16 Deferral and Minimization of Estate Taxes

Question 1

What is the Special Use Valuation?

Answer 1

1. If decedent owned real property used as a farm or in connection with a closely held business, then a reduced gross estate valuation may be available for the property.
2. Reduced valuation is made based on the the current actual use rather than its highest and best use (e.g., use as family farm instead of commercial development).
3. Executor elects on Form 706.

Question 2

Conditions for Special Use Valuation

Answer 2

1. Value of the property (real and personal) used in the farm or closely held business must be at least 50% of the adjusted value of the gross estate
2. Value of the real property alone must be at least 25% of the adjusted value of the gross estate
3. Decedent or family member must have been a material participant in the business for at least five of the last eight years
4. In determining whether the 25% and 50% tests are met, the property is valued at its highest and best use (less any mortgages or other indebtedness) and not at its current actual use (special use).
5. Adjusted value of the gross estate means the gross estate minus any mortgage or other indebtedness on the qualifying special use property.

Question 3

Consequence of Special Use Property Disposed of within 10 years

Answer 3

All or part of the estate tax savings may be recaptured

• Exceptions if the qualified heir dies or goes bankrupt).

Question 4

Who may defer Payment of Estate Tax (6166)?

Answer 4

• Available to owners of farms or closely held businesses
• The value of the closely held business must exceed 35% of the value of the adjusted gross estate (AGE)
• Applies to proprietorships, partnerships, and corporations.

Question 5

Estate Tax Deferral Period and Installment Period

Answer 5

• Executor may elect to defer for five years any estate tax payment relating to the closely held business.
• Estate tax can then be paid in 10 annual installments beginning after the five-year deferral period
• Interest is paid during the deferral period.

Question 6

Deferred Est. Tax Interest Rate

Answer 6

• 2% applied to the taxes attributable to a portion of the taxable value
• Any value over that has a rate equal to 45% of the regular underpayment interest rate.

Question 7

Deferred Estate Tax Payments: Consequence if total dispositions >= 50% Estate Tax valuation

Answer 7

Unpaid installments will be accelerated

Question 8

Stock Redemption (303)

Answer 8

Permits the estate of a decedent shareholder to redeem the decedent’s shares with favorable income tax treatment.

1. Capital gain rather than receipt of a dividend
2. Stepped-up basis at death, and thus, the capital gain or loss is only measured from the DOD instead of the predeath basis.

Question 9

Conditions required for Stock Redemption (303)

Answer 9

• The stock must be included in the decedent’s estate.
• The value of the stock must be more than 35% of the AGE.
• Redemption proceeds eligible for capital gain treatment cannot exceed federal and state death taxes plus deductible funeral and administrative expenses.

Question 10

Preparations for Deferral and Minimization of Estate Taxes

Answer 10

1. Lifetime gifting strategies
2. Better to gift nonbusiness assets than business assets.
   
   • Gifting nonbusiness assets helps raise the percentage of assets eligible for advantageous estate tax treatment (special use valuation, Section 303 stock redemption, and Section 6166 deferred payment of estate taxes).
3. Special rules, especially for gifts made within three years of death. Thus, it is critical for a financial planner to work with qualified specialists in these areas