Donald M. Thompson - Wills, Trusts, and Estate Planning


Special Use Valuation

Assets in the taxable estate are ordinarily valued a full fair market value at their highest and best use. In other words, in valuing them it is assumed they will be used in a way that produces the most value. For instance 40 acres near a large city may be more valuable as a residential subdivision than as a farm.

The Internal Revenue Code allows an election to be made to value a limited amount of real estate used for farming, held for farming or used in a closely held business at its current use value rather than its highest and best use.

The value reduction under this election is limited to $850,000. The amount is indexed for inflation.

The real estate must comprise at least 25% of the adjusted value of the gross estate and the real estate and personal property used in the business must comprise at least 50% of the value of the adjusted gross estate. The real estate must pass to the surviving spouse or ancestors or descendants of decedent.

If within 10 years of the decedent's death the property is sold or the use is changed to a non-qualifying use the tax avoided can be recaptured.

To qualify for the reduction the property must have been devoted to the qualifying use for 5 out of 8 years before the decedent's death and there must have been material participation in the activity by the decedent or a member of his or her family.

If special use valuation is elected then other discounts, such as a minority interest discount, do not apply.

This method of valuation is not available for gift tax purposes.

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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