19. Special Use Valuation

Estate tax relief is provided to the farm and the closely-held business owner and their families under Section 2032A. Prior to the change in the law (the Tax Reform Act of 1976), farm or business property was valued at its "highest and best use".

Now the executor may elect to value the estate's real property according to a special use valuation provision as a farm or as the closely-held business prior to death. Thus, the heirs are encouraged to continue the "family" business without suffering the additional tax. This "special use" valuation cannot reduce the decedent's gross estate by more
than $750,000 (1983 and thereafter).

To qualify, the following requirements must be met:

1. The decedent must have been a citizen or resident of the U.S. at
the date of death.

2. At least 50% of the decedent's net gross estate must consist of
real and personal property used in the farm or business.

3. At least 25% of the decedent's adjusted gross estate must be qualified real property used in the estate. The Decedent or a member of his family must have materially participated in the farm or closely held business for 5 of the 8 years preceding the earliest of the Decedent's date of death, disability, or retirement.

The election to use "special use valuation" must be made by the executor with the estate tax return even if the return is filed late. Once filed, the election is irrevocable.

If within 10 years after the decedent's death, the qualified real property is transferred to a nonfamily member, or if the qualified heir ceases to use the property as a farm or closely-held business, an additional estate tax is imposed. This tax recaptures the estate tax the property would have been subject to under the "best use" principle. A
special 2-year grace period immediately following the decedent's death is allowed the heir before the 10 year special use begins.

The restrictions for special use valuation cease at the end of the 10 years or at the death of the qualified heir. A sale or exchange by one qualified heir to another qualified heir will not cause a recapture.

The use of, additional probate and administrative expenses for, and the commitment by qualified heirs to special use valuation must be discussed with your attorney.

18. Short Term (Clifford) Trust

A short term Trust (sometimes referred to as a "Clifford" trust) is an arrangement whereby its Grantor places certain income-producing cash investments or real estate into a Trust designed to exist for a minimum time period of ten years and a day.

The instrument (Trust Agreement) creating the Trust is drawn in such a way that all powers of ownership now become vested in the Trustee. At the conclusion of the Trust period, the assets are returned to the Grantor of
the Trust, causing this type of arrangement to be called a "Reversionary Trust."

The basic purpose of the short term Trust is to reallocate taxable income from the Grantor to a taxpayer in a lower tax bracket. The beneficial results of a short term Trust may be illustrated by assuming that a parent in a high tax bracket is faced with the problem of providing college funds for a child. The short term Trust will yield more after-tax
income than the parent would have received from the income producing property without the benefit of the Trust arrangement.

Unlike an outright gift which would also reduce income taxes, the assets in the Trust will revert to the Grantor after the end of the period or upon the death of the beneficiary. The Trust may also terminate at the Grantor's death. This type of arrangement is irrevocable, so it is essential that the Grantor be confident it is consistent with all financial and planning objectives.

Once the agreement has been executed, it is essential that the Trust be funded immediately. When funded, there is a gift based on the commuted value of the expected income payments to the beneficiary.

A properly drawn Trust Agreement is vital to the success of this arrangement. The Trustee could be an individual, but the legal and administrative responsibilities are such that it is nearly always advisable to use a corporate (bank) Trustee. Your legal counsel must be consulted for the drafting of appropriate documents.

Tax reference verification 1-800-829-1040

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