United States Estate (and Generation-Skipping Transfer) Tax Return

Schedule T. Qualified Family-Owned Business Interest Deduction

Under section 2057, you may elect to deduct the value of certain family-owned business interests from the gross estate. You make the election by filing Schedule T, attaching all required statements, and deducting the value of the qualifying business interests on Part 5, Recapitulation, page 3, at item 22. You can only deduct the value of property that you have also reported on Schedule A, B, C, E, F, G, or H of Form 706.

The amount of the deduction cannot exceed the lesser of:

• The adjusted value of the qualified family-owned business interests (QFOBI) of the decedent otherwise includible in the gross estate, or
• $675,000.

Coordination with unified credit. The sum of the QFOBI deduction and the applicable exclusion amount cannot exceed $1.3 million. Thus, if the maximum QFOBI deduction of $675,000 is claimed, the applicable exclusion amount would be limited to $625,000, and the credit entered on line 11 of Part 2 - Tax Computation, would be $202,050.

If the amount of the QFOBI deduction is less than $675,000, increase the applicable exclusion amount by the difference between $675,000 and the amount of the QFOBI deduction (but not to exceed the maximum applicable exclusion amount in effect for the year of death).

For example, if the estate of a decedent dying in 2001 claimed a QFOBI deduction of $665,000, the applicable exclusion amount for the estate would be $635,000 (($675,000 - 665,000) + 625,000). But if the QFOBI deduction was $575,000, the applicable exclusion amount would be $675,000, the maximum for 2001.

General Requirements

Business interests may qualify for the exclusion if the following requirements are met:

• The decedent was a citizen or resident of the United States at the date of death.
• The business interests are includible in the gross estate.
• The interests must have passed to or been acquired by a qualified heir from the decedent.
• The adjusted value of the qualified family-owned business interests must exceed 50% of the adjusted gross estate (see below for a discussion of these terms).
• The interest must be in a trade or business that has its principal place of business in the United States.
• The business interest was owned by the decedent or a member of the decedent's family during 5 of the 8 years before the decedent's death.
• For 5 of the 8 years before the decedent's death, there was material participation by the decedent or a member of the decedent's family in the business to which the ownership interest relates.

Qualified Family-Owned Business Interest

In general. To qualify for the deduction, the business interest must be either an interest as a proprietor in a trade or business carried on as a proprietorship, or an interest in an entity carrying on a trade or business in which:

• At least 50% of the entity is owned by the decedent or members of the decedent's family;
• At least 70% of the entity is owned by members of two families, and at least 30% is owned by the decedent or members of the decedent's family; or
• At least 90% of the entity is owned by members of three families, and at least 30% is owned by the decedent or members of the decedent's family.

In all cases, ownership may be either direct or indirect.

Ownership rules. Ownership of the business interest may either be direct, or indirect through a corporation, partnership, or a trust. An interest owned, directly or indirectly, by or for such an entity is considered owned proportionately by or for the entity's shareholders, partners, or beneficiaries. A person is the beneficiary of a trust only if he or she has a present interest in the trust.

Corporations. Ownership of a corporation is determined by holding stock that has the appropriate percentage of the total combined voting power of all classes of stock entitled to vote and the appropriate percentage of the total value of shares of all classes of stock.

Partnerships. Ownership of a partnership is based on owning the appropriate percentage of the capital interest in the partnership.

Tiered entities. For the purpose of determining ownership of a business under section 2057, if the decedent, a member of the decedent's family, any qualified heir, or any member of the qualified heir's family owns an interest in a business, and by reason of that ownership the person is treated as owning an interest in any other business, the ownership interest in the other business is disregarded in determining the ownership interest in the first business. Likewise, you must apply the ownership rules separately in determining ownership of the other business.

Limitations

Qualified family-owned business interests shall not include the following:

• Any interest in a trade or business if its principal place of business is located outside the United States.
• Any interest in an entity if the stock or debt of the entity (or a controlled group of which the entity is a member) was readily tradable on an established securities market or secondary market at any time within 3 years of the date of the decedent's death.
• Any interest in a trade or business (excluding banks and domestic building and loan associations) if more than 35% of its adjusted ordinary gross income for the taxable year that includes the date of the decedent's death would qualify as personal holding company income (as defined in section 2057(e)(2)(C)) if such trade or business was a corporation.
• The portion of an interest in a trade or business that is attributable to:
  1. Cash and/or marketable securities in excess of the reasonably expected day-to-day working capital needs, and
  2. Any other assets (other than assets held in the active conduct of a bank or domestic building and loan) that produce or are held for the production of personal holding company income and most types of foreign personal holding company income. See section 2057(e)(2)(D) for more information.

Net cash lease. If the decedent leased property on a net cash basis to a member of the decedent's family, income from the lease is not considered personal holding company income for this purpose, and the property is not considered asset producing or held for the production of personal holding company income. However, if the income or property would have been personal holding company income or property if the decedent had engaged directly in the activities of the lessee, then this net cash lease rule does not apply.

Qualified Heir

A person is a qualified heir of property if he or she is a member of the decedent's family and acquired or received the interest from the decedent.

If a qualified heir disposes of any qualified family-owned business interest to any member of his or her family, that person will then be treated as the qualified heir with respect to that interest.

The term member of the family includes only:

• An ancestor (parent, grandparent, etc.) of the individual;
• The spouse of the individual;
• The lineal descendent (child, stepchild, grandchild, etc.) of the individual, the individual's spouse, or a parent of the individual; and
• The spouse, widow, or widower of any lineal descendent described above.

A legally adopted child of an individual is treated as a child of that individual by blood.

For the purpose of this deduction, qualified heir also includes any active employee of the trade or business to which the qualified family-owned business interest relates if the employee has been employed by the trade or business for a period of at least 10 years before the date of the decedent's death.

Interests Acquired From the Decedent

An interest in a business is considered to have been acquired from or to have passed from the decedent if one or more of the following apply:

• The interest is considered to have been acquired from or to have passed from the decedent under section 1014(b) (relating to basis of property acquired from a decedent).
• The interest is acquired by any person from the estate.
• The interest is acquired by any person from a trust, to the extent the property is includible in the gross estate.

Material Participation

To make the section 2057 election, either the decedent or a member of the decedent's family must have materially participated in the trade or business to which the ownership interest relates for at least 5 of the 8 years ending on the date of the decedent's death.

The existence of material participation is a factual determination, and the types of activities and financial risks that will support a finding of material participation will vary with the mode of ownership. No single factor is determinative of the presence of material participation, but physical work and participation in management decisions are the principal factors to be considered. Passively collecting rents, salaries, draws, dividends, or other income from the trade or business does not constitute material participation. Neither does merely advancing capital and reviewing business plans and financial reports each business year.

For more information on material participation, see page 7 of these instructions and Regulations section 20.2032A-3.

Specific Instructions

Line 4

If any qualified heir is not a U.S. citizen, the ownership interest he or she receives must pass, be acquired, or be held in a qualified trust. See section 2057(g) for details. If any qualified heir listed on line 4 is not a U.S. citizen, indicate along with their address citizen of _______, filling in the appropriate country.

Line 5

List on line 5 all qualified family-owned business interests included in the gross estate, even if they will not be included in the deduction because, for example, they pass to the surviving spouse and are deducted on Schedule M rather than Schedule T (see the instructions for line 15 below).

Line 7

Enter on line 7 the amount, if any, deductible from the gross estate as claims against the estate or indebtedness of the estate reported elsewhere on this Form 706. Do not include funeral or administrative expenses on this line.

Line 8a

Enter the amount of any indebtedness that is both:

• Included on line 7, and
• Indebtedness on a residence of the decedent that qualifies for the mortgage interest deduction under section 163(h)(3).

Line 8b

Enter the amount of any indebtedness:

• That is included on line 7, and
• The proceeds of which were used to pay educational or medical expenses of the decedent, the decedent's spouse, or the decedent's dependents.

Line 8c

Enter the amount of any other indebtedness included on line 7 but not on lines 8a or 8b, but do not enter more than $10,000.

Line 11a

Enter on this line the amount of gifts, if any, that were:

• Included on line 4 of Part 2, page 1, Form 706;
• Of qualified family-owned business interests;
• From the decedent to members of the decedent's family other than the decedent's spouse; and
• Continuously held by such members of the decedent's family from the date of the gift to the date of the decedent's death.

Line 11b

Enter the amount, if any, of gifts that would have been included on line 11a except that they were excluded under the gift tax annual exclusion of section 2503(b).

Line 13a

Enter the amount from item 12, Part 5, Recapitulation.

Line 13e

Enter any amounts (other than qualified family-owned business interests and de minimis amounts) transferred from the decedent to the decedent's spouse (determined at the time of the transfer) and within 10 years of the date of the decedent's death. At the time this form went to print, the IRS had not issued guidelines on what constitutes a de minimis amount.

Line 13f

Enter the amount of any other gifts:

• That are not included on lines 13d or 13e;
• That were from the decedent;
• That were made within 3 years of the date of the decedent's death; and
• That were not both gifts to members of the decedent's family and excluded under the annual gift tax exclusion of section 2503(b).

Line 13h

Enter the amounts, if any, from lines 13d, 13e, or 13f, that are otherwise included in the gross estate (e.g., under section 2035).

Line 15

The interests listed on line 5 above are used to qualify the estate for the section 2057 deduction. You may choose, however, not to deduct on Schedule T all of the trade or business interests that are listed on line 5. For example, if a trade or business interest that is a qualified family-owned business interest passes to the surviving spouse and you choose to deduct it on Schedule M, you may not deduct on Schedule T the part of its value deducted on Schedule M. Or, you may simply choose not to include a particular trade or business interest in the section 2057 election.

Report on line 15 only the value of those trade or business interests listed on line 5 for which you are making the section 2057 election.

Also, you must reduce the amount of the Schedule T deduction by the amount of any Federal estate or GST tax and any state inheritance taxes paid out of, and any other deductions claimed with respect to, the interests that you elect to deduct on Schedule T.

Provide the following information on an attached statement:

• Identify each trade or business interest from line 5 for which you are making the section 2057 election and the amount being deducted.
• Specify the amount, if any, of the interests for which you are making the election that is deducted on Schedule M.
• List for each trade or business interest the type and amount of any taxes paid out of that interest.
• List for each trade or business interest the type and amount of any other deductions claimed with respect to that interest.

If there are no such reductions, enter the amount from line 10 on line 15.

Schedule U. Qualified Conservation Easement Exclusion

Under section 2031(c), you may elect to exclude a portion of the value of land that is subject to a qualified conservation easement. You make the election by filing Schedule U with all of the required information and excluding the applicable value of the land that is subject to the easement on Part 5, Recapitulation, page 3, at item 11. To elect the exclusion, you must include on Schedule A, B, E, F, G, or H, as appropriate, the decedent's interest in the land that is subject to the exclusion. You must make the election on a timely filed Form 706, including extensions.

For the estates of decedents dying in 2001, the exclusion is the lesser of:

• The applicable percentage of the value of land (after certain reductions) subject to a qualified conservation easement, or
• $400,000.

Once made, the election is irrevocable.

General Requirements

Qualified Land

Land may qualify for the exclusion if all of the following requirements are met:

• The decedent or a member of the decedent's family must have owned the land for the 3-year period ending on the date of the decedent's death.
• No later than the date the election is made, a qualified conservation easement on the land has been made by the decedent, a member of the decedent's family, the executor of the decedent's estate, or the trustee of a trust that holds the land.
• The land is located in the United States or one of its possessions.

Member of Family

Members of the decedent's family include the decedent's spouse; ancestors; lineal descendants of the decedent, of the decedent's spouse, and of the parents of the decedent; and the spouse of any lineal descendant. A legally adopted child of an individual is considered a child of the individual by blood.

Indirect Ownership of Land

The qualified conservation easement exclusion applies if the land is owned indirectly through a partnership, corporation, or trust, if the decedent owned (directly or indirectly) at least 30% of the entity. For the rules on determining ownership of an entity, see the Schedule T instructions under the main heading, Qualified Family-Owned Business Interest.

Qualified Conservation Easement

A qualified conservation easement is one that would qualify as a qualified conservation contribution under section 170(h). It must be a contribution:

• Of a qualified real property interest;
• To a qualified organization; and
• Exclusively for conservation purposes.

Qualified real property interest. The term qualified real property interest means any of the following:

• The entire interest of the donor, other than a qualified mineral interest;
• A remainder interest; or
• A restriction granted in perpetuity on the use that may be made of the real property. The restriction must include a prohibition on more than a de minimis use for commercial recreational activity.

Qualified organization. Qualified organizations include:

• The United States, a possession of the United States, a state (or the District of Columbia), or a political subdivision of them, as long as the gift is for exclusively public purposes.
• A domestic entity that meets the general requirements for qualifying as a charity under section 170(c)(2) and that generally receives a substantial amount of its support from a government unit or from the general public.
• Any entity that qualifies under section 170(h)(3)(B).

Conservation purpose. The term conservation purpose means:

• The preservation of land areas for outdoor recreation by, or the education of, the public;
• The protection of a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem; or
• The preservation of open space (including farmland and forest land) where such preservation is for the scenic enjoyment of the general public, or pursuant to a clearly delineated Federal, state, or local conservation policy and will yield a significant public benefit.

Specific Instructions

Line 1

If the land is reported as one or more item numbers on a Form 706 schedule, simply list the schedule and item numbers. If the land subject to the easement comprises only part of an item, however, list the schedule and item number and describe the part subject to the easement. See the instructions for Schedule A, Real Estate, in the Form 706 itself, for information on how to describe the land.

Line 3

Using the general rules for describing real estate, provide enough information so the IRS can value the easement. Give the date the easement was granted and by whom it was granted.

Line 4

Enter on this line the gross value at which the land was reported on the applicable asset schedule on this Form 706. Do not reduce the value by the amount of any mortgage outstanding. Report the estate tax value even if the easement was granted by the decedent (or someone other than the decedent) prior to the decedent's death.

Line 5

The amount on line 5 should be the date of death value of any qualifying conservation easements granted prior to the decedent's death, whether granted by the decedent or someone other than the decedent, for which the exclusion is being elected.

Line 7

You must reduce the land value by the value of any development rights retained by the donor in the conveyance of the easement. A development right is any right to use the land for any commercial purpose that is not subordinate to and directly supportive of the use of the land as a farm for farming purposes.

You do not have to make this reduction if everyone with an interest in the land (regardless of whether in possession) agrees to permanently extinguish the retained development right. The agreement must be filed with this return and must include the following information and terms:

1. A statement that the agreement is made pursuant to IRC section 2031(c)(5).
2. A list of all persons in being holding an interest in the land that is subject to the qualified conservation easement. Include each person's name, address, tax identifying number, relationship to the decedent, and a description of their interest.
3. The items of real property shown on the estate tax return that are subject to the qualified conservation easement (identified by schedule and item number).
4. A description of the retained development right that is to be extinguished.
5. A clear statement of consent that is binding on all parties under applicable local law:
   1. To take whatever action is necessary to permanently extinguish the retained development rights listed in the agreement; and
   2. To be personally liable for additional taxes under IRC section 2031(c)(5)(C) if this agreement is not implemented by the earlier of:
      • The date that is 2 years after the date of the decedent's death, or
      • The date of sale of the land subject to the qualified conservation easement.
6. A statement that in the event this agreement is not timely implemented, that they will report the additional tax on whatever return is required by the IRS and will file the return and pay the additional tax by the last day of the 6th month following the applicable date described above.

All parties to the agreement must sign the agreement.

For an example of an agreement containing some of the same terms, see Schedule A-1 (Form 706).

Line 10

Enter the total value of the qualified conservation easements on which the exclusion is based. This could include easements granted by the decedent (or someone other than the decedent) prior to the decedent's death, easements granted by the decedent that take effect at death, easements granted by the executor after the decedent's death, or some combination of these. Important: Use the value of the easement as of the date of death, even if the easement was granted prior to the date of death.

Explain how this value was determined and attach copies of any appraisals. Normally, the appropriate way to value a conservation easement is to determine the FMV of the land both before and after the granting of the easement, with the difference being the value of the easement.

You must reduce the reported value of the easement by the amount of any consideration received for the easement. If the date of death value of the easement is different from the value at the time the consideration was received, you must reduce the value of the easement by the same proportion that the consideration received bears to the value of the easement at the time it was granted. For example, assume the value of the easement at the time it was granted was $100,000 and $10,000 was received in consideration for the easement. If the easement was worth $150,000 at the date of death, you must reduce the value of the easement by $15,000 ($10,000/$100,000 × $150,000) and report the value of the easement on line 10 as $135,000.

Line 15

If a charitable contribution deduction for this land has been taken on Schedule O, enter the amount of the deduction here. If the easement was granted after the decedent's death, a contribution deduction may be taken on Schedule O, if it otherwise qualifies, as long as no income tax deduction was or will be claimed for the contribution by any person or entity.

Line 16

You must reduce the value of the land by the amount of any acquisition indebtedness on the land at the date of the decedent's death. Acquisition indebtedness includes the unpaid amount of:

• Any indebtedness incurred by the donor in acquiring the property;
• Any indebtedness incurred before the acquisition if the indebtedness would not have been incurred but for the acquisition;
• Any indebtedness incurred after the acquisition if the indebtedness would not have been incurred but for the acquisition and the incurrence of the indebtedness was reasonably foreseeable at the time of the acquisition; and
• The extension, renewal, or refinancing of acquisition indebtedness.

Continuation Schedule

See instructions for Continuation Schedule on Form 706 itself. Rate Schedule under Victims of Terrorism Act of 2001

Rate Schedule Under the Victims of Terrorism Tax Relief Act of 2001

Caution: This Table is only to be used for the estates of decedents that qualify for the special treatment under section 2201 as revised by the Victims of Terrorism Tax Relief Act of 2001.

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The time needed to complete and file this form and related schedules will vary depending on individual circumstances. The estimated average times are:

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this address. Instead, see Where To File on page 2.

Worksheet for Schedule Q

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