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Changes to Pennsylvania Inheritance Tax and Realty Transfer Tax Signed into Law

Posted: September 2, 2012

A new tax code change in Pennsylvania recently signed into law could provide some real benefits to our local farming community. These changes relate to both Pennsylvania inheritance taxes, and to Pennsylvania realty transfer taxes that have been paid by local landowners or might have been paid in the future.

Let’s first be reminded of the Pennsylvania inheritance tax laws that were in effect prior to the tax code changes recently implemented. In Pennsylvania, inheritance taxes are imposed as a percentage of the value of a decedent’s estate transferred to beneficiaries by a will. The tax rates imposed vary depending on the relationship of the beneficiary to the decedent.

  • 0 % on transfers to a surviving spouse or to a parent from a child aged 21 or younger
  • 4.5 % on transfers to direct descendants and lineal heirs
  • 12 % on transfers to siblings
  • 15 % on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax

Here is a quick true life example of the impact the Pennsylvania inheritance tax laws had on the next generation. A local farmer that I know very well worked almost all of his life for his uncle on his uncle’s family dairy farm. When the Uncle passed away, the farm was passed down to the nephew through a will. When it came time to pay the Pennsylvania inheritance tax, the nephew, according to the table above, fell into Number 4, a 15 % inheritance tax on the value of the farm’s assets owned by the Uncle. Just like many dairy farm families, the estate had very little in cash assets, but did own around 400 acres. In order to pay the Pennsylvania inheritance taxes that were due, the nephew had to sell off a good portion of the farm’s land to generate the cash that was needed to meet this tax obligation. He soon after sold the rest of the farm and the dairy operation ceased to exist.

With this as background information, here are the changes to the Pennsylvania tax code that will benefit folks that find themselves in a similar situation to the example I have shared.

House Bill 761 and Act 85 exempts from Pennsylvania inheritance tax, real estate that meets any of the following criteria:

  • If the farm was “devoted to the business of agriculture” and transferred to other family members through a will at the time of death.
  • If the decedent’s farm was being leased to members of the family or to a partnership or corporation owned by members of the same family, (this would include parents, grandparents, brothers and sisters, aunts and great aunts, uncles and great uncles of the deceased owner, as well as all of the ancestors of the persons listed above along with their spouses), and was devoted to the business of agriculture.
  • The farm must continue to be devoted to the business of agriculture for seven years after the owner’s death and must generate a yearly gross income from agriculture of at least $2000.

The new legislation does spell out what is not considered an agriculture business for the purpose of exemption from Pennsylvania inheritance taxes. These include:

  • The use of land for recreational activities.
  • The raising of game animals or animals for sporting or recreational purposes or use as pets.
  • The business of fur farming.
  • The business of a stockyard, slaughterhouse, or manufacturing or processing operations.

The second portion of the changes to the Pennsylvania Tax Code may offer a more current $$ savings to Pennsylvania farm owners. These changes provide an exemption to family farm owners from paying real estate transfer taxes when reorganizing the family business into entities such as a Limited Liability Company (LLC) or a Limited Family Partnership (FLP). This practice of developing an ( LLC) or an(FLP) became rather commonplace here in the northeast over the past few years helping landowners with the potential windfalls of natural gas leases and potential federal estate tax consequences.

In many cases prior to this new tax law change in Pennsylvania, the transfer of farm assets to an (LLC) or an (FLP), caused the farm owner to be responsible for paying the Pennsylvania Realty Transfer Tax. This tax is calculated at 1% of the asset value of the asset being transferred.

House Bill 761 and Act 85 now exclude from the Pennsylvania Realty Transfer Tax law any conveyance of assets from one family farming business to another type of family farming business such as a (LLC) or (FLP). In addition, House Bill 761 and Act 85 exempt the Pennsylvania Realty Transfer tax from being applied in these types of business transactions retroactively to on or after July 1, 2010. This could mean that several thousand dollars that had been paid out in realty transfer taxes on or after July 1, 2010 when family farming businesses formed (LLC’s) or (FLP’s) may be returned to the farm owner.

More information on the changes to the Pennsylvania inheritance tax laws and/or Pennsylvania realty transfer taxes can be obtained by going to the websites of the Pennsylvania Farm Bureau, the Pennsylvania Department of Revenue, or by contacting the Bradford County Extension Office, Gary Hennip, Penn State Extension Dairy Team member at glh11@psu.edu or by calling  570-265-2896.

This article is written by Gary Hennip, Penn State Extension Educator and has been written for educational purposes only. These issues should be discussed with professional financial advisors and attorneys who have a good understanding of state and federal estate laws.