Inheritance tax: Exemptions for Farms and Small Businesses: Fourth and Last in a Series

Effective for decedents dying after July 9, 2013, there is a new inheritance tax exemption for qualified family-owned businesses. The law provides: “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.”

Qualified Family-Owned Business Interest

A “qualified family-owned business interest” is an ownership interest in either: (1) a proprietorship 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 of less than $5,000,000 as of the date of death; or (2) 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, has a net book value of assets of less than $5,000,000 as of the date of death, and, in either case, is wholly owned by the decedent or by the decedent and members of the decedent’s family that meet the definition of a qualified transferee.

To qualify, the entity must be 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. For example, if you put your stock portfolio in an LLC or partnership and call it a business – it’s not really a business and doesn’t qualify for this exemption.

“Qualified transferees” include a spouse, lineal descendants; siblings and their lineal descendants; and ancestors and their siblings.

The exemption does not apply to property transferred into the qualified family-owned business within one year of the decedent’s death, unless transferred for a “legitimate business purpose.”

Exemption for Farmland, Commodities, Easements and Reserves

Effective for estates of decedent’s dying after June 30, 2012, there is a Pennsylvania inheritance tax exemption for the transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve, as those terms are defined, to lineal descendants or siblings. This is an absolute exemption with no requirement for continued use in the hands of the transferees.

An “agricultural commodity ” means all plant and animal products, including Christmas trees produced for commercial purposes. An “agricultural conservation easement’ is an interest in land, less than fee simple, which represents the right to prevent the development or improvement of a parcel for any purpose other than agricultural production. The easement may be granted by the owner of the fee simple to any third party or to the Commonwealth, to a county governing body, or to a unit of local government.

An “agricultural reserve” is noncommercial open space land used for outdoor recreation or the

enjoyment of scenic or natural beauty and open to the public for such use, without charge or

fee, on a nondiscriminatory basis. “Agricultural use property” is land used for the purpose of producing an agricultural commodity or devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to a soil conservation program under an agreement with an agency of

the federal government. A “Forest Reserve” is land of 10 acres or more, that is stocked by forest trees of any size and capable of producing timber or other wood products.

Exemption for Real Estate Used in Agriculture

Also effective for estates of decedents dying after June 30, 2012, there is a Pennsylvania inheritance tax exemption for transfers of real estate devoted to “the business of agriculture” to members of the same family provided that 1) after the transfer the real estate continues to be devoted to the business of agriculture for a period of seven years beyond the transferor’s death and 2) the real estate derives a yearly gross income of at least $2,000.

A “member of the same family” can be the decedent’s brothers, sisters, the brothers and sisters of the deceased’s parents and grandparents, the ancestors and lineal descendants of any of the foregoing, or a spouse of any of the foregoing.

The “business of agriculture” is a defined term in the statute including leasing to members of the same family or leasing to a corporation or association owned by members of the same family. The business of agriculture does not include 1) recreational activities like hunting, fishing camping, show competition and racing, 2) the raising or breeding of game animals or game birds, fish, cats, dogs or pets intended for use in sporting or recreational activities (I assume that includes horses), 3) fur farming, 4) stockyard and slaughterhouse operations; or 5) manufacturing.

Any farm that is no longer devoted to the business of agriculture within seven years beyond the transferor’s date of death shall be subject to inheritance tax due the Commonwealth under section 2107, in the amount that would have been paid or payable on the basis of valuation authorized under section 2121 for nonexempt transfers of property, plus interest since the transferor’s date of death. It is unclear what happens if a non-family member takes over the farm during this seven (7) year period.

Note: The Pennsylvania Department of Revenue recommends that the Taxpayer give first consideration to exemption under the Farmland Commodities Easements and Reserves exemption and only use the Business of Agriculture exemption if the Farmland Commodities Easements and Reserves exemption is not available.