GRB Law Update

PA Estate Law Legislative Update Inheritance Tax reduced to Zero and 645 Elections now honored in Pennsylvania

By: Christina L. Krakoff
Date: July 9, 2019

Author Spotlight

headshot of Christina Krakoff, author of Inheritance Tax update Christina is an associate attorney at the firm, specializing in representing Personal Representatives and other fiduciaries in all matters related to estate and trust administration. About Christina

PA House Bill 262 of 2019 was signed into law by Governor Wolf on June 28, 2019. Included in HB 262 was a significant change to existing Inheritance Tax and Income Tax laws in the Commonwealth.

Changes to Inheritance Tax rate for parents inheriting from children under 21 years old

Most importantly, HB 262 amended 72 P.S. §9116 to add a new section (1.4) that provides that the Pennsylvania Inheritance Tax rate for transfers “to or for the use of a child twenty-one years of age or younger from a natural parent, an adoptive parent, or a stepparent of the child shall be at a rate of zero per cent.”  The new inheritance tax rate provision shall apply to property of a natural parent, adoptive parent or stepparent who dies after December 31, 2019.

Before this legislation was enacted, there was a discrepancy in inheritance tax assessed when a parent died and a child inherited and vice versa. Since 2000, Inheritance passing from a deceased child under age 21 to a parent, stepparent or adoptive parent has been taxed at zero per cent (0%). However for the reverse scenario, for inheritance passing from a deceased parent, adoptive parent or stepparent to a child under age 21, inheritance tax was assessed at a rate of 4.5%. The goal of this legislation was to ensure that whichever direction inheritance is flowing between a parent, adoptive parent or stepparent and their child under 21, zero tax will be assessed.  

PA adopts election under §645 of the Internal Revenue Code to allow Joint Tax Returns for Estate and Trust.

The Internal Revenue Code permits a Personal Representative of an Estate and a Trustee of a Trust to elect to treat the trust and the estate as one for fiduciary income tax purposes. Not only does this streamline the income tax return preparation for the two entities, but also allows the Trust return, which is filed on an annual basis, to be filed on a fiscal year basis. Before the recent amendments in Act 262, however, Pennsylvania did not recognize the §645 election to treat the estate and trust as one for tax purposes. So, even if the federal returns were combined, the PA returns must be split and the trust had to remain on a calendar year. Having differing treatment of the returns between federal and state results in a headache and multiple tax returns to prepare.  Thankfully, HB 262 amends the Pennsylvania tax code at 72 P.S. §7331 to recognize the IRC §645 election for tax years beginning after December 31, 2019. 
The goal of this legislation was to ensure that whichever direction inheritance is flowing between a parent, adoptive parent or stepparent and their child under 21, zero tax will be assessed.
- Christina Krakoff

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