Very recent changes to Pennsylvania inheritance tax law make it more affordable for families to pass on interests in family businesses. Businesses in existence for five years, with book value assets worthless than $5 million, and with fewer than 50 full-time employees can take advantage of the new law. All owners must be family members. Businesses with a principal purpose of managing investments or income-producing assets are excluded from the protection of the new law.
Now when an owner dies and leaves an interest in a qualified business to a son or daughter, husband or wife, brother or sister, or other limited lineal or ancestral relatives, the inherited interest is not subject to inheritance tax.
Before the Act was passed, when small business owners died, their heirs were subject to Pennsylvania inheritance taxes on the share of the business each inherited. Pennsylvania inheritance tax rates are based on the relationship of the beneficiary to the decedent. Spouses pay no inheritance tax, but parents, children, and grandchildren pay 4.5%, siblings pay 12%, and all other beneficiaries pay 15%. The law was passed to protect small business owners from the drain of cash or assets that is triggered by inheritance taxes on the share left by a deceased family member.
The relatives who inherit a share of the business must keep the business in family hands, continuing to maintain the business in the ownership of family members for at least seven years. They are required to report to the state every year to confirm continued family ownership or else risk losing the exemption of the new law and then having to pay inheritance taxes.