New law gives Pennsylvania Inheritance Tax exemptions for family farms

by Saul Ewing Arnstein & Lehr LLP

A recent law enacted by the Pennsylvania Legislature will enable farmers to pass their family farms to future generations without having to pay Pennsylvania Inheritance Tax. With proper estate and tax planning, this law will give many Pennsylvania land owners significant tax savings. 

Act 85 of 2012, recently enacted by the Pennsylvania Legislature, will allow farmers to pass their family farms to future generations free of Pennsylvania Inheritance Tax. To qualify for the exemption, the transferred property must be devoted to "the business of agriculture" for seven years following the decedent's death, produce a minimum yearly gross income of at least $2,000 and be transferred to "members of the same family." However, the legislation, as enacted, will require additional commentary and regulations from the Department of Revenue before the operation of the law is fully understood. Regardless of any ambiguities, land owners should start planning how they may be able to maximize tax savings for future generations.

Prior to the enactment of Act 85, children who inherited farmland from their parents had to pay a 4.5 percent inheritance tax on the value of the property transferred. In the case of land being left to a decedent's sibling, for example, the tax rate was increased to 12 percent. These costs made it difficult for farm families without access to additional capital to pay the Inheritance Tax and to continue to operate their farms without liquidating assets.   

The new statute also provides an exemption for the transfer of "an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve" to family members. This language is a bit ambiguous; it appears that the legislature's intent was to exempt the transfer of property subject to a conservation easement rather than the easement itself (which runs with the land and is therefore not transferred), but a straightforward reading of the statute indicates otherwise. Furthermore, it is unclear whether the seven-year continuous use and $2,000 gross income per year requirements also apply to these types of transfers. It's been suggested by some state officials that these rules should not apply. Although it is unlikely that these transfers will be subject to the same "business of agriculture" requirements as farmland, landowners should consider all possible interpretations of the statute until additional guidance is provided.   

There is also a question, based on the enacted language, who is required to farm the property following the transfer. As mentioned above, for the exemption to apply, the statute requires a transfer to occur "between members of the same family" (including "brothers and sisters, brothers and sisters of [the decedent's] parents and grandparents, the ancestors and lineal descendents of any of the foregoing, a spouse of any of the foregoing and the estate of any of the foregoing") and for the land to continue to be productive for seven years following the death of the decedent. However, it is not expressly stated in the statute whether the transferee of the property is required to personally operate or even own the farm following the transfer. Therefore, a situation can be imagined where a child of a farmer inherits the family farm from her parents, continues farming for a short period of time but soon grows tired of the daily operations and decides to lease the land to another farmer for a few more years. After the lease expires, the child then decides to sell the farm and its operations to a different party (who continues to operate the farm). If these events occur within seven years of the original transfer, based on the statutory language, it is unclear when, if at any time, the continuous devotion to the "business of agriculture" was broken and therefore exposed the land to the Inheritance Tax.   

Despite the uncertainties created by the statutory language, Act 85 should offer many Pennsylvania land owners significant Inheritance Tax savings for those that plan properly. But it will be necessary to see what further developments occur, either through regulations or additional legislation. As soon as we know more, we will prepare another alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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