Known as a QFOBI, the Qualified Family Owned Business Interest has caused some confusion in recent years. The deduction was part of the Taxpayer Relief Act of 1997, only to be amended a year later when the IRS released the Restructure and Reform Act of 1998. Then, when the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed, the deduction was repealed – along with the estate tax and generation-skipping tax that were scheduled for 2010. Many thought it was unnecessary because of the larger exemption amounts along with the decrease in the estate tax rates in the first decade of the millennium. Indeed, it was a bit complex and overwhelming. But, by 2010, the deduction was reinstated. The QFOBI deduction is important and a way for reducing estate taxes by permitting you to deduct a “qualified family-owned business interest” from your estate. This week, we take a look at the exemption, how to qualify for it and why reinstating it has been a good thing for many families.
There are requirements that must be met in order to qualify for the deduction. They include:
A requirement for decedent or family member to have owned and actively participated in the business for a minimum of five of the previous eight years;
The business interest must comprise a minimum of 50 percent of the adjusted gross estate of the decedent after accounting for deductible debt, expenses, and taxes;
The decedent and his family must have been the owners of at least 50 percent of the business; or members of two families must have owned 70 percent, while the decedent and the decedent’s family owned 30 percent; or members of three families must have owned 90 percent, while the decedent and decedent’s family owned 30 percent;
The business must be located in the United States and the decedent must have been a citizen or resident of the U.S.
There is another, more intricate requirement, as well:
There will exist a heavier estate tax if, within a time frame of 10 years following the decedent’s demise and prior to the qualified heir’s death, the heir opts not to maintain his or her active participation in the business for three years in any period of time lasting eight years.
The deduction amount is why many choose these, requirements and all. When the Taxpayer Relief Act was put into place in 1997, the amount of the deduction was $675,000. It could not be in excess of $1.3 million when it was added to the applicable exclusion. By 2004, there was an increase in the exclusion to $1.5 million, which meant a decrease in the maximum amount of the deduction that was allowed, and the deduction eventually disappeared in 2004. The amount of the deduction was $625,000 for decedents whose demise occurred in 2001.
Clearly, the inclusion of sound legal advice is crucial. If you’re interested in reducing your estate tax, our team of qualified estate planning attorneys welcome the opportunity to discuss the Qualified Family Owned Business Interest and help you determine if it’s the right solution for your needs. Contact us today to learn more.