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Those pesky inheritance taxes

My partner of 22 years and I have very carefully titled the assets we own jointly to make our joint ownership clear.  For example, our home is titled as "Joint Tenants with Rights of Survivorship," our vehicles are jointly titled and most of our banking accounts and investments (except qualified plans like IRAs, which must be owned by an individual) are also jointly held.  We thought that this would protect us from our home state, Pennsylvania's onerous inheritance tax of 4.5%.  But recently, we've been handling the estate of one of moms who passed away.  Imagine our surprise when we were hit with the state inheritance tax of bank accounts that were titled jointly with mom!  I know that opposite-sex spouses in Pennsylvania do not have to pay the inheritance tax on money inherited from a spouse. This is just another reason that we will continue to fight for marriage equality.  But meanwhile, is there anything else we can do to avoid this tax?  Move to Florida where there is no estate tax?  Move to Canada, where we are legally married?  Establish some sort of trust?  Neither of us is planning to pass away in any hurry but you never know … We'd appreciate your advice.

State by state

State inheritance and estate taxes are a moving target.  Not only do these taxes vary from state to state but exemptions also vary from state to state.  If you are considering a move to a particular state, it is best to speak to a qualified attorney or tax adviser in that state to get the most up-to-date information specific to your situation.  Also, it is important to keep in mind that there are many forms of taxes and that, in moving to a state to avoid paying inheritance and/or estate taxes, you may end up paying more in income taxes, sales taxes, etc.  For instance, although there is no New Jersey inheritance tax on a New Jersey decedent’s property left to a civil union partner, New Jersey ranks near the top in sales and income taxes and, on a per capita basis, ranks at the top of all states for property taxes.

Great point!

Two great points, actually. First, get a qualified attorney in the state you're considering and, second, look at teh whole picture.  Thanks again, Ben!

David Kirk
Founder of GayRites
david@GayRites.net

Joint Property & PA Inheritance Taxes

It is the unfortunate reality that jointly titled property owned by same-sex partners who reside in Pennsylvania is almost always subject to inheritance tax upon the death of one of the partners.  In fact, on the death of an owner, Pennsylvania imposes an inheritance tax on all jointly titled property that is physically located in Pennsylvania and on all intangible property jointly owned by Pennsylvania residents, unless the joint owners are husband and wife. 
Property can be owned jointly by unmarried people either as joint tenants with right of survivorship or as tenants in common.  Owning property as joint tenants with right of survivorship (“JTROS”) means that each owner owns an equal share of the property and that, when each owner dies, his or her share will automatically be transferred to the surviving owner or owners. 
When property is owned JTROS by two unmarried people and one of those owners dies, one-half of the total value of the property will be subject to the Pennsylvania inheritance tax.  When property is owned JTROS by more than two people and one of the owners dies, the percentage of the property that is subject to tax is the fractional share owned by the decedent.  Thus, if there are five JTROS owners of a property, 1/5 of the property will be subject to the Pennsylvania inheritance tax.
Joint ownership that is held as tenants in common differs from JTROS property in that property held as tenants in common does not have to be held in equal shares (so one owner could own 30% and another owner could own 70%).  This type of ownership also differs from JTROS property in that it does not automatically transfer a deceased owner’s share to the surviving owner(s).  Instead, each owner’s share will pass to his or her beneficiaries (if the owner has a will) or to his or her intestate heirs (if the owner does not have a will).  The percentage of property jointly owned as tenants in common will be the percentage of the property owned by the deceased owner.    
The rate of the Pennsylvania inheritance tax is based on the relationship of the surviving joint owner to the decedent.  The inheritance tax rate for property passed to a surviving husband or wife of the decedent or from a child under the age of 21 to a parent is 0%.  In the case of a parent and child or grandparent and grandchild, who are considered “lineal heirs”, the inheritance tax rate is 4.5%.   The rate for siblings, including brothers and sisters, and half brothers and sisters, is 12%.   For all other surviving joint owners, including same-sex partners, the inheritance tax rate is 15%.
Let’s examine how this plays out with a bank account held as JTROS with a balance of $10,000 as of the date of a joint owner’s death.   If the bank account is jointly owned by a husband and wife and the husband dies, the wife becomes the sole owner of the bank account and pays no inheritance tax.  If the $10,000 bank account is jointly owned JTROS by a child and a parent and the parent dies, the child becomes the sole owner of the account and one-half of the value of the account ($5,000) is taxed at the rate of 4.5%, resulting in inheritance tax of $225.  If the same bank account is jointly owned JTROS by same-sex partner and one partner dies, the surviving partner becomes the sole owner of the account and one-half of the value of the account is taxed at a rate of 15%, resulting in inheritance tax totaling $750.
Now imagine that the property owned JTROS by same-sex partners is not a $10,000 bank account but a home valued at $500,000 with no mortgage.  This would result in a $37,500 inheritance tax bill to the surviving partner.  Needless to say, the impact of the inheritance tax can be devastating for gay and lesbian individuals who lose a partner.  This is particularly problematic if a deceased individual leaves his or her same-sex partner residential real estate but no cash, life insurance or other easily liquidated asset that can be used to pay the inheritance tax.  It is all too common for a surviving partner to have to sell the family’s home to pay the inheritance tax due.  Life insurance, which is not subject to Pennsylvania inheritance tax, is a great way to make sure a surviving partner has enough cash to pay any inheritance tax that may be due.
Pennsylvania’s inheritance tax applies to all real estate and to all tangible personal property (such as furniture, vehicles, jewelry, etc.)  located in Pennsylvania, whether the property is owned by Pennsylvania residents or non-residents.  Pennsylvania inheritance tax also applies to all intangible property of Pennsylvania residents.  Intangible property includes property such as bank accounts, stocks, bonds, mutual funds and patents. 
Because Pennsylvania inheritance tax will apply to all intangible property of a Pennsylvania resident, no matter where the property is “located”, simply opening a joint bank account with a bank in another state will not avoid Pennsylvania inheritance tax.  However, moving yourself and your partner to a state where either there is no inheritance tax or, if the state does impose inheritance tax, where same-sex spouses are exempt from the tax, may be your best option. 
In Pennsylvania, setting up revocable trust will not avoid inheritance tax because Pennsylvania will “look through” the trust and assess tax based on the beneficiaries of the trust.  Making a gift of property or setting up an irrevocable living trust where the trust grantor gives up control of the property may avoid inheritance tax.  However, keep in mind that annual gifts of over $13,000 to a particular individual must be reported on a gift tax return for that year and may result in the imposition of gift tax liability upon the grantor’s death if the total of all of the grantor’s gifts exceeds a the lifetime gift tax exclusion (which, beginning in 2011 will be $5 million).
In order to determine how to structure your estate to minimize your tax liability it is best to consult with an attorney or tax professional in your state who specializes in tax issues for same-sex couples.
 
DISCLAIMER & NOTICE
The above is provided for informational and educational purposes only. Nothing contained herein should be construed as legal advice. Because each person's situation is unique and because laws, administrative regulations and court rules differ significantly from state to state, agency to agency and county to county, you should consult a lawyer licensed to practice in your state and familiar with the statutes, administrative regulations and court rules  in your area to obtain legal advice appropriate to your situation.
Notice: Pursuant to certain Internal Revenue Service regulations, any tax advice contained in this communication is not intended to be used, and cannot be used, for the purpose of avoiding penalties imposed under the U.S. Internal Revenue Code.

Where should we move?

This is awful news and another great reason to keep fighting for marriage equality.  In the meantime, can you point to a list of states that do not impose an estate tax on the assets of same-sex partners?  I've heard, for example, that Florida has no estate tax at all and that this is a major reason why so many people move to Florida in their later years.  But I'm not sure we'd want to move into the path of a hurricane! 

David Kirk
Founder of GayRites
david@GayRites.net