The Inheritance and Estate Tax Act — Part III

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(Article XXI of the Tax Reform Code of 1971, Act of March 4, 1971, P.L. 6, No. 2, added by Act of Aug. 4, 1991, P.L. 97, No. 22, as amended.)

— TRANSFERS NOT SUBJECT TO TAX —

 

Section 2111. Transfers Not Subject to Tax.

___(a) The transfers enumerated in this section are not subject to the tax imposed by this article.

___(b) Transfers of property to or for the use of any of the following are exempt from inheritance tax:

______(1) The United States of America.

______(2) The Commonwealth of Pennsylvania.

______(3) A political subdivision of the Commonwealth of Pennsylvania.

___(c) Transfers of property to or for the use of any of the following are exempt from inheritance tax:

______(1) Any corporation, unincorporated association or society organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual and no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.

______(2) Any trustee or trustees or any fraternal society, order or association operating under the lodge system, but only if the property transferred is to be used by the trustee or trustees or by the fraternal society, order or association exclusively for religious, charitable, scientific, literary or educational purposes or for the prevention of cruelty to children or animals, and no substantial part of the activities of the trustee or trustees or of the fraternal society, order or association is carrying on propaganda or otherwise attempting to influence legislation.

______(3) Any veterans’ organization incorporated by act of Congress or its departments or local chapters or posts, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

___(d) All proceeds of insurance on the life of the decedent are exempt from inheritance tax. Refunds of unearned premiums for the current policy period and post mortem dividends shall be considered exempt proceeds.

___(e) All proceeds of any Federal War Risk Insurance, National Service Life Insurance or similar governmental insurance are exempt from inheritance tax. Refunds of unearned premiums for the current policy period and post mortem dividends shall be considered exempt proceeds.

___(f) The pay and allowances determined by the United States to be due a member of its armed forces for service in the Vietnam conflict after August 5, 1964, for the period between the date declared by it as the beginning of his missing-in-action status to the date determined by it to be the date of his death, are exempt from inheritance tax.

___(g) Inter vivos transfers as defined in subsection (c) of section 2107 which might otherwise be subject to inheritance tax are exempt where the transferee is a governmental body as provided in subsection (b) or a charity as provided in subsection (c).

___(h) Intangible personal property held by, for or for the benefit of a decedent who, at the time of his death, was a nonresident is exempt from inheritance tax.

___(i) A transfer made as an advancement of or on account of an intestate share or in satisfaction or partial satisfaction of a gift by will, but not within the meaning of subsection (c)(3) of section 2107, is exempt from inheritance tax.

___(j) Adjusted service certificates issued under the act of Congress of May 19, 1924, and adjusted service bonds issued under the act of Congress of January 27, 1936, are exempt from inheritance tax.

___(k) Property subject to a power of appointment, whether or not the power is exercised, and notwithstanding any blending of such property with the property of the donee, is exempt from inheritance tax in the estate of the donee of the power of appointment.

___(l) Property awarded to the Commonwealth as statutory heir by escheat or without escheat, otherwise than as custodian for a known distributee, is exempt from inheritance tax. Inheritance tax shall be deducted at the applicable rate without interest from any such exempt funds thereafter distributed by the Commonwealth.

___(m) Property owned by husband and wife with right of survivorship is exempt from inheritance tax. If the ownership was created within the meaning of section 2107(c)(3), the entire interest transferred shall be subject to tax under section 2107(c)(3) as though a part of the estate of the spouse who created the co-ownership.

___(n) Property held in the name of a decedent who had no beneficial interest in the property is exempt from inheritance tax.

___(o) Obligations owing to the decedent which are worthless immediately before death are exempt from inheritance tax although collectible from the obligor’s distributive share of the estate.

___(p) The lump-sum death payment from the Social Security Administration or Veterans’ Administration or any county veterans’ death benefit or other similar death benefit, whether or not paid to the decedent’s estate, is exempt from inheritance tax.

___(q) The lump-sum burial benefit from the United States Railroad Retirement Board, whether or not paid to the decedent’s estate, is exempt from inheritance tax.

___(r) Payments under pension, stock bonus, profit-sharing and other retirement plans, including, but not limited to, H.R.10 plans, individual retirement accounts, individual retirement annuities and individual retirement bonds to distributees designated by decedent or designated in accordance with the terms of the plan, are exempt from inheritance tax to the extent that decedent before his death did not otherwise have the right to possess (including proprietary rights at termination of employment), enjoy, assign or anticipate the payment made. In addition to this exemption, whether or not the decedent possessed any of these rights, the payments are exempt from inheritance tax to the same extent that they are exempt from Federal estate tax under the provisions of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 1 et seq.), as amended, any supplement to the code or any similar provision in effect from time to time for Federal estate tax purposes, except that a payment which would otherwise be exempt for Federal estate tax purposes if it had not been made in a lump-sum or other nonexempt form of payment shall be exempt from inheritance tax even though paid in a lump-sum or other form of payment. The proceeds of life insurance otherwise exempt under subsection (d) shall not be subject to inheritance tax because they are paid under a pension, stock bonus, profit-sharing, H.R.10 or other retirement plan.

___(s) A transfer of real estate devoted to the business of agriculture between members of the same family, provided that after the transfer the real estate continues to be devoted to the business of agriculture for a period of seven years beyond the transferor’s date of death and the real estate derives a yearly gross income of at least two thousand dollars ($2,000), provided that:

______(1) Any tract of land under this article which is no longer devoted to the business of agriculture within seven years beyond the transferor’s date of death shall be subject to inheritance tax due the Commonwealth under section 2107, in the amount that would have been paid or payable on the basis of valuation authorized under section 2121 for nonexempt transfers of property, plus interest thereon accruing as of the transferor’s date of death at the rate established in section 2143.

______(2) Any tax imposed under section 2107 shall be a lien in favor of the Commonwealth upon the property no longer being devoted to agricultural use, collectible in the manner provided for by law for the collection of delinquent real estate taxes, as well as the personal obligation of the owner of the property at the time of the change of use.

______(3) Every owner of real estate exempt under this subsection shall certify to the department on an annual basis that the land qualifies for this exemption and shall notify the department within thirty days of any transaction or occurrence causing the real estate to fail to qualify for the exemption. Each year the department shall inform all owners of their obligation to provide an annual certification under this subclause. This certification and notification shall be completed in the form and manner as provided by the department.

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

___(t) A qualified family-owned business. The following shall apply:

______(1) A transfer of a qualified family-owned business interest to one or more qualified transferees is exempt from inheritance tax, if the qualified family-owned business interest:

_________(i) continues to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death; and

_________(ii) is reported on a timely filed inheritance tax return.

______(2) A qualified family-owned business interest that was exempted from inheritance tax under this subsection that is no longer owned by a qualified transferee at any time within seven years after the decedent’s date of death shall be subject to inheritance tax due the Commonwealth under section 2107, in an amount equal to the inheritance tax that would have been paid or payable on the value of the qualified family-owned business interest using the valuation authorized under section 2121 for nonexempt transfers of property. Interest shall accrue from the payment date established under section 2142 at the rate established under section 2143.

______(2.1) The exemption under this subsection shall not apply to property transferred by the decedent into the qualified family-owned business within one year of the death of the decedent, unless the property was transferred for a legitimate business purpose.

______(3) Inheritance tax due under section 2107 as a result of disqualification under paragraphs (2) or (4), plus interest on the inheritance tax, shall he a lien in favor of the Commonwealth on the real and personal property of the owner of the qualified family-owned business interest at the time of the transaction or occurrence that disqualified the qualified family-owned business interest from the exemption provided under this subsection. The nheritance tax due and interest shall be collectible in the manner provided for by law for the collection of delinquent taxes and shall be the personal obligation of the owner of the qualified family-owned business interest at the time of the transaction or occurrence that disqualified the qualified family-owned business interest from the exemption provided under this subsection. The lien shall remain until the inheritance tax and accrued interest are paid in full.

______( 4) Each owner of a qualified family-owned business interest exempted from inheritance tax under this subsection shall certify to the department, on an annual basis, for seven years after the decedent’s date of death, that the qualified family-owned business interest continues to be owned by a qualified transferee and shall notify the department within thirty days of any transaction or occurrence causing the qualified family-owned business interest to fail to qualify for the exemption. Each year the department shall inform all owners of a qualified family-owned business interest exempted from inheritance tax under this subsection of their obligation to provide an annual certification under this paragraph. The certification and notification shall be completed in the form and manner as provided by the department. An owner’s failure to comply with the certification or notification requirements shall result in the loss of the exemption and the qualified family-owned business interest shall be subject to inheritance tax due the Commonwealth under section 2107, in an amount equal to the inheritance tax that would have been paid or payable on the value of the qualified family-owned business interest using the valuation authorized under section 2121 for nonexempt transfers of property. Interest shall accrue from the payment date established in section 2142 at the rate established in section 2143.

______(5) For purposes of this subsection, the following terms shall have the meanings given to them in this paragraph:

_________”Qualified transferee.” A decedent’s:

____________(i) husband or wife;

____________(ii) lineal descendants;

____________(iii) siblings and the sibling’s lineal descendants; and

____________(iv) ancestors and the ancestor’s siblings .

_________”Qualified family-owned business interest.” As follows:

____________(i) an interest as a proprietor in a trade or business carried on as a proprietorship, if the proprietorship has fewer than fifty fulltime equivalent employees as of the date of the decedent’s death, the proprietorship has a net book value of assets totaling less than five million dollars ($5,000,000) as of the date of the decedent’s death, and has been in existence for five years prior to the date the decedent’s death; or

____________(ii) an interest in an entity carrying on a trade or business, if:

_________(A) the entity has fewer than fifty full time equivalent employees as of the date of the decedent’s death;

_________(B) the entity has a net book value of assets totaling less than five million dollars ($5,000,000) as of the date of the decedent’s death;

_________(C) as of the date of decedent’s death, the entity is wholly owned by the decedent or by the decedent and members of the decedent’s family that meet the definition of a qualified transferee;

_________(D) the entity is engaged in a trade or business the principal purpose of which is not the management of investments or income-producing assets owned by the entity; and

_________(E) the entity has been in existence for five years prior to the decedent’s date of death.

[Subsections (k) and (m) were amended by the Act of June 16, 1994, P.L. 279, No. 48, and amended by Section 17 of the Act of June 30, 1995, P.L. 139, No. 21, effective for decedents dying on or after January 1, 1995. Subsections (s) and (s1) were added by Act 85 of 2012 and Subsection (t) was added by Act 52 of 2013]

Section 2112. Exemption for Poverty.

___(a) The General Assembly, in recognition of the powers contained in section 2(b)(ii) of Article VIII of the Constitution of Pennsylvania which provides therein for the establishing as a class or classes of subjects of taxation the property or privileges of persons who because of poverty are determined to be in need of special tax provisions or tax exemptions, hereby declares as its legislative intent and purpose to implement such powers under such Constitutional provision by establishing a tax exemption as hereinafter provided in this section.

___(b) The General Assembly, having determined that there are persons within this Commonwealth the value of whose incomes and estates are such that the imposition of an inheritance tax under this article would cause them hardship and economic burden and having further determined that poverty is a relative concept inextricably joined with the ability to maintain assets inherited upon the death of a spouse, deems it to be a matter of public policy to provide an exemption from taxation for transfers of property to or for the use of that class of persons hereinafter designated in order to relieve their hardship and economic burden.

___(c) Any claim for a tax exemption hereunder shall be determined in accordance with the following:

______(1) The transferee is the spouse of the decedent at the date of death of the decedent.

______(2) The value of the estate of the decedent does not exceed two hundred thousand dollars ($200,000) after reduction for actual liabilities of the decedent as evidenced by a written agreement.

______(3) The average of the joint exemption income of the decedent and the transferee for the three taxable years, as defined in Article III, immediately preceding the date of death of the decedent does not exceed forty thousand dollars ($40,000).

___(d) Notwithstanding any other provision of this article, transfers of property to or for the use of any eligible transferee who meets the standards of eligibility established by this section as the test for poverty shall be deemed a separate class subject to taxation and, as such, shall be entitled to the benefit of the following exemptions from taxation on transfers of property as a credit against the tax imposed by this article:

______(1) For decedents dying on or after January 1, 1992, and before January 1, 1993, the lesser of:

_________(i) Two per cent of the taxable value of the property of the decedent transferred to or for the use of the transferee.

_________(ii) Two per cent of one hundred thousand dollars ($100,000) of the taxable value of the property of the decedent transferred to or for the use of the transferee.

______(2) For decedents dying on or after January 1, 1993, and before January 1, 1994, the lesser of:

_________(i) Four per cent of the taxable value of the property of the decedent transferred to or for the use of the transferee.

_________(ii) Four per cent of one hundred thousand dollars ($100,000) of the taxable value of the property of the decedent transferred to or for the use of the transferee.

______(3) For decedents dying on or after January 1, 1994, and before January 1, 1995, the lesser of:

_________(i) Six per cent of the taxable value of the property of the decedent transferred to or for the use of the transferee.

_________(ii) Six per cent of one hundred thousand dollars ($100,000) of the taxable value of the property of the decedent transferred to or for the use of the transferee.

___(e) For nonresident decedents, the credit provided in this section shall bear the same ratio as that of the decedent’s estate in this Commonwealth bears to the decedent’s total estate without regard to situs.

___(f) The credit provided in this section shall not be greater than the tax imposed.

___(g) This section shall not apply to the estates of decedents dying on or after January 1, 1995.

[Subsection (d) was amended by the Act of June 16, 1994, P.L. 279, No. 48, and amended by Section 18 of the Act of June 30, 1995, P.L. 139, No. 21, effective for decedents dying on or after January 1, 1995.
Subsection (f) was added by the Act of June 16, 1994, P.L. 279, No. 48, effective for decedents dying on or after July 1, 1994.
Subsection (g) was added by the Act of June 16, 1994, P.L. 279, No. 48, and amended by Section 18 of the Act of June 30, 1995, P.L. 139, No. 21, effective for decedents dying on or after January 1, 1995.
]

Section 2113. Trusts and Similar Arrangements for Spouses.

___(a) In the case of a transfer of property for the sole use of the transferor’s surviving spouse during the surviving spouse’s entire lifetime, all succeeding interests which follow the interest of the surviving spouse shall not be subject to tax as transfers by the transferor if the transfer was made by a decedent dying on or after January 1, 1995, provided that the transferor’s personal representative may elect, on a timely filed inheritance tax return, to have this section not apply to a trust or similar arrangement or portion of a trust or similar arrangement.

___(b) Succeeding interests not subject to tax as transfers by the transferor by reason of subsection (a) shall be deemed to be transfers subject to tax by the surviving spouse of the property held in the trust or similar arrangement at the death of the surviving spouse. The tax on that property shall be based upon its value at the death of the surviving spouse, the tax rates applicable to dispositions by the surviving spouse or by the transferor, whichever are lower, and any exemptions relating to the kind or location of property held in the trust or similar arrangement at the surviving spouse’s death.

___(c) Subsection (b) shall apply even if the succeeding interests not subject to tax as transfers by the transferor by reason of subsection (a) were also not subject to tax by reason of an exemption based upon the kind or location of property at the transferor’s death.

___(d) This section shall not apply to inter vivos transfers otherwise exempt from inheritance tax.

[Section 2113 was added by the Act of June 16, 1994, P.L. 279, No. 48, and amended by Section 19 of the Act of June 30, 1995, P.L. 139, No. 21, effective for decedents dying on or after January 1, 1995.]


Evans Law Office
Daniel B. Evans, Attorney at Law
P.O. Box 27370
Philadelphia, PA 19118
Telephone: (866) 348-4250
Email: resources@evans-legal.com

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