Keeping It All In The Family

Lynn R. Siewert AIMC
Pension Consultant | Branch Manager
Advanced Corporate Planning, Vancouver, Washington

Prior to the Taxpayer Relief Act of 1997, minor estate tax provisions benefited a family-owned business in a decedent’s estate. Now, effective for estates of individuals dying after December 31, 1997, an estate tax deduction exists for a qualified family-held business. This deduction is designed to help prevent the liquidation of family-held farms and businesses in order to meet the estate taxes due.

The qualified family-owned business deduction will allow a family-owned business or farm to pass estate tax free to heirs if its value does not exceed $1.3 million. This deduction is in addition to the unified credit exemption amount and signifies a potential $1.3 million benefit afforded a taxpayer with a family-owned business or farm.

A qualified family-owned business interest is any interest in a trade or business, in whatever legal form. This may be a sole proprietorship, partnership or corporation. A corporation, however, may not be eligible if its stock is publicly traded. The principal place of the family-owned business must be in the United States, and the ownership must be held:

1. at least 50% by one family,
2. 70% by two families or
3. 90% by three families.

Be aware that transfers of nonbusiness assets (such as investment and personal assets) to a spouse made within 10 years of the decedent’s death may be included in the decedent’s estate for purposes of calculating the 50% limitation. Similarly, transfers to others must have been made more than three years before the decedent’s death to escape inclusion. Non-taxable transfers of assets to family members and any other person that qualify for the annual gift tax exclusion (gifts under $10,000) do not count toward this three year test.

Since the purpose of the deduction is to help preserve family businesses, a qualified heir or a member of a qualified heir’s family must participate in the business for 10 years after the decedent’s death. In addition, the decedent or a family member must have owned and materially participated in the trade or business for at least five of the eight years prior to the decedent’s death. The tax benefits allowed may be subject to recapture if the participation requirements are not met or the qualified heir sells the business or a portion of the business.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing an estate planning strategy involving a family-owned business or farm, contact and consult with your Financial Advisor, estate attorney and tax professional.

Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC