In 1997, Congress added a special exemption for family-owned businesses allowing up to $1,300,000 to be transferred without federal estate tax to the extent the assets of the estate were family-owned business property. It required that at least 50 percent of the decedent’s estate consist of qualified family-owned business interests. If a couple planned to take advantage of this provision, they could avoid paying federal estate taxes on estates totaling $2.6 million. To qualify, decedent or a member of his or her family had to own the business for at least 5 years of the 8 years preceding his death and during that time, material participation by decedent or a member of his family in the business operation was required. The excess amount above the exemption equivalent amount will be subtracted in computing the adjusted gross estate. A family-owned business was defined as one where a) at least 50 percent of such entity is owned directly or indirectly by the decedent and members of his family or b) at least 70 percent is owned by members of two families and at least 30 percent is owned by decedent and members of his family, or c) at least 90 percent is owned by members of three families and at least 30 percent is owned by decedent and members of his family. Ownership interests in publicly traded companies and companies located outside of the U.S. were excluded. The participation tests were similar to those used for special use valuation. This special benefit was repealed effective December 31, 2003, but the sunset provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 will reinstate this deduction beginning January 1, 2011, unless the estate tax law is modified before December 31, 2010.
2009
Marital Deductions
There is an unlimited marital deduction for decedents. The decisions on the use and amount of marital deduction will vary with the size of the estate and the unified tax credits, which increase each year up to 2010. The strategy for some persons will be to change the amount of the marital deduction during this period if the objective is to reduce estate taxes. The executor will often have to make computations to determine whether to elect to have certain qualified terminal interest properties qualify. Qualified terminal interest property means property that passes from the decedent, and in which the surviving spouse has a qualifying income interest for life. Disclaimers will likely be used more. (See post on disclaimers.)
Computation of the Taxable Estate
The taxable estate is the gross estate less deductible:
• Funeral expenses.
• Estate administration expenses.
• Claims against the estate.
• Taxes accrued but unpaid at the date of death.
• Loss from fire, storm, and theft (casualty losses) not compensated for by the insurance or claimed as a deduction in an income tax return.
• An unlimited marital deduction is allowed for qualifying property that passes to a surviving spouse. The executor may even elect to have certain life interests qualify for the marital deduction. A special rule applies for charitable remainder trusts. See discussion below on marital deduction.
• The amount of transfers to charitable, religious, and similar institutions approved by IRS.
After the taxable estate is determined, the includible taxable gifts are added to the taxable estate before referring to the tax tables to determine the amount of the estate tax.