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The New Pennsylvania Inheritance Tax Exemption for Family-Owned Business Interests

Posted in Business Succession Planning, Pennsylvania Inheritance Tax

On July 9, 2013, Governor Corbett signed House Bill No. 465 into law making numerous changes to the Pennsylvania tax law.  This law adds a new inheritance tax exemption for transfers of “qualified family-owned business interests” to “qualified transferees”.  This new provision continues a trend to carve out exemptions to the Pennsylvania inheritance tax.

The purpose of the new provision is to protect certain family-owned business interests from being subject to Pennsylvania inheritance tax.  While the Pennsylvania inheritance tax rates are modest relative to the federal estate tax rates, the Pennsylvania inheritance tax can still be substantial, particularly if the beneficiary is not a spouse, child or lineal descendent of the decedent.  The Pennsylvania inheritance tax rate is based on the relationship of the beneficiary to the decedent:  0% for spouses, 4½% for parents, children and grandchildren, 12% for siblings and 15% for all other beneficiaries.

The heart of the provision is the definitions of qualified family-owned business interest (QFOBI) and qualified transferee (QT).

QFOBI is defined as a sole proprietorship or an interest in an entity carrying on a trade or business that:

1. has fewer than 50 full-time employees,

2. has a net book value of less than $5 million,

3. has been in existence for 5 years prior to the decedent’s death,

4. is wholly owned by the decedent or the decedent and members of the decedent’s family that are QTs, and

5. is engaged in a trade or business, the principal purpose of which is not the management of investments or income producing assets.

QT is defined as:

1. husband and wife,

2. lineal descendants,

3. siblings and the sibling’s lineal descendants, and

4. ancestors and the ancestor’s siblings.

If the QFOBI is not owned by a QT for seven years, inheritance tax will be due.   The new statute will be of limited use since it only applies to a narrowly defined asset type.  The revenue estimates for this provision indicate that the loss of tax revenue will only be about $3.8 million per year.  Compare this to the $803.57 million of revenue generated by the Pennsylvania inheritance tax in the fiscal year ended June 30, 2012, and it is apparent that the provision is not expected to have a significant impact in many estates.  However, for estates where the provision does apply, the tax savings can be important.  In addition, because the statute defines eligible business interests based on book value of assets rather than fair market value, it may apply to much larger businesses than one would expect.

To read more about the new law and planning opportunities that it presents, click the following link:  The New Pa. Inheritance Tax Exemption for Qualified Family-Owned Business Interests