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Will you owe estate taxes?

The deeper you get into the estate planning process in Pennsylvania, the more you realize that there are opportunities to optimize your plans in order to preserve assets for your beneficiaries. These include structuring your estate so as to avoid probate, or implementing a plan to pay off debts before your passing. You may believe you cannot do anything, however, to avoid paying estate taxes.

Yet is this truly the case? Pennsylvania does not impose a local estate tax on its residents, meaning that the only potential tax liability you need to worry about comes from the federal level. Yet with the right plan, you may even be able to reduce (or even avoid) that expense as well.

Understanding the federal estate tax exemption

First foremost, you should know whether your estate will be subject to taxes at all. The federal government offers an estate tax exemption (allowing many to escape a tax liability altogether). According to the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million.

Married couples may be able to work together to preserve even more than the exemption threshold allows. To do this, however, you need to plan to take advantage of estate tax portability.

Planning for portability

To take full advantage of portability, you need to rely on another tax benefit: the unlimited marital deduction. This allows you to pass an unlimited to your spouse without it being subject to tax. If you plan on leaving your entire estate to your spouse, you thus preserve your entire exemption amount. Your spouse can then claim that amount (and combine it with their own) by filing an estate tax return electing portability after your passing.

While such a plan does help mitigate estate taxes, you will want to prepare your adult descendants for having to pay the state’s inheritance tax.