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Repeal of the PA Inheritance Tax on Family Farms

Extra! Extra! Read all about it! A new law that ends the Pennsylvania inheritance tax on family farms was part of the 2012-13 state budget package. Governor Corbett signed the Act on July 2nd. The repeal of the inheritance tax on certain farms is effective for the estates of decedents dying after June 30, 2012.

Under previous Pennsylvania law, children who inherit farmland from their parents must pay a 4.5% inheritance tax. If the farmland is left to a sibling, the inheritor must pay a 12% inheritance tax in Pennsylvania. There already is a relief provision for farms - the special use valuation which allows a favorable value below fair market value for farms.

The new law provides that a transfer of real estate devoted to the business of agriculture between members of the same family will not be subject to the PA inheritance tax 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.

Also, the new law provides that a 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 is exempt from inheritance tax.

For purposes of the law, 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.

Every owner of real estate that gets the benefit of this inheritance tax exemption must certify to the Department of Revenue annually that the land continues to qualify for the exemption. The owners must notify the department within 30 days of any transaction or occurrence causing the real estate to fail to qualify for the exemption.

Governor Corbett's press release said: "The death tax has forced too many families to sell their legacy, their land and their way of life. This tax has put too many farms out of business because it was too expensive for farmers to pass them down to their children. This will happen no more. We intend to save our farms." Giving special exemptions to one class of asset always raises the question of disparate treatment of owners of other classes of assets. For example, family businesses are frequently in the same position as family farms when it comes to inheritance tax? Is that fair? Here's an idea. Repeal the Pennsylvania inheritance tax all together.

A reader asked me to clarify a statement in last week's column about tax preparers. I said, "Persons who are certified public accountants (CPAs), attorneys or enrolled agents are required to register but are not required to take the exam or continuing education." They are not required to take the IRS mandated education and exam, but as part of their certifications or licensing as attorney, CPA or enrolled agent, they are subject to continuing education requirements.

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Spencer Law Firm LLC
320 Race Ave
Lancaster, PA 17603

Toll Free: 866-639-5451
Phone: 717-207-7935
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