Masonry Magazine June 1999 Page. 14
by Mark E. Battersby
Estate Planning Without Pain
Very few masonry contractors want to think about what will happen to their business after their passing, let alone plan for it. Fortunately, Congress has taken pity on those contractors who fail to take the steps necessary to ensure that the masonry operation will pass to the desired beneficiaries with a minimum of tax bills.
Until recently, the total amount given as gifts during the contractor's lifetime was combined with the total amount left behind by the deceased contractor in order to arrive at an estate value upon which estate taxes could be levied. Aside from the marital exclusion, a unique "unified credit" exists that, in essence, allows a contractor's estate to escape taxes on up to $650,000 of the estate's value in 1999.
Before the passage of the Taxpayer Relief Act of 1997 (TRA '97), there was no specific estate tax provision that excluded a portion of a qualified family-owned business from anyone's estate. TRA '97 contained a new, highly touted, exclusion for part of the value of a deceased contractor's interest in one or more family businesses. Indeed, the most talked about change in the Federal transfer tax law was that addition of a $675,000 Federal estate tax exclusion for eligible estates composed of or containing family owned business interests.
Naturally, in order to qualify for this unique exclusion, the family-owned business must meet a number of complex requirement laid down by our lawmakers. What's more, combining the amount of estate value offset by the "unified gift and estate tax credit" with the allowable portion of the family-owned business exclusion will always equal $1.3 million regardless of how it is divided.
It is important to note that while the law and all of the accompanying "hoopla" speak in terms of a total $1.3 million exclusion, that is not what the law actually provides. The new exclusion is, after all, an exclusion, not a credit.
As a result, like other tax credits, the new exclusion comes off the top of the masonry contractor's taxable estate and can never exceed $675,000. The unified credit, on the other hand, comes off the bottom and is slated to increase to $1,000,000 by the year 2006.
If we assume that the gross estate of a masonry contractor, Charlie, who dies in 1999 is valued at $1,400,000, we can see how this exclusion really works. Charlie dies in 1999, when the applicable exclusion amount is $650,000. His estate includes $1,400,000 of qualified family owned business interests (QFOBIs) and his executor elects to take the maximum $675,000 deduction. Since the estate is electing to take the maximum QFOBI deduction, the applicable exclusion amount is only $625,000.
Since the law provides that the exclusion is from the gross estate, the net amount after this exclusion and all other deductions will constitute the "taxable estate," and possibly a significant starting point for other computations. The basis for qualification is contained in the dreaded "special use valuation" rules among the most difficult and contentious provisions in our tax law. The requirements for utilizing this new exclusion can be summarized as follows:
The decedent was, at the date of death, a citizen or resident of the United States.
The business interest must be included in the gross estate.
The executor of the estate must make an election to qualify as well as furnish the agreement relating to payment of the recapture tax.
The adjusted value of the family business interests, subject to further adjustments, exceeds 50 percent of the value of the "adjusted gross estate."
During five out of eight years ending on the date of death, the business interests were owned by the decedent or a "family member," and there was "material participation" in the operation of the business interests by the decedent or a "family member."
If the business interest is held by an entity, the decedent's family must own at least 50 percent or 70 percent must be owned by two families, or 90 percent must be owned by three families, so long as the decedent's family owns at least 30 percent.