On July 9, 2013, Pennsylvania enacted new legislation that made significant changes to their inheritance tax law by exempting the transfer of small family owned businesses. (H.B. 465) A qualified family-owned business is defined as a proprietorship or entity with fewer than 50 full time employees and 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, be an active business (not just the management of investments or income-producing assets), and have been in existence for five years prior to the decedent’s date of death.The decedent must transfer the business to one or more qualified transferees, which include a spouse, lineal descendants, siblings, lineal descendants of a sibling, ancestors or a siblings of an ancestor. Lineal descendants most likely includes stepdecedendants as well as adopted children.
It is very important to note that the business must be held by the qualified transferee for seven years, or you will lose the exemption. Accordingly, the Pennsylvania Division of Revenue will require that the transferee submit a form for each of those seven years to maintain the exemption.
This is the second time that Pennsylvania has changed its inheritance tax laws in the last two years as it most recently eliminated the tax of many family farms. Both of these laws are designed to allow families to keep small businesses and farms without having to sell them off to pay the tax. They are also designed to help people keep their jobs.
I will note that the law also makes dramatic changes to other tax laws, including requiring owners of out of state entities to report their Pennsylvania source income.