Gregory J. Lederman

Gregory J. Lederman specializes exclusively in estate, trust and probate matters. Gregory J. Lederman has been certified as a specialist in estate, trust and probate law by the California Board of Legal Specialization of the State Bar of California. Gregory J. Lederman has extensive litigation experience in the area of estate, trust and probate litigation from discovery, law and motion and trial work.

FEDERAL ESTATE TAX REQUIREMENTS FOR “SPECIAL USE” VALUATION

Although Congress passed legislation in 2001 incrementally increasing the amount exempt from federal estate tax over the next few years, with complete elimination of federal estate taxes in 2010, unless Congress acts affirmatively to make the repeal of federal estate tax permanent, estate taxes will resume after 2010 at former rates and levels. In any event, estate taxes will continue to be a concern for large estates for at least the next few years.

CALCULATION OF THE VALUE OF ESTATE ASSETS

Estate taxes are calculated based upon the value of the assets in the estate. One duty of the executor or administrator is to inventory all estate assets and assign a value to each or obtain an appraisal. The sum of the asset values, less allowable deductions for payment of debts, such as funeral and last illness expenses, is the basis for calculating estate tax. In general, the value assigned to an asset must be its “fair market value” (FMV) at the time the decedent died, with some exceptions. The Internal Revenue Service (IRS) defines FMV as the price at which property would change hands between a willing buyer and a willing seller, neither of which is under any compulsion to buy or sell, and both of which have reasonable knowledge of relevant facts. There are, however, some exceptions to the FMV rule, including the special use valuation discussed in this article.

SPECIAL USE VALUATION

Commentators have long decried the disappearance of the family farm. One reason often asserted for the disappearance is that it became increasingly difficult for farming couples to pass on the farm intact to their kids. Farmland located near urban areas often has a FMV for the land itself, for potential housing or other development, which greatly exceeds what the farmers originally paid. The inflated FMV could result in estate taxes where there is insufficient liquidity in the estate to pay the tax, requiring that all or a sizable portion of the land must be sold. In recognition of this problem, the IRS and federal tax law allow a different valuation for certain farm and closely-held business (those owned by a small number of shareholders) properties. For qualifying property, and providing other requirements are met, valuation may reflect “current use” value, instead of their FMV.

SPECIAL USE VALUATION METHODS

The preferred method of calculating current use value for farm property is based on rents for comparable farm property in the area. The cash rental of the comparable property is “capitalized.” That means that average rental of comparable land, minus applicable real estate taxes, is divided by the average annual effective interest rate charged for new loans by the Federal Land Bank.

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