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This loss in the value of the qualified family-owned business exclusion is further exacerbated by the estate tax rate structure. tax organizer Property tax rates. This is because the applicable exclusion amount saves estate taxes at the lowest marginal rate while the new family business exclusion saves taxes at the highest rate. For example, in 1998 the tax on a $5 million estate that includes sufficient family business interests to secure a maximum exclusion would be $1,817,500. In 2006, assuming no change in the value of the assets, the estate tax would be $1,880,000, an increase in estate tax of $62,500. tax organizer 2002 federal income tax tables. Still, the new family business exclusion is available in addition to the special use valuation reduction and the estate tax deferral privileges (discussed below), each of which has just gotten more valuable. With careful planning, in appropriate circumstances, it may be possible for both a husband and wife to take advantage of the family-owned business exclusion, doubling its benefit for the family. ESTATE TAX DEFERRAL UNDER IRC SECTION 6166 IMPROVEDEstate taxes may be deferred for up to 14 years, with payment of interest only during the first four years under IRC 6166 when an estate consists substantially of interests in closely held businesses. tax organizer Alabama income tax. The purpose of the deferral is to avoid a forced sale of a family business in order to satisfy estate tax obligations. The Act changes aspects of the authorized deferral for estates of decedents dying after 1997. During the initial four-year period, when interest only is due, the interest rate on the first $1 million in value of the business interests previously was 4%. Beginning next year, the interest rate is reduced to 2% with the $1 million being adjusted for inflation starting in 1999. As to the interest rate on the balance of the deferral, it has been reduced as well to 45% of the standard rate for underpayments of tax. In return for these benefits, the deferred interest is no longer deductible for either estate or income tax purposes. CommentBy disallowing the deduction for the deferred interest, it is unclear whether the reduction in the interest rates provides any real tax savings. At the same time, the Act does at least eliminate the administrative complexity and associated costs of claiming the annual deduction (which cannot be estimated in advance and changes the taxable value of the estate and therefore the tax which is due). 15% EXCISE TAX ON RETIREMENT PLANS AND IRAs FOR EXCESS DISTRIBUTIONS AND ACCUMULATIONS REPEALEDPrior law provided that when an individual received a distribution of more than $150,000 (as indexed) in one year from an IRA or a qualified plan, a 15% excise tax was imposed on the excess (in addition to the income tax due on the distribution). At death, the "excess accumulation" in an IRA or qualified plan was also subject to a 15% excise tax (in addition to the income tax, estate tax and any generation-skipping tax then due). The excess accumulation was calculated by taking the balance of the plan at death and reducing it by the present value of a benefit which would not be subject to the 15% tax on excess distributions. In 1996, some relief was provided from the tax on excess distributions by a law that repealed it for a three-year window period (1997-99). The Act, however, repeals both the 15% excess distributions tax and the 15% excess accumulations tax in their entirety. CommentIndividuals making large withdrawals from their qualified plans and/or IRAs to take advantage of the three-year window period need not do so anymore. They may revert to a smaller or even minimum distribution amount without concern for the 15% excise tax at death.
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