Deduction for qualified family-owned business interests

The provision allows an estate tax deduction for qualified family-owned business interests. The maximum deduction is $675,000. This deduction is coordinated with the estate tax exclusion that is available to all estates. If the maximum $675,000 deduction for qualified family-owned business interests is taken, then the amount of the estate tax exclusion (regardless of the year in which death occurs) is $625,000. If the family-owned business deduction is less than $675,000, then the $625,000 exclusion amount is increased by the amount by which $675,000 exceeds the deduction. However, the exclusion amount can't be increased above the amount that is generally available for the year of death. For example, if an estate took a deduction of only $600,000 for the value of family-owned business interests, its $625,000 exclusion amount would be increased by $75,000 ($675,000 - $600,000) to $700,000, but only if the year of death was 2002 (when the generally available exclusion amount will be $700,000) or later. If the year of death was 2000 or 2001, the exclusion amount couldn't exceed $675,000, which is the generally available amount of the exclusion for those years.

The requirements for the deduction are detailed, of course (this is the tax code, after all), but there are several planning techniques that can be employed to ensure that this valuable tax break will not be missed. For example, one of the requirements is that the value of the decedent's qualified family-owned business interests that are included in the estate or given as gifts to family-members that do not qualify for the gift tax annual exclusion must exceed 50 percent of the decedent's adjusted gross estate. To put it in concrete terms, that means that if the business interest is valued at $600,000, an estate with an adjusted gross estate of $1,190,000 would qualify for the deduction (since the interest would comprise more than half the estate) but one with an adjusted gross estate of $1,250,000 would not. With a little planning, though, the $1,250,000 estate could receive the deduction, since the law allows the amount of the adjusted gross estate to be reduced by gifts made to members of the decedent's family that are otherwise excluded under the gift tax annual exclusion. Thus, gifts of $10,000 to each of three children for two years (a total of $60,000) would not only be free of gift tax, but would also bring the value of the adjusted gross estate down to where it could qualify for the deduction for family-owned business interests.


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