Pennsylvania Inheritance Tax

If I have a Philadelphia County registered same-sex relationship can I
avoid the Pennsylvania Inheritance Tax?

No. Unlike the Commonwealth of Pennsylvania of which Philadelphia is
part, Philadelphia has recognized domestic partnership status and
allows partners to register formally as domestic partners. Philadelphia
then recognizes the couple as married for tax issues such as real
estate transfer taxes. Unfortunately, the Pennsylvania Inheritance
Tax is a Commonwealth Tax, not a Philadelphia Tax, so Philadelphia's
recognition has no effect on the Inheritance Tax. This means that
instead of paying the 0% married couple inheritance tax rate a registered Philadelphia domestic partner will pay the 15% rate of inheritance tax between unrelated persons.

Civil Union in One State, Divorce in Another...

If I have entered into a New Jersey civil union with my partner, but
now we are Pennsylvania residents, can we get a Pennsylvania divorce?

In limited circumstances when both parties are in complete agreement
Pennsylvania courts have dissolved same-sex marriages and civil unions
but when there is not complete agreement the parties are not allowed
to use Pennsylvania courts. To get your divorce you have to return to
New Jersey, or whatever state created your same-sex marriage, civil
union or domestic partnership, become a resident then file for divorce
or dissolution. This is a changing area of the law, so don’t be surprised if in 2012 or sometime soon after this answer changes.

Gifting Assets to Trusts as LGBT Estate Planning

Joe of Bucks County has a partner to whom he would like to leave a certain amount of money at his death, but if Partner dies before using the assets Joe would like the money to be used for his Niece. A typical Will gives the money directly to Partner subject to a 15% inheritance tax and the money is available to Partner’s creditors and Partner may leave the money to whomever he wishes, ignoring Joe’s wishes. Lets say Partner respects Joe’s wish, dies a resident of Philadelphia, and in his Will gives the remaining assets to Niece; a second 15% Inheritance Tax occurs.

One Answer: Lawyer could form an Irrevocable Trust into which Joe transfers the assets so that at his death the assets are not his…they are trust’s. Partner can have access to this trust during Joe’s lifetime, or only after Joe’s death, whatever Joe wishes. At Joe’s death there is no Pennsylvania Inheritance Tax, a 15% savings. Plus, should Partner later have creditors, the assets are safe. Further, the trust can require the remaining assets be used for Niece. Joe’s wishes are respected and the 15% tax is avoided.

Estate Planning, Inheritance Tax and Life Insurance for LGBT couples

Estate planning for the LGBT couple in Pennsylvania is complicated by the fact that no matter how long the couple may have lived with one another or be committed to one another, for Inheritance Tax purposes they are considered non-relatives. This means that transfers at death from one person to another are taxed at the highest possible rate; 15%.

One exception to this tax is life insurance. The Pennsylvania Inheritance Tax rate on life insurance passing from on LGBT person to another at death is 0%. Every LGBT estate plan should then carefully examine the assets available to the couple and see if the existing life insurance, or life insurance purchased as part of the plan, can reduce the Inheritance Tax due.

For example, if one partner wishes to leave another partner $100,000 in cash, the surviving partner will only receive $85,000 after the 15% inheritance tax. On the other hand, if the partner left $100,000 from a life insurance policy, the surviving partner receives the entire $100,000. With a small amount of planning, the surviving partner in this example ends up with an additional $15,000.