How to Use Charitable Giving in Pennsylvania Estate Planning to Reduce Taxes and Support Your Legacy

Pennsylvania is one of only six states with an inheritance tax, with rates varying dramatically based on your relationship to beneficiaries. However, transfers to qualified charitable organizations are completely exempt from Pennsylvania inheritance tax.

Pennsylvania Inheritance Tax Rate Comparison:

Key Tax Benefits:

• Charitable transfers avoid all Pennsylvania inheritance tax
• Federal estate tax deduction for charitable gifts
• Income tax deductions during lifetime giving
• Capital gains tax avoidance on appreciated assets

Important Note: Unlike federal tax law, Pennsylvania does not provide a state income tax deduction for charitable contributions, but the inheritance tax exemption provides substantial estate-level savings.

Direct Charitable Bequests

The simplest strategy involves leaving assets directly to charity through your will or trust. Benefits include:

• Complete Pennsylvania inheritance tax exemption
• Federal estate tax deduction
• Flexibility to change beneficiaries during lifetime
• No immediate impact on current income or lifestyle

Charitable Remainder Trusts (CRTs)

CRTs provide income to you or family members for life, with the remainder going to charity. This powerful strategy offers:

• Immediate partial tax deduction based on the charitable remainder value
• Capital gains tax avoidance on highly appreciated assets
• Income stream for life or term of years
• Estate tax reduction for the charitable portion

CRT Example: If you fund a CRT with $500,000 in appreciated stock (cost basis $100,000), you avoid immediate capital gains tax on the $400,000 appreciation while receiving an immediate charitable deduction and lifetime income.

Charitable Lead Trusts (CLTs)

CLTs reverse the CRT structure by providing income to charity first, with remaining assets eventually passing to family members. Benefits include:

• Gift tax deduction for the charitable interest
• Reduced transfer tax cost for family transfers
• Ideal for appreciating assets expected to grow substantially
• Multi-generational wealth transfer with tax efficiency

Donor-Advised Funds

These provide flexible charitable giving with immediate tax benefits:

• Immediate tax deduction upon contribution
• Ability to recommend grants to charities over time
• Investment growth potential for charitable assets
• Simplified administration compared to private foundations

Qualified Charitable Distributions (QCDs) allow direct transfers from traditional IRAs to qualified charities, providing significant tax advantages for Pennsylvania seniors:

QCD Benefits:

• Up to $105,000 annually for individuals over 70½
• Counts toward Required Minimum Distribution (RMD) requirements
• Not included in taxable income, potentially keeping you in lower tax brackets
• Avoids Pennsylvania inheritance tax on distributed amounts
• No itemization required to receive tax benefits

QCD Strategy Example:

A 72-year-old Pennsylvania resident with a $1 million IRA faces annual RMDs of approximately $40,000. By directing $20,000 annually to charity through QCDs:

• Reduces taxable income by $20,000
• Satisfies half of RMD requirement
• Eliminates inheritance tax on that portion
• Supports favorite charitable causes

Important: QCDs must be made directly from the IRA custodian to the charity - you cannot receive the distribution and then donate it to qualify for QCD treatment.

The Tax Cuts and Jobs Act nearly doubled the standard deduction, making it harder to benefit from itemizing charitable donations. Gift bunching solves this problem by consolidating multiple years of giving into a single tax year.

How Bunching Works:

Instead of donating $10,000 annually, you might:

• Year 1: Donate $20,000 (itemize deductions)
• Year 2: Donate $0 (use standard deduction)
• Result: Same charitable impact with better tax benefits

Bunching Strategies:

• Donor-Advised Funds: Make large contribution in bunching year, recommend grants over time
• Charitable Remainder Trusts: Fund in high-income year for immediate deduction
• Appreciated Asset Donations: Bunch highly appreciated stock or real estate gifts

Pennsylvania Considerations:

While Pennsylvania doesn't allow state income tax deductions for charitable contributions, bunching strategies still provide:

• Federal income tax optimization
• Enhanced estate planning through charitable vehicles
• Pennsylvania inheritance tax elimination on gifted amounts

Donating appreciated assets instead of cash provides significant tax advantages for Pennsylvania estate planning:

Benefits of Appreciated Asset Donations:

• Avoid capital gains tax on the appreciation
• Receive full fair market value deduction (if held over one year)
• Eliminate Pennsylvania inheritance tax on donated assets
• Preserve cash for family or other needs

Optimal Assets for Charitable Donation:

Example Calculation:

Pennsylvania Family Scenario:

• Asset: Stock worth $100,000 (cost basis $20,000)
• If sold: $80,000 capital gains × 20% = $16,000 federal tax
• If donated: $0 capital gains tax + $100,000 charitable deduction
• Additional benefit: No Pennsylvania inheritance tax on $100,000

Understanding the tax implications of different transfer strategies helps optimize your Pennsylvania estate plan:

$1 Million Transfer Tax Comparison:

*Assumes estate exceeds federal exemption ($13.99M in 2025)

Strategic Split Example:

Many Pennsylvania families use a balanced approach:

• 70% to family: $700,000 (PA inheritance tax: $31,500)
• 30% to charity: $300,000 (PA inheritance tax: $0)
• Total savings vs. all family: $13,500 in inheritance tax
• Additional benefit: Federal estate tax deduction on charitable portion

Integrated Estate Planning Approaches:

1. Charitable Split-Dollar Life Insurance

Combine life insurance with charitable giving for:

• Income tax deductions for charitable premium payments
• Estate tax benefits for charitable interest
• Family wealth replacement through insurance proceeds

2. Charitable Bargain Sales

Sell appreciated property to charity below fair market value:

• Receive cash from the "sale" portion
• Get charitable deduction for the "gift" portion
• Reduce capital gains tax liability
• Eliminate Pennsylvania inheritance tax on gifted portion

3. Net Income Makeup Charitable Remainder Unitrusts (NIMCRUTs)

Provide flexibility for Pennsylvania retirees:

• Defer income during high-earning years
• Accelerate distributions during retirement
• Optimize timing of taxable income

4. Private Foundation Strategies

For substantial charitable goals:

• Perpetual charitable vehicle
• Family involvement in governance
• Significant estate and gift tax benefits
• Legacy creation beyond financial wealth

Pennsylvania-Specific Considerations:

• Charitable remainder trusts can help manage Pennsylvania inheritance tax on large estates
• Donor-advised funds provide flexibility without state income tax complications
• IRA charitable distributions particularly valuable given Pennsylvania's lack of state deductibility
• Timing strategies should consider both federal and Pennsylvania tax implications

Case Study 1: Pennsylvania Business Owner

Situation: Chester County business owner with $5M estate, including $2M in highly appreciated company stock

Strategy: Charitable Remainder Trust funded with company stock

Results:

• Avoided $400,000 in capital gains tax
• Received $600,000 immediate tax deduction
• Eliminated $90,000 Pennsylvania inheritance tax on CRT assets
• Generated lifetime income stream for family
• Total tax savings: ~$1.1M

Case Study 2: Retired Couple with Large IRAs

Situation: Montgomery County couple, both age 75, with $3M in traditional IRAs

Strategy: Annual QCDs combined with estate charitable bequest

Results:

• $105,000 annual QCDs reduce taxable income
• Eliminates inheritance tax on gifted amounts
• Supports local charities during lifetime
• Remaining IRA passes tax-efficiently to children
• Total tax savings over 10 years: ~$350,000

Case Study 3: Real Estate Investor

Situation: Delaware County family with $10M real estate portfolio

Strategy: Charitable Lead Trust + family limited partnership

Results:

• $2M charitable lead annuity reduces gift tax liability
• Remaining $8M transfers to children at significant discount
• Eliminates inheritance tax on charitable portion
• Supports community development programs
• Total transfer tax savings: ~$2.8M