Special Exemption for Family-Owned Businesses

If qualified family-owned business interests (QFOBIs) make up more than 50 percent of your taxable estate, you may benefit from a special provision that can increase your total effective exemption from estate tax to $1.3 million.

If an estate is eligible and elects to take the qualified family-owned business (QFOB) deduction, up to $675,000 of the adjusted value of QFOBIs may be deducted from the value of the estate. From the $675,000 maximum, you must subtract some of the amount that is effectively exempt from estate tax under the general provisions of the law. More specifically, you must subtract the portion of the general exemption amount that exceeds $625,000.

The general exemption amount is scheduled to rise to $1 million in 2002 and 2003. So, the "extra" exemption benefit for small business will shrink from $625,000 in 2000-2001, to $300,000 in 2002-2003.

The QFOB deduction has been criticized as being overly complicated and not very helpful to the estates of small family business owners. Starting in 2004, this controversial deduction is scheduled to be eliminated. The elimination of this deduction, however, is more than made up by the increased estate tax exclusion amounts which rise to $1.5 million in 2004-2005, $2 million in 2006-2008, and $3.5 million in 2009.

To qualify for the family business exemption, your business and your heirs must meet certain criteria.


You leave your business to your two children. Your daughter materially participates in the business, but your son does not. Both heirs meet the material participation rule, since your daughter is a member of the son's family.

However, if the daughter stopped participating in the business within 10 years of your death, neither heir would meet the rule.

These are the major requirements you need to meet, but the law has a number of complicated twists and turns, and if you want to take full advantage of it, you'll definitely need to consult an estate planning professional.