By: Gary J. Heim, Esq.
As Benjamin Franklin famously declared, the only things certain in life are death and taxes...but the ag/family business exemptions enacted in recent years are reducing the Pennsylvania inheritance taxes for many farm families. With proper planning and action, both before death and even after death, these inheritance tax savings can be substantial.
Practically every farm family has, historically, paid Pennsylvania inheritance taxes at some point in time. Unlike the federal estate tax with a current exclusion of over $5 million of assets, Pennsylvania's death taxes are payable on the first dollar of non-exempt assets. With a tax rate of 4.5% for transfers to direct family members, $45,000.00 of inheritance tax is payable for a farm family with a $1,000,000.00 estate, but the ag/family business exemptions can eliminate all of these taxes.
There are three separate ag/family business exemptions that were enacted in the past five years, which can be described as follows:
1. An ag exemption for immediate family members (lineal descendants and siblings);
2. An ag exemption for extended family members (as distant as second cousins); and
3. A family business exemption that includes ag businesses, but also extends to non-ag businesses.
Each of these exemptions has different qualifications and requirements, which is why an in-depth knowledge of the exemptions by your attorney is essential for proper planning. For example, two of the three exemptions include a seven-year look-back condition, similar to the Clean and Green law for real estate tax purposes. This condition, which you want to try to avoid, is often referred to as a clawback feature that requires the inheritance tax savings to be repaid if certain actions or events occur.
The immediate family ag exemption does not have a clawback provision so there is no need to account to the Department of Revenue for what is done with the exempt assets after a person's death. It is the most narrow of the ag/family business exemptions in terms of the eligible beneficiaries, the type of farm assets exempted and the manner in which the farm assets need to be owned by the deceased person at death.
The family business exemption, available for both ag and non-ag businesses, is the broadest in scope, but even it has limitations, such as the requirement that the net book value of the family business be less than $5 million. However, there are pre-death planning techniques that can expand the family business value covered by this exemption even though the collective fair market value of the family business may exceed $5 million.
If you are in the planning stages for your estate or farm succession, these ag/family business exemptions are one of many factors that need to be considered in the development and documentation of a complete estate and succession plan. Similarly, if a family member of yours has died within the past four to five years, and the estate attorney or other advisers did not utilize these ag/family business exemptions to reduce the Pennsylvania inheritance taxes, there may still be an opportunity to do that because a refund request can be made for inheritance taxes for a period of up to three years from the date of final payment or determination of tax.
Mette, Evans & Woodside attorneys are knowledgeable about these ag/family business exemptions to Pennsylvania's inheritance tax, as well as the many other tax and non-tax factors to be considered for your estate and succession plan and to settle the estate of a family member with farm or other family business assets. They are able to assist you with these and other legal matters.