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New Tax Break for Family Business Transfers

Pennsylvania’s new inheritance tax exemption for family businesses offers sizeable tax breaks – between 4.5 percent to 15 percent of the total value of a business – that can mean the difference between a business folding or continuing as an ongoing entity.

The exception brings tax breaks for transfers of businesses to many family members. And while the law was intended for small family businesses, it uses net book value to determine whether a business falls under the $5 million threshold for the exemption to apply, rather than fair market value, which is used to calculate the tax. This means that an individual could inherit a multi-million dollar business and not pay inheritance tax, while another could inherit a modest home from a relative and incur a sizeable inheritance tax bill.

Other criteria that must be met in the new law include:

  • The business must be at least five years old at the time of death.
  • It must have fewer than 50 employees at the time of the decedent’s death.
  • The business must be wholly owned by the decedent and other family members.
  •  The transfer of ownership must be to a “qualified transferee,” which is defined as the decedent’s spouse, lineal decedent, sibling (and the sibling’s lineal decedents) and ancestors (and ancestor’s siblings).
  • Family ownership after death must continue for seven years. Specifically, the exemption will be lost if the business changes hands to someone other than “qualified transferee” within seven years after the decedent’s death.
  • Businesses created solely to manage investments do not qualify for the new exemption.

For additional information on the exemption and how it may affect your tax and estate planning, contact John J. McAneney at Timoney Knox LLP.

Sources:

Where Not To Die In 2014: The Changing Wealth Tax Landscape, Forbes, 11/1/2013

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