Agricultural-related Exemptions to Pennsylvania’s Inheritance Tax
Commonly referred to as a death tax, an inheritance tax is a tax that is imposed on individuals who receive property upon another’s death (the decedent). Pennsylvania is one of only six states to impose such a tax. Nonetheless, state law provides approximately 19 exemptions to the tax—3 of which are particularly relevant for the agricultural community. Specifically, property transfers involving the business of agriculture, qualified family-owned business interests, and agricultural commodities and certain rural and conservation lands are exempt from the tax. To be timely filed, an inheritance tax return claiming one of the exemptions discussed below must be filed within 21 months of the decedent’s death or 27 months if a 6-month extension was granted. However, while related, each of these exemptions has differing, specific criteria that must be met for the exemption to apply.
Business of Agriculture Exemption
Enacted in 2012, the business of agriculture exemption applies to certain real estate transfers involving decedents who passed away after June 30, 2012. To qualify, the real estate must have been devoted to the business of agriculture at the time of the decedent’s death and subsequently transferred to or for the benefit of the decedent’s members of the same family; a transfer to a trust is allowed if its beneficiaries are comprised solely of qualified family members. Additionally, the real estate must: (1) continue to be used for the business of agriculture for seven years after the decedent’s death, (2) derive a yearly gross income of at least $2,000, and (3) be reported on a timely filed inheritance tax return.
The “business of agriculture” does not include recreational activities (e.g., hunting, fishing, or skiing), fur farming, stockyard or slaughterhouse operations, any kind of manufacturing or processing operations, or raising or breeding game and domestic animals for sporting or recreational activities. However a deceased owner who was leasing real estate to another qualified family member or a business that is owned by members of the same of family would also be considered to be engaged in the “business of agriculture” if the property is being directly and principally used for agricultural purposes. Residential homes on land that otherwise qualifies for the exemption are presumed to be devoted to the business of agriculture, but commercial buildings affixed to exempt land must actually be used in the business of agriculture to be exempt.
“Members of the same family” is defined very broadly and includes the decedent and their siblings, aunts, uncles, great aunts and uncles. Ancestors, lineal decedents, spouses, or estates of any of those persons also qualify. Legally adopted or half-blood relatives are considered full-blood relatives under the inheritance tax law. Due to amendments in 2016, a surviving spouse is considered a member of the same family with any of the above-mentioned relatives of their late spouse. The 2016 amendments also permitted a transfer of real estate to a trust, as previously described above. The amendments were made retroactive to decedents who died after December 31, 2012, and therefore, parties which filed previously non-exempt returns that now qualify for the exemption may request an administrative correction from the Department of Revenue.
In addition to the inheritance tax return, a schedule AU form listing each real estate parcel for which the exemption is sought must be filed. After Department approval, each owner must file an annual certification for the seven-year period after the decedent’s death, confirming that the real estate continues to be used for the business of agriculture and generates the minimum annual revenue. If the real estate fails to satisfy either of those conditions, an owner is liable for the inheritance tax amount that would have been due, based on the real estate’s fair market value at the time of the decedent’s death, plus interest.
Qualified Family-owned Business Interest Exemption
Similarly, for decedents who passed away after June 30, 2013, a transfer of a qualified family-owned business interest to or for the benefit of a decedent’s members of the same family is exempt from the inheritance tax if the business interest is owned by such family members for seven years after the decedent’s death, and is reported on a timely filed return. Transfers to a trust are permitted, but are subject to same requirements previously discussed for the business of agriculture exemption. Likewise, the definition of “members of the same family,” including the surviving spouse amendment, is identical to that under the business of agriculture exemption. Both the trust allowance and surviving spouse amendments are retroactive to June 30, 2013.
A qualified family-owned business must have fewer than 50 full-time equivalent employees, a net book value of assets less than $5 million, been in existence at least five years prior to the decedent’s death, and cannot have a primary purpose of managing investments or income-producing assets. Additionally, property transferred to the business within one year of the decedent’s death is not eligible for the exemption unless the transfer was for a legitimate business purpose. As with the business of agricultural exemption, annual certifications are required for the seven-year period following the decedent’s death.
Agricultural commodity and conservation and rural land exemptions
Lastly, a transfer of agriculture reserve, agricultural use, or forest reserve land, as well as an agricultural commodity or agricultural conservation easement, is exempt from the inheritance tax if the transfer is to or for the benefit of the decedent’s lineal descendants or siblings, and is timely filed. In line with the other exemptions, a transfer to a trust is allowed if the trust’s beneficiaries are comprised solely of lineal descendants or siblings; the trust allowance provision is retroactive to decedents who passed away after December 31, 2012.
Regarding the property types, agricultural reserve land is noncommercial, open space land that is used for outdoor recreation or aesthetic enjoyment; the land must be open to the public at no charge, on a nondiscriminatory basis. To qualify as agricultural use property, land must be used to produce an agricultural commodity or enrolled in a federal soil conservation program. Forest reserve land must be ten acres or more, stocked by forest trees of any size, and capable of producing timber or other wood products. An agricultural commodity consists of any plant or animal product, including Pennsylvania-grown Christmas trees used for commercial purposes. As defined in the Agricultural Area Security Law, an agricultural conservation easement is a property interest that permanently prohibits non-agricultural developments or improvements on a land parcel. Pertinently, unlike the prior two exemptions, no annual certification or income requirements apply under this exemption category.
For more information on the inheritance tax and these exemptions: