Peacock Tales • Winter 2014


Saving the Family Business from Death Taxes

By Eva Hershey

Following suit to Pennsylvania’s recent elimination of inheritance tax on family farms*, the Pennsylvania legislature has eliminated inheritance tax on small family businesses. Act No. 52 was signed by Governor Corbett on July 9, 2013, and will apply to business owners dying on or after July 9, 2013.

In order to qualify for the exemption, the transfer of the business must be a transfer of a “qualified family-owned business interest,” to one or more “qualified transferees,” so long as the business continues to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death, and is reported on a timely filed inheritance tax return.

The Act contains two definitions for a qualified family-owned business, one pertaining to proprietorships and the other pertaining to business entities. Both definitions require the proprietorship or business entity to have fewer than fifty full-time equivalent employees as of the date of the decedent’s death, to have a net book value of assets totaling less than five million dollars as of the date of the decedent’s death, and to have been in existence for five years prior to the date the decedent’s death. By definition, a proprietorship refers to a single owner. Business entities include partnerships, corporations and limited liability companies.

The Act further requires that as of the date of the decedent’s death, “the entity was wholly owned by the decedent or by the decedent and members of the decedent’s family that meet the definition of a qualified transferees,” and that “the entity was engaged in a trade or business the principal purpose of which is not the management of investments or income-producing assets owned by the entity.”

Under the Act, those who are considered qualified transferees include spouses, lineal descendants, siblings, sibling’s lineal descendants, ancestors and ancestor’s siblings.

This exemption, as is the case with the family farm exemption, can be lost if the transferee no longer owns the business at any time within seven years from the date of the decedent’s death. At that time, the inheritance tax and interest become due. The business, for the seven years following the decedent’s death, must file an annual certification with the state certifying the business continues to be owned by a qualified transferee. The business is also required to notify the state within thirty days if the business no longer meets the criteria of the exemption as set forth by statute. Failure to file the annual certification and/or failure to promptly notify the state that the business no longer qualifies for the exemption, will also lead to the loss of the exemption.

*Editor’s Note: The family farm exemption currently only pertains to a decedent’s ownership of the land used for family farming. It does not pertain to a decedent’s ownership of stock in a family farm corporation or membership in a limited liability company which owns the land used for farming.

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