Pennsylvania remains as one of the few states to impose an inheritance, or so-called “death tax,” on the heirs of its deceased residents.

With a maximum rate of 15%, the inheritance tax was especially burdensome on family-owned businesses. Often, the surviving family members were forced to liquidate essential business resources to create enough cash to pay the tax bill. As a result, many of these businesses shut down.

Effective immediately, however, Pennsylvania’s inheritance tax no longer applies to family-owned small business interests.

Act 52 of 2013, signed into law by Governor Corbett on July 9, 2013, provides that a transfer of a qualified family-owned business interest to one or more qualified transferees is exempt from inheritance tax, if that interest: (i) continues to be owned by a qualified transferee for a minimum of 7 years after the decedent’s date of death; and (ii) is reported on a timely filed inheritance tax return.

What is a “Qualified Family-Owned Business Interest?

According to the Act, a “qualified family-owned business interest” means either:

An interest as a proprietorship in a trade or business carried on as a proprietorship, if the proprietorship has fewer than 50 full-time equivalent employees as of the decedent’s death, the proprietorship has a net book value of assets totaling less than $5 million as of the decedent’s death, and has been in existence for 5 years prior to the decedent’s death; or

An interest in an entity carrying on a trade or business, if:

  • The entity has fewer than 50 full-time equivalent employees as of the decedent’s death;
  • The entity has a net book value of assets of less than $5 million as of the decedent’s death;
  • The entity 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, as of the decedent’s death;
  • The entity is 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; and
  • The entity has been in existence for 5 years prior to the decedent’s death.

Who is a “Qualified Transferee?”

The Act specifies that a “qualified transferee” is a decedent’s: (i) husband or wife; (ii) lineal descendants; (iii) siblings and the sibling’s lineal descendants; and (iv) ancestors and the ancestor’s siblings.

Losing the Exemption:

If a qualified business interest that was exempt from inheritance tax under this provision is no longer owned by a qualified transferee at any time within 7 years after the decedent’s death, inheritance tax, plus interest, will be due at that time.

For each of the 7 years following the decedent’s death, the owners of business interests exempted by this provision must certify to the PA Department of Revenue that the interest continues to be owned by a qualified transferee.

The owners also have a duty to notify the Department within 30 days of any transaction or occurrence that would disqualify the business interest from the exemption.

The Department of Revenue will create forms for these purposes, and a failure to file the appropriate certification or notification form will result in a loss of the exemption.

This legislation offers welcome relief to Pennsylvania business owners and should go a long way toward keeping these enterprises in business for generations.

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