Dear Liz: My father-in-law’s spouse recently died. He is 89 and not in very good health. He has assets of about $3 million and lives in a state (Pennsylvania) that has an inheritance tax. What can he do to avoid state taxes and make sure his assets go where he wants them to go? He does not like to talk about these things but I’m trying to help. I have no interest in benefits to myself but I would hate to see his assets go to the state.
Answer: It’s one thing to encourage a parent or in-law to set up estate documents that protect them should they become incapacitated. Everyone should have durable powers of attorney drawn up so that someone else can make healthcare and financial decisions for them if they’re unable to do so.
It’s quite another matter to urge a potential benefactor to make sure the maximum amounts possible land in inheritors’ laps, especially if he or she doesn’t want to discuss the matter. You may need to accept that not everyone is interested in minimizing taxes for his heirs. Your father-in-law’s resistance to talk about these things is a good indicator that you should back off.
It’s not as if the majority of his assets will wind up in state coffers anyway. Although Pennsylvania is one of the few states that has an inheritance tax, the rate isn’t exorbitant for most inheritors. (Unlike estate taxes, which are based on the size of the estate, inheritance taxes are based on who inherits. Your father-in-law doesn’t have to worry about estate taxes, since the federal exemption limit is now over $5 million and Pennsylvania doesn’t have a state estate tax.) In Pennsylvania, property left to “lineal descendants” — which includes parents, grandparents, children and grandchildren — faces tax rates of 4.5%. The tax rate is 12% for the dead person’s siblings and 15% for all others. Surviving spouses are exempt.
If he were interested in reducing future inheritance taxes, your father-in-law could move to one of the many states that doesn’t have such a tax. He also could give assets away before he dies, either outright or through an irrevocable trust. He may not be interested in or comfortable with any of those solutions. If he is, it’s up to him to take action. If he needs help or encouragement, let your wife or one of her siblings provide it. In estate planning matters, it’s usually best for in-laws to take a back seat.