Estate Planning & Probate

Federal Estate Tax Pennsylvania | Exemptions, Rates and Planning

Most Pennsylvania families do not owe federal estate tax. For those who do, the difference between a plan and no plan is often measured in millions of dollars.

For families with significant wealth across multiple states, the 40 percent federal estate tax rate above the exemption can transfer more to the IRS than to the next generation.

Federal estate tax and Pennsylvania inheritance tax are separate obligations. A large estate may owe both. An estate below the federal exemption still owes Pennsylvania inheritance tax on transfers to anyone other than a surviving spouse. Executors need to account for both in the administration timeline before any distribution to heirs.

What the Federal Estate Tax Actually Is

The federal estate tax is a tax on the right to transfer property at death, paid by the estate before heirs receive anything. It applies only to estates above the applicable exemption, but at 40 percent above that threshold, the dollars at stake are significant.

The federal estate tax is a tax imposed on the right to transfer property at death. It is calculated on the total fair market value of everything owned by the decedent at the time of death, including real estate, investment accounts, retirement accounts to the extent included, business interests, life insurance proceeds payable to the estate, and other assets. The tax is not an income tax, and it is not Pennsylvania inheritance tax. It is a separate federal obligation with its own exemptions, its own rates, and its own filing requirements. The federal estate tax return (Form 706) is due nine months after the date of death under 26 U.S.C. § 6075(a). Extensions are available but the tax itself, if owed, must be estimated and paid by the original deadline to avoid interest and penalties. The tax is paid by the estate before any distribution to heirs, which means executors must plan for liquidity before the estate is distributed.

The Current Exemption After the One Big Beautiful Bill Act

The current federal estate tax exemption is $15 million per individual. For a married couple using portability, the combined exemption is $30 million. Estates below those thresholds owe no federal estate tax regardless of how the assets are distributed.

The One Big Beautiful Bill Act, signed into law on July 4, 2025, permanently raised the exemption and eliminated the sunset provision that had been scheduled to cut it roughly in half at the end of 2025. The exemption is now indexed for inflation going forward. Congress can always change the law. Families with estates in the $10 million to $30 million range should not treat the current exemption as a permanent guarantee. The conversation has shifted from emergency action to long-term structural planning, but it has not ended.

The 40 Percent Rate and What It Means in Practice

For the portion of an estate that exceeds the applicable exemption, the federal estate tax rate is 40 percent. That is not a marginal rate on the whole estate. It applies only to the taxable excess above the exemption. But at that rate, the numbers move quickly.

Pennsylvania Inheritance Tax and Federal Estate Tax: Two Different Problems

Pennsylvania is one of only six states that imposes an inheritance tax. Under 72 P.S. § 9116, the Pennsylvania inheritance tax applies to nearly every transfer at death, at rates ranging from zero percent for transfers to a surviving spouse to 4.5 percent for transfers to children and lineal descendants, 12 percent for siblings, and 15 percent for all others. There is no exemption based on estate size. A $200,000 estate and a $2 million estate both go through the same inheritance tax calculation.

Federal estate tax and Pennsylvania inheritance tax are separate obligations. A large estate may owe both. An estate below the federal exemption still owes Pennsylvania inheritance tax on transfers to anyone other than a surviving spouse. Executors and administrators need to account for both in the administration timeline and cash flow planning for the estate.

The Snowbird Problem: Florida Property and Federal Estate Tax

Many Pittsburgh families own Florida property, including condominiums in Naples or Sarasota, residences in the Tampa Bay area, and units in Fort Lauderdale buildings they have owned for twenty years. Florida has no state income tax and no state estate tax, which is one reason Pittsburgh families have been buying there for decades. But Florida property counts in the federal gross estate calculation regardless of where the owner was domiciled.

The domicile question is where the real money is. If you spend six months in Florida, file a Declaration of Domicile, and vote there, but Pennsylvania still considers you domiciled here, your estate pays Pennsylvania inheritance tax on every dollar. A contested domicile proceeding before the Register of Wills is expensive, slow, and unwinnable without documentation that should have been assembled years earlier. Stephen H. Lebovitz is licensed in both Pennsylvania and Florida. Clients navigating the domicile question, Florida property administration, or both Pennsylvania inheritance tax and federal estate tax on the same estate work with one attorney who knows both bodies of law and can document the domicile shift properly while there is still time to do it.

North Carolina Property: Mountain Homes and the Estate Tax Calculation

Pittsburgh families with North Carolina property face a specific problem at death: an ancillary probate proceeding in North Carolina is required to transfer real property titled in the decedent’s individual name, regardless of where the owner lived. A mountain home in the Asheville area, a lake property in the western counties, or a retirement residence all trigger this requirement unless proper planning is done before death. Proper planning, such as a revocable trust, an LLC holding the property, or a properly structured deed, can avoid ancillary probate entirely.

North Carolina does not impose a state estate tax, but North Carolina real estate is included in the federal gross estate. That planning also affects the estate tax calculation depending on how the property is held and what valuation discounts may apply to closely held interests.

Planning Strategies That Actually Work at the Federal Level

For families whose estates approach or exceed the current exemption, several strategies reduce federal estate tax exposure. Each of these strategies involves real trade-offs. The right answer depends on the size of the estate, the family structure, and how long the planning horizon is. That is the conversation worth having before anything is signed.

Irrevocable Life Insurance Trusts (ILITs). Life insurance proceeds payable to the estate are included in the gross estate under 26 U.S.C. § 2042. Proceeds payable to an ILIT are not, provided the trust is properly structured and the insured does not retain incidents of ownership. An ILIT can remove a significant asset from the taxable estate while still providing liquidity to pay estate taxes or make distributions to heirs.

Gifting during life. The annual gift tax exclusion, currently around $18,000 to $19,000 per recipient per year and adjusted for inflation, allows tax-free transfers that reduce the taxable estate over time without touching the lifetime exemption. Larger gifts use the lifetime exemption but remove future appreciation from the estate. For a business or investment portfolio with significant growth potential, removing assets now locks in current value for exemption purposes.

Spousal Lifetime Access Trusts (SLATs). A SLAT permanently removes assets from the grantor spouse’s taxable estate while maintaining indirect access through distributions to the beneficiary spouse during the marriage. The structure requires careful drafting to avoid the reciprocal trust doctrine when both spouses create trusts for each other, and it carries risks if the marriage ends or the beneficiary spouse dies first.

Qualified Personal Residence Trusts (QPRTs). A QPRT transfers a residence to a trust at a discounted gift tax value, allowing the grantor to continue living in the home for a term of years before full transfer to heirs. The discount reduces the taxable gift at transfer. The Florida condo or North Carolina mountain home that has appreciated substantially may be a candidate for this structure.

Portability. A surviving spouse can use the deceased spouse’s unused exemption amount (DSUE) by filing a timely Form 706 estate tax return after the first death, even if no tax is owed. This is not automatic. The election must be made under 26 U.S.C. § 2010(c)(5). Missing the portability election is one of the most common and costly estate planning mistakes for married couples with combined estates in the $15 million to $30 million range.

QTIP Trusts. A qualified terminable interest property trust allows assets to pass to a surviving spouse and qualify for the unlimited marital deduction while preserving the principal for remainder beneficiaries the grantor names. The structure is particularly valuable in second marriages where the grantor wants to support a surviving spouse while ensuring children from a prior relationship receive the principal at the spouse’s death.

Valuation discounts. Business interests and real property held through entities may qualify for lack-of-control or lack-of-marketability discounts that reduce the value included in the gross estate. These discounts require qualified appraisals and proper entity structuring. They are legitimate planning tools but they attract IRS scrutiny and must be properly documented.

What Federal Estate Tax Planning Requires from an Attorney

Federal estate tax planning starts with a conversation about what you have built, who you are building it for, and what happens to it if you do nothing. The documents come after that conversation. It requires analysis of the gross estate, coordinated planning with the family’s accountant and financial advisor, valuation work for business interests and real property, entity structure review, trust drafting where trusts are part of the strategy, and ongoing updating as the law and the family’s circumstances change.

Families with multistate property, whether Pennsylvania plus Florida, Pennsylvania plus North Carolina, or all three, need an attorney who can account for all of it in a single coordinated plan. A Pittsburgh estate planning attorney who does not know Florida law cannot advise on domicile questions. An attorney who does not know North Carolina probate procedure cannot plan around ancillary administration. When your estate crosses state lines, one attorney who knows all of those jurisdictions is worth more than three who each know one.

Frequently Asked Questions

For more information on estate planning in Pennsylvania, visit our Estate Planning and Probate practice area page.

Stephen H. Lebovitz is an estate planning attorney in Pittsburgh who is licensed in Pennsylvania, Florida, and Maine and advises families on federal estate tax planning, Pennsylvania inheritance tax, and multistate estate administration.