Section 2032A — Special Use Valuation (Portfolio 833)

Description

Generally, assets included in a decedent’s gross estate are valued at their “highest and best use” for estate tax purposes. As discussed in this Tax Management Portfolio, Section 2032A — Special Use Valuation, No. 833, if specific requirements are met, §2032A permits an alternative method for valuing certain real property used either as a farm for a farming purpose or in a trade or business other than farming. This alternative method is intended to reflect the (lower) value of the property in its current use.

To qualify for the §2032A special use valuation election, substantiality and historical usage requirements must be met. The substantiality component is established by demonstrating that 25% of the adjusted value of the decedent’s gross estate consists of the adjusted value of real property used in the business, and that 50% of the adjusted value of the decedent’s gross estate consists of real or personal property used in the business. The historical usage component is established by demonstrating that the decedent or a family member has materially participated in the business and used the real property for a qualified use for five of the eight years preceding the decedent’s death, disability, or retirement. To avoid a later recapture of the special use valuation benefit, a future usage component must also be satisfied: The property must pass to a qualified heir of the decedent, and, during the 10-year period following the decedent’s death, the decedent’s family must continue to materially participate in the business and employ the property in a qualified use.

Section 2032A qualification criteria and election procedures are discussed extensively in this Portfolio. Since the significant tax savings available through a §2032A election require careful pre- and post-mortem planning, and substantially limits the freedom of heirs to dispose of the qualifying property during the recapture period, this Portfolio also includes comprehensive analysis of the implications that §2032A and its alternatives have on business and tax planning.

For additional relevant materials, see 809 T.M., Estate Planning for Owners of Closely Held Business Interests; 829 T.M., The Family-Owned Business Deduction — Section 2057; and 830 T.M., Valuation: General and Real Estate.

This Portfolio may be cited as Zumbach, Reames and Krishna, 833 T.M., Section 2032A — Special Use Valuation.

Table of Contents

I. Introduction
II. Eligibility Criteria
III. Definitions
IV. Valuation
V. Reduction Limitation
VI. Recapture: The Additional Estate Tax
VII. Election
VIII. Special Lien
IX. Adjusted Basis and Gain on Transfer
X. Corporations, Partnerships and Trusts
XI. Section 2032A and § 2032 Alternate Valuation
XII. Gift and Generation-Skipping Transfer Taxes
XIII. Planning