Family Farms Now Exempt from Inheritance Tax

In June 30, 2012, Governor Corbett signed into law legislation that would exempt family farms from Pennsylvania Inheritance Tax.  Farm estates are often large, and they are usually “illiquid” (i.e., the typical family farmer is “land rich” and “cash poor”).  As a consequence, the inevitable act of dying often forced the executor of a family farmer’s estate to sell all or part of the farm simply to pay the tax.  The new legislation is intended to prevent that result, and, in doing so, keep the farm in the family.

To qualify for the exemption, the post death transfer must be made to a member of the decedent’s family (either a child or a sibling), the property must be used in the business of farming for a period of seven years after the death of the decedent, and during each such year the farm must produce gross income of at least $2,000.00.

A transfer to a child, without this exemption, would be taxed at 4.5% of the date of death value of the farm.  A transfer to a sibling would be taxed at a 12% rate.  For an illiquid estate either of these rates poses a problem, and the benefits of qualifying for the exemption become obvious.  (Note that transfers to a surviving spouse are not taxed; thus, there is no need for the new exemption to cover transfers to a spouse.)

Given that “agribusiness” is the Commonwealth’s largest industry and that 63,000 farm families are now located in Pennsylvania, it is somewhat surprising that this exemption is just now hitting the books.  Unfortunately, the tax relief provided by Governor Corbett and the Pennsylvania legislature will be little consolation to the owners of many larger family farms if Congress does not act with respect to the federal estate tax before the current “patch” to the estate tax law expires on December 31, 2012.  If nothing is done on the federal level family farms (and remember that is more than just land, it includes, equipment, trucks, buildings, commodities, livestock, etc.) that are valued at over $1,000,000.00 would be subject to tax at a starting rate of 55%.  While certain planning and valuation techniques may be utilized to avoid that result, it should not be assumed that the threat that death taxes pose to family farms has disappeared.

— Rod Fluck


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