Berman & Asbel, LLP

Death is inevitable. Taxes don't always have to be

Pennsylvania is one of only 16 states, along with the District of Columbia, that seeks to impose taxes on inheritances. What that means is that one of the challenges in developing solid estate plans is understanding the tax landscape not in the here and now, but in the future, after you are gone.

As we all know, death is a given and close on its heels is taxes. But with proper planning there may be ways to limit the bite the government takes from the amount you want transferred to heirs. In fact, in some instances it may be possible to reduce the tax implications to zero.

Perhaps the major thing to remember related to inheritance taxes is that money going to charity or paid out as a life insurance benefit is exempt.

One strategy that might be considered in circumstances where the estate owner holds a large Individual Retirement Account is to set up a wealth restoration structure. In brief, what this might involve is using proceeds from an IRA inherited from a spouse to fund an irrevocable life insurance trust. This presumes that the minimum distribution from the IRA isn't all needed to cover the estate owner's living expenses.

Under the plan, the value of the inherited IRA would be willed to a favorite charity. Meanwhile, the distributions would be used to purchase a life insurance policy on the estate owner equal in value to the IRA. That would reside with the trust with children or other selected heirs designated as beneficiaries.

If properly structured, at the time of death, the inherited IRA would go to charity, tax free, and the heirs would receive the insurance payout, tax free.

This is obviously somewhat complicated. And it might not always be possible to do. State laws can and do change, which is why working with an experienced attorney is always recommended.

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