| Estate & Gift Tax / Estate tax special use valuation election |  |
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For estate tax purposes, property
must generally be valued at its value for its 'highest and best' use.
This means, for example, that if real estate could be sold for $1
million to developers who will build a shopping mall on it, that's the
value for estate tax purposes, even if the decedent and his family were
using it as farmland or in a family business, and its value as farmland
(or as business property) was only $600,000. In an attempt to save families from
having to sell farms or closely-held (family) businesses to meet estate
tax obligations, the estate tax law allows a decedent's executor to
elect 'special use' valuation for estate tax purposes. If a series of
tests are passed, the real estate described above can be valued at just
$600,000 in the gross estate. Here are the tests: 1. The real estate in question must
pass from the decedent to a 'qualified heir.' This heir can either
inherit it or buy it from the estate. Qualified heirs include the
decedent's ancestors (parents, grandparents), spouse, and lineal
descendants (children, grandchildren). They also include the lineal
descendants of the decedent's spouse or parents, and the spouses of the
lineal descendants. 2. For five of the eight years
leading up to the decedent's death, the realty must have been used in a
farm or family business on or in which the decedent or a family member
worked ('materially participated'). 3. (i) The real and personal
property in the business or farm included in the decedent's estate has
to comprise at least 50% of the gross estate, and (ii) the real property
in the business or farm included in the decedent's estate has to
comprise at least 25% of the gross estate. (For these purposes, the
realty is valued at its 'high' value, e.g., $1 million in the example
given in the first paragraph above.) In meeting these tests, two or more
qualifying businesses can be combined as long as they all have real
estate included in the decedent's estate. 4. The qualified heir must consent
(with IRS) to be liable for all of the estate taxes saved if, within ten
years, the property is transferred to anyone other than a qualified heir
(of the first qualified heir) or if the property stops being used for
the qualified purpose (for example, if it's sold to an outsider or is
developed by the family as a shopping mall). 5. Even if the property qualifies
for special use valuation, the property's value can't be reduced by more
than $800,000 (for estates of decedents dying in 2001; subject to an
adjustment for inflation after 2001). Example (1).
Land with a highest and best use value of $3 million qualifies for
special use valuation as farmland and has a value as farmland of $2.5
million. If the election is made, it's valued in the gross estate at
$2.5 million, its value as farmland. Example (2). Land with a highest and best use value of $3 million qualifies for special use valuation as farmland and has a value as farmland of $2 million. If the election is made, it's valued in the gross estate at $2,200,000. You can't bring it all the way down to its farmland value of $2 million, because you can't reduce its highest and best use value by more than $800,000. If the decedent dies in a year when the $800,000 limitation has been increased for inflation to (for example) $820,000, then the farmland would be valued in the gross estate at $2,180,000. |
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