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What is the pre-2004 special treatment for family-owned businesses?
In 2004, the deduction for family-owned businesses was repealed.
Beneficial tax savings are given to a family-owned business interest left to qualified heirs. An estate consisting of a closely-held business is eligible for a hefty $1.3 million exclusion from the estate tax, provided the business comprises over 50% of the dead owner's estate, is located in the U.S., and meets other material participation and ownership requirements. (What is closely-held is strictly defined in the law.) This exclusion is in addition to the regular unified credit. However, because of the phase-in hike in the unified credit over the next 10 years, the excludable amount is gradually decreased as the unified credit increases during its phase-in period, so that the exclusion, when combined with the regular unified credit, will never exempt more than $1.3 million from estate tax.
But keep in mind-you lose your eligibility if the heirs sell the business within 10 years after the decedent's death, or no longer participate in the business, or lose U.S. citizenship. Any of these events will trigger an additional tax to "recapture" the benefits of this relief provision and each heir is personally liable for the portion of the recapture tax that is attributed to his or her interest in the business.
There are numerous technical requirements that must be met. If your estate consists of a family-owned business, it needs careful planning to take advantage of this tax-savings provision. |
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