Qualifying for the Family-Owned Business Exemption from Pennsylvania Inheritance Tax

Beginning July 1, 2013, the transfer at death of certain family owned business interests are exempt from the Pennsylvania inheritance tax. Pennsylvania Inheritance Tax is currently 4.5% for linear descendants, 12% for siblings and 15% for everyone else. To qualify for the family-owned business exemption, a family-owned business interest must:

  1. Have been in existence for five years prior to the decedent’s death;
  2. Have less than 50 full time equivalent employees and a net book value of assets totaling less than $5,000,000 at the date of the decedent’s death;
  3. Be engaged in a trade or business, the principal purpose of which is not the management of investments or income producing assets;
  4. Be transferred to one or more qualified transferees – the decedent’s husband or wife, grandfather, grandmother, father, mother, or children, siblings or their children. Children include natural children, adopted children; and stepchildren;
  5. Owned by a qualified transferee for a minimum of seven years after the decedent’s death;
  6. Reported on a timely filed Pennsylvania inheritance tax return and filed within 9 months of the decedents date of death, or within 15 months of the decedent’s date of death if the estate or person required to file the return was granted the six month statutory extension.

The transferee must file an annual certification and notify the Pennsylvania Department of Revenue within thirty days of any transaction or occurrence causing the qualified family-owned business to fail to qualify for the exemption. Failure to comply with the certification or notification requirements results in a total loss of the exemption.

If you feel you qualify for the family-owned business exemption please contact Gregory J. Spadea online or at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

What Happens to Your Debts When You Die?

When you die, your executor has responsibility to pay all your remaining debts if your estate has enough probate assets to pay them. Probate assets are assets that were in your name alone and pass by your will. Before your executor pays any creditors he or she must first pay the estate administration expenses such as funeral costs, grave marker, probate fees, medical bills, attorney fees and rent for the previous six months prior to your death. After the administrative expenses are paid, the secured creditors are paid and any probate assets remaining will go to pay unsecured creditors.

If the estate is not solvent, and a creditor is paid more than he is entitled to receive, the executor can be held personally responsible to the extent of the overpayment. The executor also may be personally liable if he or she distributes estate property without having given proper notice to those having a claim against the estate.

As a general rule, debt collectors may not try to collect from your heirs. However, there are several exceptions. The first exception is if an heir was a co-signer of a particular debt in which case they would be responsible for that debt or if someone held property jointly with you, they would be responsible for any debts on the joint property. The third exception is if an heir inherits a car or a boat that had an outstanding loan, they would have to pay the loan off or the car or boat would be repossessed by the lender.

Creditors cannot be paid from any assets that pass directly to a beneficiary. Assets that pass directly to a beneficiary are called non-probate assets and include jointly owned bank accounts and any account or life insurance policy with a named beneficiary. Therefore a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds. In addition creditors cannot access funds held in an irrevocable trust.

A debt collector may not contact your heirs or relatives to try to collect payment unless they were co-signers of the debt or the debt was a jointly owned debt. Debt collectors are allowed to contact the executor of your estate, or your spouse, or your parents if you were a minor, to discuss the debts but may not discuss the debts with anyone else.

Contact Gregory J. Spadea

If you have any questions or need help probating an estate please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

Is My Property Exempt From Pennsylvania Real Estate Tax?

A house

If you own a property that is regularly used by a charity or falls into one of the 8 categories below you may be exempt from paying real estate tax. To qualify for an exemption your property must be:

  1. Zoned in your Current Municipality for a Real Estate Tax Exemption
  2. An actual place of regular religious worship;
  3. A non-profit burial place;
  4. Property used regularly for public purposes;
  5. Owned Occupied and used by any branch or post of honorably discharged service persons and regularly used for charitable or patriotic purposes;
  6. Actually and regularly used by an institution of purely public or private charity for the purpose of the institution;
  7. A Hospital or institution of learning (schools) or charity including fire and rescue station founded and maintained by public or private charity; or
  8. A Public Library, museum, art gallery or concert music hall provided and maintained by public or private charity.

If your organization falls into any one of the seven categories listed above you can apply for an exemption from real estate tax in the county you are located. If you have any questions call Spadea & Associates, LLC at 610-521-0604.

Wrongful Death Proceeds Are Not Subject to Pennsylvania Inheritance Tax or Federal Income Tax

The Pennsylvania Wrongful Death statute allows the personal representative of an estate to bring an action for the benefit of a decedent’s spouse, children or parents to recover damages for the death of the decedent caused by the wrongful act, neglect, unlawful violence of another. The statute entitles a plaintiff to recover damages for pain and suffering, loss of earning power, medical and hospital bills, funeral expenses and certain estate administration expenses.

Wrongful death proceeds are not taxable for Pennsylvania Inheritance purposes or for federal income tax purposes. On the other hand survival action proceeds are subject to Pennsylvania inheritance tax. Since Pennsylvania taxes survival actions but not wrongful death actions, you, through your attorney want to maximize the wrongful death recovery amount. The court tends to allocate the proceeds of wrongful death actions and survival actions based upon the facts of the case and the evidence presented by your attorney.

Under the Pennsylvania Probate, Estate and Fiduciary code the Pennsylvania Department of Revenue is an interested party in any orphan’s court proceeding. Therefore your attorney must get written consent from the Pennsylvania Department of Revenue regarding the proposed allocation since its interests will be adversely affected by the amount allocated to the wrongful death action.

Survival Actions are valued at the decedent’s date of death for Pennsylvania Inheritance tax purposes. Any unpaid Inheritance tax is due within thirty days after the estate receives the proceeds. If there is any tax due beyond thirty days the Pennsylvania Department of Revenue begins charging interest on the unpaid balance which is currently 6%.

Contact Gregory J. Spadea

If you have a question about a wrongful death action or survival action please contact Spadea & Associates, LLC online or at 610-521-0604, located in Ridley Park, Pennsylvania.

Why Is My Inherited IRA Subject To Both Pennsylvania Inheritance Tax And Federal Income Tax?

Pennsylvania levies inheritance tax on the following classes of beneficiaries:

1. Class A – This class includes grandparents, parents, children including natural children, adopted children and step-children, and an un-remarried spouse of a child. This is the only class that receives a $3,500 family exemption from the Pennsylvania inheritance tax which is 4.5% for Class A Beneficiaries.

2. Class A1 – This class includes brothers, half-brothers, sisters, half-sisters, and persons having at least one parent in common with the decedent, either by blood or by adoption. Pennsylvania inheritance tax is 12% for Class A1 Beneficiaries.

3. Class B – This class includes all other beneficiaries. Pennsylvania inheritance tax is 15% for Class B Beneficiaries.

Generally inheritances are not subject to income tax under Section 102 of the Internal Revenue Code. One exception to that rule is traditional Individual Retirement Accounts (IRA’s) because IRA’s contain tax deferred assets that have never been subject to income tax. Therefore, in addition to paying Pennsylvania inheritance tax a beneficiary also has to pay income tax when they inherit a traditional IRA in the year they withdraw money from the IRA. The good news is that the Traditional IRA is not subject to Pennsylvania income tax.

If you inherit an IRA you should consider all the options the Plan Administrator offers you.

One option would be taking a lump-sum distribution. Another option would be taking distributions over five years to lessen the tax bite. A third option may be rolling the inherited IRA over into your existing traditional IRA if the Plan Administrator allows it.

Keep in mind that no matter which option you select you will not have to pay the 10% premature distribution penalty since inherited IRA’s are always exempt from the penalty regardless of the age you decide to take the distribution.

If you have any questions about inherited IRA’s feel free to call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

What is the Family Exemption on the Pennsylvania REV-1500?

The Commonwealth of Pennsylvania created the Family Exemption to help the children or surviving spouse who lived with the deceased and relied on that person’s assets or income to take up to $3,500 from the decedent’s bank account until the estate account is opened. At death a person’s assets are frozen until the Executor goes to the Register of Wills with the will and death certificate to open an estate. During this time the surviving spouse or child might find himself or herself without a way to pay for household expenses. In the alternative, if the estate is small, an executor might hesitate to distribute any assets to a dependent child until the Pennsylvania Inheritance Tax was paid in full making the child wait months for a distribution. To guard against this possibility the Pennsylvania legislature created the Family Exemption, which is a right of a person living in the same household with the decedent to retain or to claim real or personal property of a decedent up to $3,500.00 under the theory that this is enough to allow the person to survive until the estate account is opened. Executors can feel comfortable distributing this amount to a dependent child knowing that it will not be subject to the Pennsylvania Inheritance Tax.

Beneficiaries that are members of the decedent’s household are eligible for the Family Exemption. They include grandparents, parents, children including adopted children and step-children, and an un-remarried spouse of a child of the decedent.

Since its inception, the family exemption was legally payable only from the probate estate of the decedent. Furthermore, this exemption can be taken as a deduction on line 3 of Schedule H of the Pennsylvania Inheritance Tax Return Form REV-1500.

If you have any questions about the REV- 1500 or the family exemption you should contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

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