• New Pennsylvania Inheritance Tax Legislation which benefits Family Business Owners and Family Farm Owner
  • September 25, 2013 | Author: Nikolaos I. Tsouros
  • Law Firm: MacElree Harvey, Ltd. - West Chester Office
  • I. Introduction:

    Recently, changes have been enacted in the Commonwealth of Pennsylvania that effect Pennsylvania Inheritance Taxes for Family Business Owners and Family Farm Owners as follows:

    A. Family Businesses owned by a Decedent:

    On July 9, 2013, House Bill 465 was enacted into law which provides that for estate of decedents who pass away on or after July 1, 2013, the transfer of all business assets, including real estate, between members of the same family, is not subject to the inheritance tax provided that after the transfer the qualified family owned business interest continues to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death. If an asset that was exempt is no longer owned by a qualified transferee during the seven-year period, the asset shall be subject to inheritance tax in the amount that would have been paid plus interest accruing as the date of death.

    Some of the specific requirements are as follows:

    • Effective July 1, 2013, provides a small business exemption from inheritance tax for a transfer of a family-owned business interest to one or more family members, provided that after the transfer, the family-owned business interest continues to be owned by a family member for a minimum of seven years after the decedent’s date of death.

    • The exemption is limited to qualified family-owned business interests, defined as having fewer than 50 full-time equivalent employees, a net book value of assets less than $5 million, and being in existence for at least five years, as of the decedent’s date of death. In addition, the principal purpose of the entity must not be the management of investments or income-producing assets owned by the entity.

    • Specifies that any family-owned business interest no longer owned by a member of the decedent’s family within seven years shall be subject to the inheritance tax in the amount that would have been paid for nonexempt transfers of property, plus interest.

    • Requires annual certification to the department that the family-owned business interest qualifies for the exemption and notification to the department within 30 days if it fails to qualify.

    • Does not apply to property transferred to the business within one year of the date of death unless the transfer is for a legitimate business purpose.

    B. Family Farm owned by a Decedent:

    The Department of Revenue has created Schedule, AU, Agricultural Use Exemption form (REV-1197),for residents to claim inheritance tax exemptions established under Act 85 of 2012. Act 85 of 2012 created two agricultural exemptions from Pennsylvania inheritance tax for estates of
    decedents dying on or after June 30, 2012: (1) the Farmland Commodities, Easements and Reserves exemption and (2) the Business of Agriculture tax exemption for working family farms.

    Under the Farmland Commodities, Easements and Reserves tax exemption, transfers to lineal descendants or siblings of agricultural commodities, agricultural conservation easements, agricultural reserves, agricultural use property and forest reserves are not subject to inheritance tax.

    Under the Business of Agriculture exemption, real estate devoted to the business of agriculture that is transferred between family members or from one generation to the next is not subject to inheritance tax, so long as the working family farm:

    • Is transferred to members of the same family;

    • Is devoted to the business of agriculture at the time of the decedent’s death;

    • Is devoted to the business of agriculture for seven years after the decedent’s date of death; and

    • Produces annual gross income of at least $2,000 in the business of agriculture for seven years after the decedent’s date of death.

    To claim either exemption, Schedule AU must be completed and submitted with REV-1500, Inheritance Tax Return for Resident Decedents or REV-1737-A, Inheritance Tax Return for Nonresident Decedents.

    II. Conclusion:

    If you are an Executor or Administrator of an Estate of a Decedent who passed away after July 1, 2013, who owned a family business or after June 30, 2012, who owned a family farm, and you would like to discuss how these new acts would affect the estate you are administering, the estate administration department of MacElree Harvey has a team of experienced estate administration attorneys who can assist you in navigating through the estate administration process and preparing the Pennsylvania Inheritance tax Return, or any other services needed during the estate administration process.