Archive for May, 2009

If the property is disposed of within ten years after the death of the decedent to nonfamily members or ceases to be used for farming or other closely-held business purposes, the tax benefits are fully or partially recaptured.
1. Full recapture occurs within the first ten years.
2. Recapture does not occur, however, on death of the qualified heir.
3. Partial dispositions lead to partial recapture of the tax savings.
4. The qualified heirs are responsible for the recaptured tax.
5. For purposes of “cessation of qualified use,” absence of material participation for three or more years during any eight-year period ending after decedent’s death triggers recapture.
6. A special lien, in favor of the United States, will be attached to the property. Liens on loans by the Treasury will be subordinate to bank loans.
7. A two year grace period after the decedent’s death during which a qualified heir’s failure to use the qualifying property in the qualified use will not cause imposition of a recapture tax.
8. Active management by eligible qualified heirs will satisfy the post-death material participation requirement. Eligible heirs in this case include the decedent’s spouse, or a qualified heir who has not attained age 21, who is a student or is disabled.

The “Current Use” value is determined in one of two ways:
1. Capitalization of rent, which is computed by dividing the average annual gross cash rental for comparable farmland in the locality, less average real property taxes, by the average annual effective interest rate for all new Federal Land Bank loans. Five year average data is used.   If there is no comparable land from which the average annual gross cash rental may be determined, “average net share rental” may be substituted for average gross cash rental. Net share rental is defined as the excess of the value of the produce received by the lessor of the land over the cash operating expenses of growing such produce, which are paid by the lessor under terms of the lease.
Each average annual computation is to be made on the basis of the five most recent calendar years. For decedents dying in 2006, the average interest rate was 7.75 percent. The following example assumes that the current average land rent is $32.50 per acre, taxes are $2.50 per acre, and the Federal Land Bank interest rate 75.75 percent.
32.50  -  $2.50  =  $ 387.10 per acre current use value .0775
2. If there are no comparable sales or the formula method is not used, the value of real property may be deter- mined by application of the following factors:
a.  The capitalization of income that the property can expect to yield for farming or for closely-held business purposes over a reasonable period of time under prudent management, using traditional cropping patterns for the area, taking into account soil capacity, terrain configuration, and similar factors.
b.  The capitalization of the fair rental value of the land for farming or for closely-held business purposes.
c.  The assessed land values in a state that provides a differential or use value assessment law for farmland or closely-held business property.
d.  Comparable sales of other farm or closely-held business land in the same geographical area far enough removed from a metropolitan or resort area so that nonagricultural use is not a significant factor in the sales price.
e.  Any other factor which fairly values the farm or closely-held business value of the property.

The executor may elect to value real property devoted to farming or other closely-held business at its “current use” value rather than market value if certain conditions are met. The conditions are as follows:
1. The adjusted value of the farm or other closely-held business assets (assets minus debt) must comprise at least fifty percent of the decedent’s adjusted gross estate (assets minus debts).
2. At least twenty-five percent of the adjusted value of the gross estate must be qualified farm or other closely-held business real property.
3. The farm or other closely-held business must pass to qualified heirs.
4. The real property must have been owned by the decedent or a member of the decedent’s family and held for use as a farm five out of the last eight years preceding the decedent’s death.
5. The decedent or member of the decedent’s family must have materially participated in the operation of the farm or other business for five out of the last eight years immediately preceding the decedent’s death (or retirement or disability).
Special rules for decedents who are retired or disabled are as follows: The material participation has to be satisfied during periods aggregating five or more of the eight year period ending before the earlier of (1) the date of death; (2) the date on which the decedent became disabled; or (3) the date on which the individual began receiving Social Security retirement benefits, which continued until decedent’s death.
If the property was passed to the surviving spouse, he or she will be treated as having materially participated during periods when engaged in active management of the farm or business. The term “active management” means the making of management decisions of a business that is more than just the daily operating decisions.
The definition of a member of a family means only (a) an ancestor, (b) the spouse, (c) a lineal descendent of decedent or of decedent’s parents or of decedent’s spouse, or (d) the spouse of any lineal descendent described in (c) above. For purposes of the preceding sentence, a legally adopted child of an individual shall be treated as the child of such individual by blood. Lineal descendents of the decedent’s grandparents are no longer considered to be family members unless they are also descendents of the decedent’s parents. This means that aunts, uncles, nieces, nephews, and cousins are excluded.
6. The special valuation cannot reduce the decedent’s gross estate by more than $940,000 for 2007 and will be in- dexed for inflation in the future.
7. An election to specially value the property must be made on the other decedent’s estate tax return.
8. A written agreement must be signed by each person who has an interest in the property for which the special use is elected, stating that additional estate taxes will be paid if there is a premature disposition or cessation of qualified use of the property.
9. Special rules exist relative to standing timber.