Certain items may be excluded from the value of the "gross estate". For decedents dying on or after January 1, 1998, the value of the gross estate may be determined by applying the “family-owned business exclusion.” This exclusion is equal to the lesser of:
The adjusted value of any “qualified family-owned business interests” otherwise includible in the estate; orThe excess of $1,300,000 over the “applicable exclusion amount” for the year in which the decedent dies. EXAMPLE: Mr. Bill dies in 1998, when the “applicable exclusion amount” is $625,000. His estate includes a “qualified family-owned business” with an adjusted value of $1,000,000. The amount of the family-owned business exclusion available in Mr. Bill's estate is the lesser of $1,000,000 (the adjusted value of the business interests) or the excess of $1,300,000 over $625,000, resulting in an exclusion of $1,000,000.
One unfortunate consequence of this exclusion is that its value will be reduced as the applicable credit amounts increase. The maximum amount of the family-owned business exclusion is currently fixed at $1,350,000. This amount is reduced by the applicable credit amount, which is scheduled to increase to $1,000,000 by the year 2006 and remain at that level thereafter. Thus, in the example above, if Mr. Bill dies in 2006 or thereafter, when the “applicable exclusion amount” is $1,000,000, the family-owned business exclusion will be the lesser of $1,000,000 or the excess of $1,350,000 over $1,000,000, resulting in an exclusion of $300,000.
Section 2033A is nothing more than an adjustment to the calculation of the estate tax. For purposes such as adjustment to basis to fair market value at death, therefore, the business is considered to have been included in gross estate.
Note: The family-owned business exclusion is only available if the decedent was a citizen or legal resident of the United States on the date of death.
There are other limitations, such as who are qualified heirs, and the requirement of material participation which makes this exclusion a complex issue requiring specific legal and tax advice.