Family Farms Freed From Burden of Inheritance Tax

October 16, 2012

The silos, cattle and cornfields along Pennsylvania’s winding roads are a reminder that farming is an integral part of the Commonwealth’s economy. Many of these farms are family businesses that politicians in both parties say they want to help.  Pennsylvania’s legislators came to the aid of farm families a few months ago.  To help ease the burden on Pennsylvania’s 63,000 farm families, there is new legislation that offers relief in the form of an inheritance tax exemption.

The relief is effective for decedents leaving behind family farms whose dates of death fall after June 30, 2012. Section 2111 adds a new exemption to transfers not subject to the Pennsylvania Inheritance Tax:

(s) A transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve, as those terms are defined in Section 2122(a), to lineal decedents or siblings is exempt from inheritance tax. 

Under the law, not only the farms themselves, but also farm commodities such as livestock and crops, are exempt. Forest reserves are also exempt.

The various sections and subsections of the law provide, in summary, the following criteria that must be met for a parcel of real estate to qualify for the exemption: 

  • The real estate must continue to be devoted to agriculture for a period of seven years beyond the decedent’s death, and the real estate must derive a yearly gross income of at least $2,000.
  • If the real estate ceases to be devoted to agriculture in that seven years, then the real estate is subject to inheritance tax in the amount that would have been paid or payable as the asset was valued at the time of death, plus interest from the date of decedent’s death (at a rate established by the Department of Revenue). That tax would then be secured by a lien in favor of the Commonwealth and a personal obligation of the owner of the property.
  • The owner of the real estate passing from the decedent and in whose estate (and on the tax return of which) the exemption is claimed, must certify to the Department of Revenue on an annual basis that the land qualifies for the exemption and must notify the Department within 30 days of any transaction or occurrence causing the real estate to fail to qualify for the exemption.  The Department will notify the owners of the obligation and provide an appropriate form.

In addition to the above requirements, two phrases in the language of the law are of special significance:  "business of agriculture" and "members of the same family."  

The "business of agriculture" term includes the leasing of property which is directly and principally used for agricultural purposes to members of the same family or to a corporation or an association owned by members of the same family. The business of agriculture also includes recreational activities such as hunting, fishing, camping, skiing, show competition or racing; raising, breeding or training of game animals or game birds, fish, cats, dogs or pets or animals intended for use in sporting or recreational activities; fur farming; stockyard and slaughterhouse operations; and manufacturing or processing operations.

Jon Gruber is an attorney at Russell, Krafft and Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from the University of Virginia and practices in a variety of areas, including Estate Planning and Estate and Trust Administration