With the likely changes to the estate tax laws this year, it may be beneficial to dust off our understanding of U.S. Code Section 2032A, special use farm valuations. This may become a useful tool for farm families to avoid federal estate tax.
U.S. Code Section 2032A allows the executor of a decedent’s estate to elect special use valuation for farm real estate on the decedent’s estate tax return. The asset value will be reduced based on its use as farm property rather than the actual the fair market value.
The rules and calculations for making this election are very technical and must be followed precisely. The executor of a decedent’s estate is advised to seek professional counsel when making this election.
The following are the general requirements to make a 2032A election:
• The farm property must have been used by the decedent or a family member who was materially participating in the farming operation (trade or business) for at least five of the eight years preceding the decedent’s death, disability or retirement.
• The adjusted value of real property used in the business must be at least 25% of the adjusted value of the decedent’s gross estate.
• The value of the real or personal property used in the farm operation (trade or business) must be at least 50% of the adjusted value of the decedent’s gross estate.
• The property must be distributed to a qualified heir of the decedent. Qualified heirs include the decedent’s ancestors, spouse, descendants and their spouses, spouse’s descendants and their spouses, and parents’ descendants and their spouses.
• The qualified heirs must sign an agreement that during the 10-year period following the decedent’s death, the decedent’s family will continue to materially participate in the farm operation (business) and use the property for the qualified use.
• In the event the required terms are broken or the property is sold within 10 years of the decedent’s death, the 2032A election would be recaptured, and the interested parties would be responsible for paying the resulting estate tax.
With proper estate planning for a married couple, this additional exempted property could provide significant estate tax savings for some family farms.
Balzarini is an attorney at law with Miller Legal Strategic Planning Centers, P.A. Send comments and questions to him at [email protected].