IRC § 2057 provides that an estate is entitled to a deduction for the value of "qualified family-owned business interests" passing to qualified heirs. Qualification requirements are rigorous and the amount of the deduction coupled with the IRC § 2010 ($675 for 2000 – $1 million in 2006) cannot exceed $1.3 million. This deduction is available for interests in proprietorships and business entities. To determine the eligibility of a business its principal place of business must be in the U.S. and the ownership of the trade/business is to be held at least 50% by 1 family, 70% by 2 families or 90% by 3 families (however, the decedent's family must own at least 30% of the trade or business if owned by 2-3 families.) Subject to adjustments the deduction is only available when the value of the estate's QFOBI's exceed 50% of the value of the estate. The business must be located in the U.S. and cannot have equity or debt that is readily tradable on an established securities market or secondary market. (IRC § 2057(e)(2)(A).) IRC § 2057(a)(2) provides as follows: (A) IN GENERAL. – Except as provided in subparagraph (B), if this section applies to an estate, the applicable exclusion amount under section 2010 shall be $625,000.00. (B) INCREASE IN UNIFIED CREDIT IF DEDUCTION IS LESS THAN $675,000.00.-- If the deduction allowed by this section is less than $675,000.00, the amount of the applicable exclusion amount under section 2010 shall be increased (but not above the amount which would apply to the estate without regard to this section) by the excess of $675,00.00 over the amount of the deduction. Example, someone dying in 2004. AEA = $850,000.00. If estate has QFOBI equal to or greater than the maximum deduction of $675,000.00, the estate will receive the QFOBI deduction of $675,000.00 and an AEA of $625,000.00 instead of $850,000.00. Requirements: 1. Decedent must have been a U.S. citizen or resident at the time of death; a. Decedent Needs to Own Property Used in a business, but need not own an interest in the business itself – Decedent is not required to own an equity interest in a business it can be sufficient to own property that is leased to a family member for use in a family business. 2. Aggregate value of decedent's QFOBI passing to qualified heirs, and/or persons who have worked in the business at least 10 years, exceeds 50% of decedent adjusted gross estate; a. Qualified Heir – One defined at § 2032A(e)(1) and includes any active employee of trade/ business to which QFOBI relates if employee has been employed by trade/business for period of at leat 10-years before date of decedent's death. [May want to have trustee have power to shift QFOBIs from initial trust to special QFOBI trust in which all beneficiaries are qualified heirs.] (1) 2032A(e)(1) definition – with respect to any property, a member of the decedent's family who acquired such property (or to whom such property passed) from the decedent. If a qualified heir disposes of any interest in qualified real property to any member of his family, such member shall thereafter be treated as the qualified heir with respect to such interest. 3. Decedent or family member owned the interests for 5 of the 8 year period ending at the date of decedent's death; 4. Decedent or family member materially participated in operation of the business for 5 of 8 year period ending at the date of decedent's death; and 5. Executor files an election to apply § 2057 and files the required agreement consenting to imposition of the recapture tax. a. Election – § 2032A(d)(1) directs the manner of making the election. b. Post-death Material Participation – Qualified heirs or members of the family must continue to operate the business for ten years following the decedent's death, otherwise the benefits of the exclusion are recaptured. § 2057, (f)(1)(A). Also, remainder interests must not be contingent on surviving a non-family member nor subject to divestment in favor of a non-family member. c. QDOT requirement for Non-Citizen Beneficiaries – Borrowing from the qualified domestic trust provisions of IRC § 2056A, qualified heirs who are not citizens must provide security for the collection of any recapture tax by putting their interests into the equivalent of a QDOT.