New $15M Federal Estate Tax Exemption in PA

The One Big Beautiful Bill Act, signed into law on July 4, 2025, raised the federal estate and gift tax exemption to $15 million per person, $30 million for married couples, effective January 1, 2026 (the 2025 exemption was $13.99 million per person). No sunset. It is permanent.

For many families, this was good news. The exemption had been set to revert to roughly $7 million at the end of 2025 unless extended. This change made the higher threshold permanent, indexed for inflation going forward.

Here is what I am seeing in my practice: many families think this solves their tax problem. They are wrong. In Pennsylvania, the confusion runs even deeper.

Federal Exemption ≠ Pennsylvania Escape

Pennsylvania imposes a separate, brutal inheritance tax that has nothing to do with the federal exemption.

Here’s the rate structure:

• 0% to surviving spouses
• 4.5% to direct descendants (children, grandchildren)
• 12% to siblings
• 15% to everyone else

There is no exemption threshold. None. A $50,000 transfer to a niece is taxable at 15%. A $5 million transfer to a grandchild is taxable at 4.5%. The federal exemption does not shield you from a single dollar of Pennsylvania inheritance tax.

A Pennsylvania family could owe zero dollars in federal estate tax and still owe tens of thousands in state inheritance tax. This happens all the time.

What the Federal Change Means for Planning

The $15 million exemption is genuinely useful for high-net-worth families. But it has created a planning complication I am now seeing in client files.

Many existing estate plans contain formula clauses designed to maximize the federal exemption. They worked well under the smaller exemptions in effect when those plans were drafted, roughly $5 million per person from 2011 to 2017 and about $11 million to $13.99 million per person from 2018 to 2025. An “AB trust” or “credit shelter trust” would direct enough assets to the second spouse’s trust to use up the exemption, minimizing estate taxes.

With a $15 million exemption, those formulas now allocate vastly more to the non-tax-sheltered trust, creating unintended consequences. Surviving spouses lose flexibility. Bequests shift in ways the client did not anticipate. Assets end up in trusts that trigger unnecessary income tax.

If you created your estate plan between 2010 and 2024, you likely have a formula clause that needs review and probably modification.

The Pennsylvania Planning Opportunity

Here is the opportunity most people miss: Pennsylvania exempts charitable bequests from inheritance tax entirely.

If you are charitably inclined and have a Pennsylvania estate subject to inheritance tax, charitable giving becomes disproportionately powerful. A $100,000 gift to charity avoids the 4.5%-15% inheritance tax that would otherwise apply, depending on who the beneficiary would have been. In effective terms, a $100,000 charitable gift costs your family less than a $100,000 gift to a non-charitable beneficiary.

This is true regardless of the federal exemption. It is purely a Pennsylvania phenomenon.

What You Should Do

First, if you have an estate plan from the last decade, have it reviewed. The new federal exemption may have thrown your planning out of alignment.

Second, understand that the federal exemption is one issue and Pennsylvania inheritance tax is another. They are separate systems with separate rules. You need both on your radar.

Third, if you are charitably inclined, Pennsylvania law gives you an outsized incentive compared to other states. That should influence your planning.

Fourth, if you are married and your plan relied on old exemption formulas, now is the time to update it. The cost of updating is far less than the tax cost of leaving outdated formulas in place.

The Bottom Line

The federal exemption increase is good news for high-net-worth families. But it is not a complete solution, and it has created planning complications for families with existing plans. Pennsylvania’s inheritance tax remains a separate, unforgiving system that requires deliberate planning to minimize.

We coordinate federal and state tax planning, review outdated estate plans, and structure gifts and bequests to actually align with how Pennsylvania law works.

If your estate plan is more than a few years old, or if the new federal exemption has you wondering what changed for your family, call us at (215) 949-0888. We handle both the federal and state sides of this and can tell you exactly where you stand.

Need help with estate tax planning or updating your will or trust? Ballow & Lynde represents clients throughout Bucks County in estate planning and tax minimization matters. Schedule a free consultation or call us at 215-949-0888.

Related Practice Areas:

• Estate Planning
• Last Wills & Testaments
• Pennsylvania Inheritance Tax Guide
• Irrevocable Trusts