In addition, family businesses and farms that qualify can take a special deduction of up to $675,000, making a total of $1.3 million exempt from estate taxes.
Of course, you'll have to jump through a few hoops to qualify. For example, the business must make up at least 50% of your estate, you or a family member must have "materially participated" in it for at least five of the last eight years before your death, and the business must remain "in the family" and in the U.S. for ten years after you die. If it doesn't, your family will have to pay back some of what they saved in estate taxes by using this exemption -- plus interest.
Also, keep in mind that in 2006, when the individual exemption will be $1 million, the family business deduction will only be worth an additional $300,000. So, for many families, it will not be worth the trouble and expense.
To keep the rest of this presentation simple and understandable, we will assume that you do not qualify for the family business deduction.
