The return is due nine months after death. The 5% discount for early payment closes at three months — find out on day one whether early payment is feasible. Real estate and business interests require professional valuation, not an estimate. The tax must generally be paid before final distribution to beneficiaries. If you distribute assets first and the tax goes unpaid, the liability follows you personally.

Executors who move through estate administration without legal counsel often make errors that cost the estate — and themselves — significantly more than the cost of getting it right the first time.

---

This article is for general informational purposes and does not constitute legal advice. Pennsylvania tax law is subject to change. Contact our office to discuss your specific situation.

Related:
Wills, Estates & Trusts  · 
Estate Administration and Probate  · 
Estate Planning FAQs  · 
Business Succession Planning