Pennsylvania’s Governor signed a new law which went into effect on July 9, 2013. This law is significant in the area of PA Wills and Trusts, as it allows an inheritance tax exemption for the transfer of qualified family-owned businesses. This law specifically defines how this inheritance tax exemption is applied and defines what a “qualified family business” means.
The law specifically states that “A transfer of a qualified family-owned business interest to one or more transferees is exempt from inheritance tax, if 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.” This exemption will be available for decedents who die after July 9, 2013.
What is a “Qualified Family-Owned Business”?
This is defined as an ownership interest in either a proprietorship which has been in existence for five years prior to the date of death, and also has a net book value of assets less than $5,000,000.00 as of the date of death OR an interest in an entity carrying on a trade or business that has been in existence for five years prior to the date of death, has fewer than fifty full-time equivalent employees as of the date of death, and has a net book value of assets less than $5,000,000.00 as of the date of death. In both types of ownership interests described, the “Qualified Family-Owned Business” must be wholly owned by the decedent or the decedent and members of the decedent’s family who meet the definition of a “qualified transferee.” A qualified transferee includes a decedent’s husband or wife, lineal descendants, siblings and the sibling’s lineal descendants, and ancestors and the ancestor’s siblings.
In order to qualify for the exemption, the business entity must be engaged in trade/business where the principal purpose of the business is NOT the management of investments or income-producing assets owned by the entity itself.
In order to receive this inheritance tax exemption, the qualified family-owned business must continue to be owned by a qualified transferee for a minimum of seven years after the date of the decedent’s death. The exemption also will not apply to property transferred by the decedent into the qualified family-owned business within one year of the date of death, unless this property was transferred for a legitimate business purpose.
If at any time during the seven year period after the decedent’s death, the business is not owned by the qualified transferee, the exemption will be lost and at that point, the inheritance tax plus interest is due. Owners of a qualified family-owned business interest must file forms every year for all seven years with the Department of Revenue certifying that the business continues to be owned by a qualified transferee.
Any questions about Pennsylvania Inheritance or interested in drafting a PA Will? Contact our experienced Allegheny County Wills & Estates attorneys today.