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PA Transfer Tax Exemptions: Family Farms Relief

On July 2, 2012 Governor Tom Corbett signed Act 85 into law, which contained two major items of good news for Pennsylvania family farms.

On July 2, 2012 Governor Tom Corbett signed Act 85 into law, which contained two major items of good news for Pennsylvania family farms.

First is a new PA transfer tax exemption for family farms.

Pennsylvania has a realty transfer tax which is imposed on the value of real estate transferred by deed, instrument or long-term leases.  The tax is imposed at a rate of 1% by the State, and usually 1% at the local level.

Some real estate transfers are exempt from the tax, most notably transfers among family members.  There had been a very narrow exemption for transfers of a “family farm business” to a “family farm corporation”.  However, the narrow definition of these two terms precluded a lot of estate planning and asset protection planning techniques.

Thus, the realty transfer tax was a major obstacle to the use of many estate planning techniques for family farms.  While parents could transfer the family farm to individual family members as an exempt transfer, they could not transfer the farm real estate to many types of entities typically used for estate planning and asset protection planning, even if the entity was wholly owned by family members.

Act 85 of Pennsylvania

Many techniques used to reduce Federal estate taxes and Pennsylvania inheritance taxes, as well as techniques to transfer farm real estate to multiple family members, require the transfer of the farm real estate to entities such as family limited partnerships or LLCs.  Unfortunately, many families chose not to use such entities due to the large realty transfer tax imposed in the transactions.

Act 85 replaces the narrow definition of “family farm corporation with the new term “family farm business”, and exempts transfers of real estate to a “family farm business” from the realty transfer tax.

“Family farm business” is a broader term, including entities of which at least 75% of the assets are devoted to the business of agriculture, and at least 75% of each class of stock (or other ownership) is continuously owned by members of the same family.

While prior law only exempted transfer to “family farm corporations”, now any kind of entity, specifically including family limited partnerships and LLCs, can receive farm real estate from family members free of the realty transfer tax.

Family limited partnerships are a very effective entity to hold family farms.  Parents can transfer the real estate to the limited partnership, and then transfer limited partnership interests to their children (and grandchildren).  This can reduce taxes, permit management of the family farm, and spread the value of the farm among multiple family members, all of which should greatly aid families in keeping the farm “in the family” for future generations.

May 25, 2013 | Articles

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