Pennsylvania Offers Inheritance Tax Exemption for Family Businesses

Estate Planning

By Melanie LaSota

Recent legislation spells good news for family business owners concerned with the impact of Pennsylvania inheritance taxes upon their deaths. On July 9, 2013, Governor Tom Corbett signed a bill that excludes certain family-owned businesses from inheritance taxes.

Pennsylvania is among the handful of states that impose an inheritance tax upon the transfer of a decedent’s assets upon death. The tax is imposed at a rate of 0%to 15% of the value of the assets transferred, depending upon the relationship of the recipient to the decedent. Family businesses often comprise a significant portion of a decedent’s total assets, and business assets are subject to inheritance taxes whether or not the business is profitable. Estates that do not contain enough liquid assets to pay the tax bill are often forced to sell business assets, lay off employees, or even close the business altogether.

For decedents passing away on or after July 1, 2013, transfers of “qualified family-owned business interests” will be exempt from inheritance taxes. To be eligible for the exemption, the business must have fewer than 50 full-time employees, a net book value of assets worth less than $5 million, and must have been wholly owned by the decedent and certain qualifying members of the decedent’s family at the time of death. In addition, the entity must be engaged in a trade or business which is not the management of investments or income-producing assets, and must have been in existence for five years prior to the decedent’s date of death.

Only transfers to “qualified transferees” will avoid taxation. Qualified transferees include spouses, lineal descendants, siblings and their lineal descendants, and ancestors and the siblings of such ancestors. In addition, to eliminate the potential incentive to avoid inheritance taxes by transferring personal assets to the business in anticipation of imminent death, assets transferred to the entity within one year of death are not eligible for the exemption unless the transfer serves a legitimate business purpose.
A family-owned business exempted from inheritance tax under this new provision must continue to be owned by qualified transferees for seven years following the decedent’s date of death. In the event the business is no longer owned by a qualified transferee at any time during this seven-year period, the exemption is lost and the inheritance taxes that would have otherwise been due will be triggered, together with interest.

If the exemption is claimed, each of the owners of the business must certify to the Department of Revenue, on an annual basis, that the business continues to be owned by qualified transferees. In addition, written notice must be provided within 30 days of any transaction or occurrence causing the business to be disqualified for the exemption. Failure to comply with the certification or notification requirements will trigger the inheritance tax and interest as described above. In the event that the exemption is claimed and the transaction is subsequently disqualified, either by transfer to a non-qualified transferee or by failure to comply with the certification or notification requirements, a lien in favor of the Commonwealth will be imposed on the real and personal property of the owner of the business interest at the time of the transaction that caused the disqualification.

Proper planning for the liquidity needs of a family business in the event of the untimely death of an owner can be the deciding factor as to whether the business can survive the transition to the next generation. It is important to recognize that the new Pennsylvania legislation applies only to Pennsylvania inheritance taxes, and does not apply to the estate taxes that may be imposed at the federal level. Federal estate taxes currently have a top marginal rate of 40%. Various techniques exist to help fund or eliminate the estate tax burden, including buy-sell agreements, gifting, and insurance planning.

Our experienced estate planning professionals would welcome the opportunity to explore which strategies are appropriate for your family business. Please contact us for more information.

Act 52 of 2013 (HB 465).

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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