Are you operating a family-owned business and worried about how to transfer the business to your family members? The transfer of your family-owned business to your family members may not be subject to any PA Inheritance Tax if it meets certain requirements.

PA Inheritance Tax is due within 9 months after the date of death and is based on the value of the assets in your estate. Assets transferred to your spouse are taxed at 0%; assets transferred to your parents, children and grandchildren are taxed at 4.5%; assets transferred to your siblings are taxed at 12%; and transfers to all other beneficiaries are taxed at 15%. For example, if your business is valued at $250,000 and is transferred to your children, then the PA Inheritance Tax would be 4.5% of $250,000 or $11,250.

However, if your business meets the definition of a “qualified family-owned business interest” (QFOBI) and the transfer is to a “qualified transferee” (QT), your estate will not pay any PA Inheritance Tax on this transfer and save the $11,250. QFOBI is defined as a sole proprietorship or an interest in an entity carrying on a trade or business that:
1. has fewer than 50 full-time employees
2. has a net book value of less than $5 million
3. has been in existence for five years prior to the decedent’s death
4. is wholly owned by the decedent and/or family members that are QTs, and
5. is engaged in a trade or a business (not just holding investments)

QT is defined as: (a) husband and wife (b) lineal descendants (c) siblings and the sibling’s lineal descendants, and (d) ancestors and the ancestor’s siblings.

The other requirements are that:
1. The QFOBI must continue to be owned by a QT for 7 years after the decedent’s death.
2. The QFOBI must be reported on a timely-filed PA Inheritance Tax Return
3. A certification must be filed annually by each QT for the 7-year period.
4. Property transferred to the QFOBI within 1 year of death is not eligible

Failure to file the certification will result in loss of the exemption and the inheritance tax will be due upon the QFOBI. Also, if the QFOBI is no longer owned by a QT during the 7-year period, inheritance tax will be due upon the QFOBI.

For more information and a consultation, please call Supinka & Supinka PC 724-349-6768