The Family-Owned Business Deduction — Section 2057 (Portfolio 829)

Description

Tax Management Portfolio, The Family-Owned Business Deduction — Section 2057, No. 829, discusses in detail the federal estate tax family-owned business exclusion which was enacted by the Taxpayer Relief Act of 1997 and amended in 1998. The provision was designed to provide federal estate tax relief to eligible farms and other small businesses which continue beyond the deaths of the owners. Many, but not all, of the provisions are drawn from §2032A, special use valuation. That section has provided, since 1977, two procedures for valuing land (used in a business) for federal estate tax purposes. The Portfolio discusses the significant modifications made by the 1998 IRS Reform Act, which most significantly converted the exclusion into a deduction for qualifying family-owned business interests under §2057 and better coordinated the benefit with the unified credit to take into account the increases in the applicable exclusion in later years. Finally, the Portfolio addresses the repeal of §2057 by the 2001 Tax Relief Act. Since repeal did not affect the recapture tax imposed for failure to meet the qualified use requirements in the post-death period, planning for qualified use during that period will continue to be important.

The Portfolio discusses in detail the pre-death qualification requirements for the family-owned business deduction with particular emphasis on the material participation and passive asset tests. The Portfolio also provides detailed coverage of the recapture rules for the 10-year period after death including the post-death material participation test, transfer of assets outside the family and the meaning of the statutory requirement for a “business” after death. Further, the Portfolio outlines the requirements for the family-owned business interest election, which is derived from the special use valuation rules. The Portfolio also explores several post-death planning considerations including the integration of the family-owned business provision with special use valuation of land and 15-year installment payment of federal estate tax. The Portfolio discusses the availability of discounts on asset values under the three provisions. The Portfolio contains planning guidelines as well as detailed Worksheets which provide guidance on using the family-owned business deduction.

For additional relevant materials, see 833 T.M., Section 2032A — Special Use Valuation; and other Tax Management Portfolios listed in the “Estates, Gifts, and Trusts Portfolio Classification Guide” in the Tax Management Portfolio Index binder.

This Portfolio may be cited as Harl and McEowen, 829 T.M., The Family-Owned Business Deduction — Section 2057.

Table of Contents

I. Introduction
II. Pre-Death Requirements For Eligibility
III. Election
IV. Post-Death Requirements to Avoid Recapture
V. Other Post-Death Planning Considerations
VI. Planning Guidelines
VII. Other Considerations