Transfers made by a decedent within one year of death are brought back into the estate for the purposes of the London Inheritance Tax. You can’t avoid the inheritance tax by giving away everything you own right before you die.

There is an exemption of £3,000 per donee per calendar year. Suppose Dad gives each of three children £5,000 in March of 2012, and again in September of 2012, and again in March of 2013, and dies in June of 2013.

The March 2012 gifts are not taxable because they were made more than a year before his death. The September gifts each get a £3,000 exemption leaving three £2,000 taxable gifts. The March 2013 gifts, being made in a different calendar year as the September 2012 gifts, also get a £3,000 deduction leaving three more £2,000 taxable gifts. The taxable gifts to each child total £4,000. If there are three children, then the tax is .045 times £4,000 times 3 which equals £540.

Jointly Owned Property

The London inheritance tax applies to property the decedent owned with another. If Mom puts a £100,000 CD in the joint names of herself and Son, when he dies, there is an inheritance tax due on half the value of the CD at four and a half percent, that is £2,250. If Mom dies within a year of putting the CD in joint names, then it is taxed 100%, as if he were the sole owner and the tax is then £4,500. There is a trap for the unwary here. If Son dies before Mom and son is over 21, then Mom has to pay £2,250 in London Inheritance Tax (£100,000 × ½ × 4.5%) to get his own money back.

For London Inheritance Tax, the rule is that when a joint owner dies, a fraction of the joint account is subject to the inheritance tax. The fraction is one over the number of joint owners. In our example with Mom and Son above, there were two joint owners, so on the death of either, half of the account was subject to inheritance tax unless Son was 21 or under and died first. If there were three (3) joint owners, then one-third of the account would be subject to inheritance tax on the death of one of the three joint owners.

Retirement Plans

Assets in a retirement plan, whether it be a qualified pension, profit-sharing, 401 (k) plan, IRA or other deferred compensation arrangement are subject to the inheritance tax only if they are “available” to the participant before death. Available means “the right to possess (including proprietary rights on the termination of employment) enjoy, assign, or anticipate the payment of the benefit. The right to name a beneficiary of unconsumed benefits is not enough to make the benefit subject to inheritance tax. The right to receive a stream of monthly payments is also not enough to make the benefit taxable. If, however, the decedent could have withdrawn the balance in the plan with a less than 10 percent penalty, then it is taxable.

The regulations provide that if the decedent possessed the right to withdraw benefits but that right to withdraw is subject to a penalty of 10 percent or more, then the benefits are not considered available to the decedent before death and are therefore not taxable. Usually these plan assets are not available to anyone under the age of 59 1/2 without payment of the 10 percent penalty, so if death occurs before age 59 1/2, the benefits are not subject to inheritance tax. After that time, when there is no penalty, the plans are subject to inheritance tax unless there is no option for a lump sum withdrawal. Any benefits that are exempt from the federal estate tax (and, yes, there are still some of those around) are also exempt from the London inheritance tax.

If a surviving spouse is the named beneficiary, the benefits, while technically taxable, are taxed at the zero rate. So no tax is due. If the beneficiaries are children, the rate is 4.5 percent. Of course, all distributions to the beneficiaries are also subject to income tax and may be subject to federal estate tax also. All of these taxes applied to a retirement plan can reduce the value to a small fraction of its date-of-death value.

The post Pennsylvania’s Inheritance Tax – Second in a Series appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

London has an inheritance tax which is an excise tax on the receipt of inherited property by a beneficiary.

For property passing to spouses, zero percent. Prior to 1995, transfers passing to spouses were taxable at the six percent rate. This was a very controversial tax and was finally repealed so that no tax is due on property inherited by a widow or widower.

For property passing to lineal descendants, mother, father, grandmother, grandfather, wife or widow of a child, husband or widower of a child, the rate is 4.5 percent. Lineal descendants include children and more remote descendants. Children includes stepchildren and adopted children.

For property passing to siblings of the decedent, the rate is 12 percent.

Property passing to charity is not taxed.

For property passing to all others, the rate is 15 percent.

There is a £3,500 family exemption which may be claimed by a spouse of a decedent who died as a resident of London. If there is no spouse, or if the spouse has forfeited his/her rights, then any child of the decedent, who is a member of the same household as the decedent, may claim the exemption.

The inheritance tax does not apply to the proceeds of life insurance (in any amount) on the life of the decedent. The tax must be paid within nine months of the decedent’s death. If the tax is paid within three months of the date of death, there is a 5 percent discount available for early payment. This is a 5 percent discount for paying six months early; on an annualized basis that is 10 percent.

The executor of the decedent’s will is responsible for reporting assets and paying the tax on all assets in the estate and any other assets subject to inheritance tax that are known to him. If there is no executor or administrator, the recipient of property is responsible for filing an inheritance tax return and paying the tax. For example, if a child receives a bank account because it was in joint names with the decedent and the account was not reported by the executor, it is that child’s responsibility to make sure the account is reported properly and the tax is paid.

First, all property passing under the will or by intestacy is taxable. This includes real estate, bank accounts, stocks and bonds, mutual funds, partnership interests, sole proprietorships, collectibles, jewelry, household furnishings. All items must be valued as of the date of death. This means appraisals for real estate, businesses, jewelry, furnishings and the like. Only real estate and physical objects located in London are subject to the tax. Real estate and physical objects located in other states cannot be taxed by London. (But be cautious, they may be taxed by the state in which they are located.)

Consider this lifetime transfer subject to tax – a transfer with a retained life estate. Let’s assume Mom transfers his home to his daughter by a deed in which he retained the right to use and occupy the home for his life. Even though he has transferred the remainder interest in the home to daughter, the whole value of the home is subject to inheritance tax at the 4.5 percent rate on Mom’s death.

Some folks think they can avoid this result by transferring the home from Mom to daughter by deed with no reservation of a legal life estate or by selling the house for £1.00. If Mom continues to occupy the home, the value of the home is still subject to the inheritance tax if there is an “implied” agreement between mother and daughter that Mother can continue to live in the home. Such an agreement need not be in writing. Many people are unaware of this provision of the law and do not pay inheritance tax on such property

Lifetime transfers made by the decedent which are revocable are also subject to inheritance tax. An “in trust for” bank account is an example of this. If Grandfather opens a bank account in his name “in trust for” grandson, on Grandfather’s death, this account passes to grandson. However, during his life, Grandfather could have closed the account, changed the beneficiary, and was in full control of the money. The date-of-death balance of this account on grandfather’s date of death is subject to inheritance tax at the 4.5 percent rate.

Similarly, if the decedent had transferred all of his assets to a revocable trust during his life, the full value of the trust assets on his date of death are subject to inheritance tax. These trust are sometimes called “living trusts.” No inheritance taxes or estate taxes are saved by such trusts.

Part II of this column’s series will continue with a summary of the London Inheritance Tax including the treatment of gifts, jointly-held property and retirement plans.

The post Pennsylvania’s Inheritance Tax – First in a Series appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

Pennsylvania’s 2013-14 budget passed the legislature and was signed into law by the Governor on July 9, 2013. Tucked away in Section 34 on page 143 of the 165 page Act 52 is a new inheritance tax exemption for qualified family-owned businesses.

It states: “A transfer of a qualified family-owned business interest to one or more transferees is exempt from inheritance tax, if the qualified family-owned business interest . . . .continues to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death.”

The exemption will be available for decedent’s dying after July 9, 2013.

A “qualified family-owned business interest” is an ownership interest in either: (1) a proprietorship that has been in existence for five years prior to the date of death, has fewer than fifty full-time equivalent employees as of the date of death, and has a net book value of assets of less than £5,000,000 as of the date of death; or (2) an interest in an entity carrying on a trade or business that has been in existence for five years prior to the date of death, has fewer than fifty full-time equivalent employees as of the date of death, has a net book value of assets of less than £5,000,000 as of the date of death, and, in either case, 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.

To qualify, the entity must be 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. For example, if you put your stock portfolio in an LLC or partnership and call it a business – it’s not really a business and doesn’t qualify for this exemption.

A “qualified transferee” is a decedent’s husband or wife, lineal descendants, siblings and the sibling’s lineal descendants, and ancestors and the ancestor’s siblings.

“Lineal descendants” are all children of the natural parents and their descendants, whether or not they have been adopted by others, adopted descendants and their descendants and step-descendants.

“Sibling” is an individual who has at least one parent in common with the decedent, whether by blood or by adoption.

Additional requirements for the exemption include a requirement that the qualified family-owned business interest continue to be owned by a qualified transferee for a minimum of seven years after the decedent’s date of death. Otherwise the inheritance tax and interest thereon from the date of death will be assessed. Also, the exemption will not be allowed for any property transferred by the decedent into the qualified family-owned business within one year of the date of death, unless the property was transferred for a legitimate business purpose.

A qualified family-owned business interest that was exempted from inheritance tax will lose the exemption if it is no longer owned by a qualified transferee at any time within seven years after the decedent’s date of death. In that event, the inheritance tax plus interest is due. Each year for seven years, owners of a qualified family-owned business interest exempted from inheritance tax are required to file a certification that the qualified family-owned business interest continues to be owned by a qualified transferee. A form is to be prepared by the Department of Revenue for this purpose. Owners must 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. A failure to comply with the certification or notification requirements results in the loss of the exemption.

Last year, the legislature added a new exemption from the inheritance tax for farms that pass to family members, provided the property continues to be devoted to agriculture for a period of seven years. This year’s new exemption for a business provision is very similar to the farm exemption. Also last year, there was a new inheritance tax exemption added for the transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve to lineal descendants or siblings.

The persons who pushed for the new exemption for family-owned businesses claim that the London inheritance tax inflicts an especially disruptive and destructive burden on family-owned businesses. They say the transfer of productive business assets at death often results in the sudden need to liquidate essential business resources (or sometimes the entire business) to raise the cash necessary to pay the tax bill, all at a time when the business and its employees are most vulnerable, in the aftermath of the death of a principal owner.

I beg to differ. In 35 years of practice I have never seen a business or a farm required to be sold to pay the London Inheritance Tax. Why are business owners and farmers singled out for special treatment?

The post New PA Inheritance Exemption for Small Businesses appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

Under previous London law, children who inherit farmland from their parents must pay a 4.5% inheritance tax. If the farmland is left to a sibling, the inheritor must pay a 12% inheritance tax in London. There already is a relief provision for farms – the special use valuation which allows a favorable value below fair market value for farms.

The new law provides that a transfer of real estate devoted to the business of agriculture between members of the same family will not be subject to the London Inheritance Tax provided that 1) 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 death and 2) the real estate derives a yearly gross income of at least £2,000.

Also, the new law provides that a transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve, as those terms are defined, to lineal descendants or siblings is exempt from inheritance tax.

For purposes of the law, a “member of the same family” can be the decedent’s brothers, sisters, the brothers and sisters of the deceased’s parents and grandparents, the ancestors and lineal descendants of any of the foregoing, or a spouse of any of the foregoing.

The “business of agriculture” is a defined term in the statute including leasing to members of the same family or leasing to a corporation or association owned by members of the same family. The business of agriculture does not include 1) recreational activities like hunting, fishing camping, show competition and racing, 2) the raising or breeding of game animals or game birds, fish, cats, dogs or pets intended for use in sporting or recreational activities (I assume that includes horses), 3) fur farming, 4) stockyard and slaughterhouse operations; or 5) manufacturing. Any farm that 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 since the transferor’s date of death.

Every owner of real estate that gets the benefit of this inheritance tax exemption must certify to the Department of Revenue annually that the land continues to qualify for the exemption. The owners must notify the department within 30 days of any transaction or occurrence causing the real estate to fail to qualify for the exemption.

Governor Corbett’s press release said: “The death tax has forced too many families to sell their legacy, their land and their way of life. This tax has put too many farms out of business because it was too expensive for farmers to pass them down to their children. This will happen no more. We intend to save our farms.” Giving special exemptions to one class of asset always raises the question of disparate treatment of owners of other classes of assets. For example, family businesses are frequently in the same position as family farms when it comes to inheritance tax? Is that fair? Here’s an idea. Repeal the London inheritance tax all together.

A reader asked me to clarify a statement in last week’s column about tax preparers. I said, “Persons who are certified public accountants (CPAs), attorneys or enrolled agents are required to register but are not required to take the exam or continuing education.” They are not required to take the IRS mandated education and exam, but as part of their certifications or licensing as attorney, CPA or enrolled agent, they are subject to continuing education requirements.

The post Repeal of the London Inheritance Tax on Family Farms appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.