The best way to avoid inheritance tax on property is to reduce the taxable value of your estate through strategic planning, such as using irrevocable trusts, gifting property interests over time, or utilizing lifetime exemptions. For 2025, you can gift up to $19,000 annually per recipient tax-free, or utilize the $13.99 million lifetime exemption.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
While trusts avoid probate, they do not avoid Pennsylvania inheritance tax. With few exceptions, in Pennsylvania, any property that passes at death is subject to inheritance tax, no matter if it passes by will, trust or law.
Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.
To avoid Pennsylvania inheritance tax, use strategies like lifetime gifting (especially >1 year before death), transferring assets to a spouse or minor child (0% rate), using life insurance for beneficiaries, making charitable donations, establishing irrevocable trusts, leveraging joint ownership with right of survivorship, or structuring assets to qualify for exemptions for family farms/businesses, all while planning early with an estate attorney.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
However, there is a little-known IHT loophole that does not have a set limit or post-gift survival requirement, known as 'Gifts for the Maintenance of Family'. Any gift that qualifies under this loophole is exempt from IHT. If HMRC decide that the gift was larger than reasonable, the reasonable part is still exempt.
There has been speculation that the generous seven-year rule that allows families to pass on a potentially unlimited amount inheritance tax (IHT)-free could be abolished in the Autumn Budget. Speculation about the Budget has been rife, and savers should make sure to take any rumours with a healthy bucket of salt.
The most tax-efficient way to leave a home to a child usually involves leaving it in your will for them to inherit, which qualifies for a stepped-up tax basis (reducing capital gains tax if sold) and avoids immediate gift taxes, though trusts (like Revocable Living Trusts for probate avoidance or QPRTs for advanced planning) or Transfer-on-Death (TOD) deeds (where available) offer control and probate avoidance, while outright gifting is generally less tax-efficient due to inherited basis issues. Consulting an estate planning attorney is crucial to choose the best method for your specific situation.
Generally, from a tax perspective, it is more advantageous to inherit a home rather than receive it as a gift before the owner's death.
If you choose to put your house in an irrevocable trust that names your children as the beneficiaries, the property will no longer be part of your estate when you die. By removing it, there will be no estate taxes charged in the transfer and the property will not be subject to Medicaid estate recovery.
Transfer assets into a trust
Certain types of trusts can help avoid estate taxes. An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries.
The simplest way of avoiding Inheritance Tax is via the spouse or civil partner exemption rule. This covers couples who are either legally married or in a civil partnership.
Because you no longer own the assets held within an irrevocable trust, those assets are typically excluded from your taxable estate. As a result, an irrevocable trust can potentially minimize or even avoid Pennsylvania inheritance tax, making it a valuable tool for reducing your estate's tax burden.
For most people, a Revocable Living Trust is the best choice for putting a house in a trust, as it lets you keep control, avoid probate for the home, maintain privacy, and easily manage the property, while an Irrevocable Trust offers asset protection but sacrifices control and flexibility, making it better for specific goals like Medicaid planning.
If you die within 7 years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40%. This is instead of the reduced amount of 20% which is payable when the payment is made during your lifetime.
In California, real property is one of the most valuable assets you can inherit from a loved one. But inheriting real estate that has increased in value over time can trigger capital gains tax consequences when you sell that piece of property.
The Hive Law indicates, "A house can stay in a deceased person's name until either the probate process is completed or legal actions require a change in ownership. Typically, the probate process takes 6 months to 2 years, depending on the jurisdiction and complexity of the estate.