Pennsylvania has just passed legislation that allows, if certain conditions are met, the tax free transfer of a family owned business to a decedent’s heirs. The idea behind this exemption is in these tight economic times to keep businesses in the family. This financial burden comes at a critical juncture as the business is now faced with not only a forced transfer of organizational control, but an inheritance tax bill when nothing has changed in the actual running of the fundamental core business. In some cases, the business is forced to sell assets to meets its inheritance tax obligations or in dire circumstances, has to shut down business operations altogether. While the local governments want to collect every penny they can, our elected officials also know this hurts the economy at the grass roots level because when an otherwise viable business shuts down only because it cannot afford to pay an inheritance tax, employees who were gainfully employed are now added to the unemployment line and this becomes another drain on the local economy.

With this as background, in order to be entitled to the family owned business inheritance tax exemption the following requirements must be met:

• Qualified Business – The business must be a “qualified business” which requires that the business must be operated by either a sole proprietor or through a business entity (LLC, partnership or corporation). The business must have fewer than 50 employees and a net book value of less than $5million dollars.

•Ownership of Qualified Business – The business must have been in existence for the past 5 years and must have been owned by the decedent and members of the decedent’s family.

•Qualified Transferees
– The “qualified business” may only be transferred to “qualified transferees”. Qualified transferees are, as you would expect, the decedent’s immediate family – spouse, children, grandchildren, siblings, cousins, parents and grandparents.

•Time Restriction – In order to retain this tax savings, the family business may not be transferred to another individual or entity for a period of 7 years from the date of the decedent’s death. Yearly certifications to the taxing authority will be required. If the business is transferred within this 7 years period, all inheritance tax plus interest that would have been due will now become immediately due and payable.

The take away here is that we now know that inheritance tax liability for certain qualified businesses under certain conditions are now exempt. Having this knowledge, a business owner can create a careful succession plan such that the business he has given his life to creating will not be crippled by his passing. If you would like to discuss this, or any other aspect of your business and its daily operations, please feel free to contact Douglas Leavitt at Danziger Shapiro.

This entry is presented for informational purposes only and is not intended to constitute legal advice.

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