By: Hollis J. Fishman, Esq.
Pennsylvania collects an inheritance tax on assets inherited by certain groups of people.
The tax rate depends upon the relationship of the inheritor(s) and the deceased. Certain categories of beneficiaries pay no inheritance upon someone’s death. These beneficiaries include: a surviving spouse, parents or step parents who inherit from a child who was under the age of 22 years upon his or her death, charitable organizations and government entities. Parents of children who are 22 years of age or older upon his or her death, grandparents, a spouse of a child, and lineal descendants (children of a parent and their descendants) pay 4.5% inheritance tax on what they inherit. Siblings, including half-brothers and half-sisters, related by either blood or adoption, are taxed at 12% on their inheritance. An inheritance received by all others, such as cousins, nieces, nephews, aunts, uncles or friends are taxed at 15%.
An important provision was recently added to the Pennsylvania Inheritance Tax Act effective for estates of decedents dying on or after July 1, 2013. The new provision helps families by exempting taxation of their family-owned business. This new tax exemption assists families who want to continue to run a family business and encourages steady employment, continuation of small businesses after a death and prevents job loss. These benefits are achieved because owners will not have to sell assets to pay Pennsylvania inheritance taxes. This recent provision is the second in two years to assist family businesses. Just last year, Pennsylvania eliminated the tax on the inheritance of agricultural real estate by family members if the property continues to be devoted to agriculture for a period of 7 years.
There will be no taxation on the transfer of small family owned businesses if certain requirements are met. First, the business must be family owned. A qualified family-owned business is defined as a proprietorship or entity with fewer than 50 full time employees and a net book value of assets less than $5,000,000 at the decedent’s death. The decedent and the decedent’s family must own 100% of the business at the time of the decedent’s death. The business must be an active business, i.e., not just the management of investments or income-producing assets. The business must have been in existence for five years before the decedent’s date of death. Importantly, after the decedent’s death, the business must continue to be owned by a qualified person for a minimum of seven years. A qualified person includes the decedent’s spouse; lineal descendants, such as children, siblings, and/or grandchildren, lineal descendants of a sibling and ancestors or siblings of an ancestor. The failure to continue business operations for seven years after the decedent’s date of death by a qualified person will result in the assessment of a tax that would originally have been assessed as if it was a non-exempt asset, plus interest. To qualify for this exemption, this information must be reported on a timely filed Pennsylvania inheritance tax return. Every year, each owner of the business must certify to the Department of Revenue that the business continues to be owned by a qualified person. The Department must be notified within thirty days of any transaction or occurrence causing the business interest to fail to qualify for this tax exemption.