When engaging in business planning or estate planning for the family farm one of the issues that should be considered is the impact of the planning on the availability of what is called the “special use valuation” under Section 2032A of the internal revenue code. There is currently a $5.25M per person estate tax exemption and that is scheduled to increase to $5.34M on January 1. The special use valuation is an alternate valuation method available to farms allowing real property to be valued based upon its actual use as opposed to the normal “highest and best” use.
To qualify for special use valuation under section 2032A certain requirements must be met. First, farm assets (real and personal) must make up at least 50% of the adjusted value of the gross estate. Next, real property must make up at least 25% of the adjusted value of the gross estate. It is also required that for five of the previous eight years:
– the real property was owned by the decedent or a member of the decedent’s family;
– the real property was used as a farm for farming purposes; and
– the decedent or a member of the decedent’s family “materially participated” in the operation of the farm business.
The real property must pass to a qualifying heir – this is usually a family member and each person having an interest in the real property must sign an agreement consenting to any additional estate tax that may be imposed later. The additional estate tax is imposed if, within ten years: (1) any interest in qualified real property is disposed of – other than disposition to a family member; or (2) the real property ceases to be used for the qualified use.
As with most tax laws, what constitutes compliance with the above requirements is not necessarily self evident from the language of the statute. Competent counsel should be sought to ensure that your planning doesn’t deprive you of the opportunity of qualifying for the special use valuation.