Qualified Family Business Exemption for Inheritance Tax

by McNees Wallace & Nurick LLC

The Pennsylvania Inheritance Tax Act was amended recently to exempt interests in a “qualified family-owned business” from the Inheritance Tax. The goal of this exemption is to preserve certain family-owned business enterprises in the event of the death of the owner. Although the exemption makes for a good sound bite, it will have limited application for business succession planning.


The exemption applies if (1) the transfer is to one or more “qualified transferees,” (2) the qualified transferee(s) continue to own the business for a seven-year period after the date of death, and (3) the transfer is reported on a timely filed Inheritance Tax return. A “qualified transferee” includes the decedent’s spouse, children and other descendants, siblings, the descendants of siblings (nieces and nephews), as well as the decedent’s ancestors and the siblings of ancestors (so a decedent’s parents and the siblings of parents are included).


Each qualified transferee must certify to the Department of Revenue each year for seven years, that the family business continues to be owned by one or more qualified transferees. The failure to make this certification will result in loss of the exemption. The consequence of the loss of the exemption is that the Inheritance Tax that was avoided is due plus interest on the amount due.


The definition of a qualified family-owned business interest (a “QFOBI”) depends on whether the QFOBI is a sole proprietorship or an entity such as a corporation, partnership, or LLC, although there are requirements common to both a sole proprietorship and an entity, all of which are evaluated as of the date of death. First, there must be fewer than 50 “full-time equivalent” employees. Second, the net book value of the business must be less than $5,000,000. Third, the business must have been in existence for five years.


If the QFOBI is an entity, there are two additional requirements. First, the entity must be wholly owned by the decedent and qualified transferees. Second, the entity must be engaged in a trade or business which is not the management of investments or income-producing assets.


There are a number of issues (and perhaps opportunities) with the QFOBI exemption. For example:

  • The definition of “qualified transferee” does not include a trust that benefits one or more qualified transferees. Trusts are often an important part of a client’s estate plan, such as providing the surviving spouse with creditor protection or consolidated asset management, so this definitional limitation will restrict planning for certain clients.
  • A QFOBI that is an entity must be wholly owned by the decedent and qualified transferees. Therefore, businesses that are owned in any part by an unrelated person are not QFOBIs. For example, a partnership or corporation owned by two unrelated persons does not satisfy the definition. Similarly, based on the definition of a qualified transferee, it appears that in-laws are not qualified transferees, so a business owned by two brothers-in-law would not qualify. Furthermore, the definition excludes businesses that have rewarded valuable, unrelated employees with minority ownership interests.
  • There are no exceptions to the annual certification requirement. The penalty for failing to meet this requirement is harsh, and a reasonable cause exception would be fair accommodation.
  • The definition of “entity” requires that the entity be in existence for five years. What if as of the decedent’s date of death the entity existed for three years and the entity’s creation was preceded by three years of a sole proprietorship? Logic would dictate that the QFOBI exemption would apply, but this is not clear from the definition.
  • What is a “full-time equivalent employee”? This definition will be important for certain businesses that have part-time employees, such as restaurants and seasonal businesses.
  • How will the Department of Revenue approach family limited partnerships? A family limited partnership generally will be owned exclusively by qualified transferees, but disputes may arise over whether the partnership was “engaged in a trade or business which is not the management of investments or income-producing assets.”
  • The $5,000,000 book value requirement favors service oriented businesses (such as consulting) over capital intensive businesses (such as manufacturing or construction).
  • There is no “common holding” limitation. Therefore, for certain businesses that do not meet the QFOBI definition, a spinoff of a division into a separate entity may be considered to divide employees and equity to ensure that both entities qualify as QFOBIs.

Although the QFOBI exemption will benefit some business owners, the exemption has limited application. In addition, many business succession plans involve the lifetime transfer of business interests, such as a sale to a third party or a transfer to one or more family members. This lifetime planning should not be affected by the exemption. Also, the growth and success of a family business should not be constrained by trying to maintain QFOBI status. Many planning techniques exist to mitigate or eliminate exposure to the Inheritance Tax (and the Federal Estate Tax), and these techniques can be employed to allow for the growth of a family business beyond the definitional limitations.


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.

© McNees Wallace & Nurick LLC | Attorney Advertising

Written by:

McNees Wallace & Nurick LLC

McNees Wallace & Nurick LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.