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Qualified Family Owned Business Interest
The Taxpayer Relief Act of 1997 created the Qualified Family-Owned Business Interest Exception (herein “QFOBI”). The exception provides that up to $1.3 million, less the then applicable annual exclusion, of a qualified family owned business may pass to the family members if certain qualifications are met. For example, for decedent’s dying this year, the amount of the QFOBI exception is $625,000 ($1.3 million - $675,000 (applicable exclusion amount) = $625,000). By the year 2006, the maximum exclusion under this exception will only be $300,000 because the applicable exclusion amount will then be $1,000,000.00.
In order to take advantage of the QFOBI Exception, the following requirements must be met:
1. The decedent must be a U.S. citizen or resident.
2. The personal representative must elect treatment as a Qualified Family-Owned Business Interest.
3. The value of the business interest property plus certain gifts made by the decedent must exceed 50% of the adjusted gross estate.
4. The business must be active.
5. If the business is a corporation or a limited liability company, 50% or more of the business must be owned by the decedent and members of the decedent’s family.
6. The principal place of business must be in the United States.
7. No stock or debt of the company can have been publicly traded within three (3) years of the decedent’s death.
8. No more than 35% of the adjusted ordinary gross income of the business may be personal holding company income (in other words, no passive income).
9. The business must have been operated for five (5) of the past eight (8) years by the decedent or members of the decedent’s family and there must have been material participation by the decedent or family members.
10. The business interests must pass to a qualified heir or heirs.
11. The qualified heir who receives the property has to be a citizen of the United States.
If a family owned business qualifies, additional assets of the estate can be sheltered from the estate tax. With estate tax rates starting at 37% and quickly going up to 55%, this additional tax savings advice is a great weapon in the taxpayers' arsenal to avoid estate taxation.
Bypass (Credit Shelter) Trust
For married couples a relatively quick and painless way to shelter assets from the estate tax, is the bypass or credit shelter trust. For decedents dying in the year 2000, each person is allowed an estate tax exemption of $675,000. Thus, for a married couple would be allowed to shelter a combined $1.35 million dollars. The amount of the unified credit amount will go up to $1 million dollars per person by the year 2006. A second estate tax savings device between spouses is that anything that passes between spouses at death or during life is gift and estate tax free via the unlimited marital deduction.
Usually there is no estate tax due until the second spouse dies because of the unlimited marital deduction. When the first spouse dies, if everything passes automatically to the survivor, there is no estate tax incurred because of the unlimited marital deduction.
The real problem occurs at the death of the second spouse. When the second spouse dies, he or she only has one $675,000 exemption left. There are ways to maximize the two $675,000 exemptions for estate tax savings. One such vehicle is a bypass or credit shelter trust built into your will, and for the best results, your spouse's will as well.
Without the bypass trust, the first of the two spouses to die will waste the $675,000 exemption. A bypass trust provides that upon death, the trustee of that trust will place up to $675,000 of assets, preferably those that do not qualify for the marital deduction, and place it in this trust. The reason it is called a "bypass trust" is because these assets "bypass" the estate of the surviving spouse. In order to take advantage of this bypass trust provision, it is important that some of your assets not be owned jointly or as tenants-by-the entirety.
Depending on your goals, you may want to make your spouse the primary beneficiary of the bypass trust, or you may wish to make other family members the beneficiaries.
With proper planning, married couples can shelter a combined $1.35 million dollars from estate tax. By the year 2006, that amount will increase to $2 million. Every dollar saved is a dollar for their children,
grandchildren or other beneficiary. A proper estate plan goes a long way to avoid estate taxes.
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