Masonry Magazine June 1999 Page. 15
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The provision has special tier entity and look-through rules. In general, when it comes to incorporated masonry operations, the decedent and members of the decedent's family must own the required percentage of all classes of voting stock and the value of all classes of stock. In the case of partnerships, ownership must be of partnership capital.
The business interest must pass to a "qualified heir" within the meaning of our tax rules. However, for this purpose, "qualified heirs" include 10-year employees. If the qualified heir is not a citizen, the interest will qualify only if it passes to a qualified domestic trust or meets alternative security arrangements approved by the Internal Revenue Service.
Obviously, consideration should be given, if necessary, to reducing the nonbusiness assets in the gross estate during the contractor's lifetime in order to qualify for the family-owned business exclusion. This does require advance planning.
Every masonry contractor should keep in mind that transfers to the decedent's spouse will not be effective unless they are made more than 10 years before the contractor's death and transfers to others, except nontaxable transfers to members of the decedent's family, must occur more than three years before the decedent's death.
Naturally, those contractors hoping to avoid estate planning by having their heirs take advantage of this new exclusion for the value of family-owned business interests, should be aware of just how our lawmakers define "family- owned business interests."
A qualified family-owned business interest is defined as either an interest in a trade or business carried on as a sole proprietorship or an interest in an entity (corporation, partnership or limited liability company (LLC) carrying on a trade or business.
There are two key requirements for qualification for the family-owned business exclusion, as mentioned. First, the interest must be in an entity which carries on a trade or business. Second, the decedent or a member of the decedent's family must have owned and materially participated in the business for five of the eight years prior to the date of the decedent's death and a qualified heir must continue to materially participate in the masonry business for 10 years after the date of the decedent's death. Material participation refers to full-time management. If the decedent was the owner, self-employment tax should have been paid. If the masonry business was operated as an agent or employee, there should be proof of authority. Being a shareholder, partner, officer or director does not prove material participation.
According to our lawmakers, "physical work and participation in management decisions" are the principal Continued on page 28
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MASONRY-MAY/JUNE, 1999 15