| | | © McCauley, Nicolas & Company, LLC | Spring 2007
Go back to E-letter | Printer-friendly version | | Estate PlanningRon Barnes, CPA, PFS,
Partner | Special Use Valuation:
A Special Estate BreakYour business may be your most valuable asset. But it could end up costing your family a pretty penny in estate tax. In fact, your heirs may even be forced to sell the business to cover the estate-tax liability.
However, with proper planning, your family may benefit from “special use valuation.” If this election is made by your executor, it can reduce the value of the estate by hundreds of thousands of dollars. The lower the value of the estate, the less estate tax your family has to pay—if any.
Details: The fair-market value of property owned by a decedent at death must be included in the owner’s taxable estate. As a general rule, the fair-market value is determined by the property’s “highest and best use.” In other words, if the property is raw land that would be worth a small fortune to real estate developers, the higher value as real estate development property is treated as the “fair-market value” for estate-tax purposes.
But the story doesn’t end there for farms and property of a closely held business. As long as certain requirements are met, a business owner’s property is valued according to its current actual use upon the owner’s death—not the “highest and best” use. Note: The reduction in the estate-tax value under this election cannot exceed an annual amount adjusted for inflation. The maximum amount for decedents dying in 2007 is $940,000 (up from $900,000 in 2006).
To secure special use valuation on business property, the following three requirements must be met.
1. The net value of the business property must be at least 50% of the decedent’s gross estate and the net value of the business real property must be at least 25% of the decedent’s adjusted gross estate (the gross estate reduced by certain deductible debts, expenses, claims and losses).
2. The decedent must have transferred the business to a qualified heir or heirs (i.e., close family relatives).
3. The business must have been owned and operated by the decedent or a close family relative for five out of the last eight years before the death, disability or retirement of the decedent.
These requirements are relatively easy to meet, but there’s still another catch: If your heirs sell or otherwise dispose of the property to outsiders within ten years of death or begin using the property for another purpose, the estate-tax savings must be recaptured. Thus, it’s important that all parties comply with the rules.
Practical advice: Set up a meeting with us to determine if this technique is appropriate for your situation.
Email Ron at Ron_Barnes@mnccpa.com.
|  | | | © McCauley, Nicolas & Company, LLC | Spring 2007
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