Estate tax qualified family-owned business interests

Now available! Excise Tax Advisory (ETA) 3239.32023 - Estate Tax Deduction for Qualified Family-Owned Business Interests: Real Estate Activities.

The following information provides a general explanation of the qualified family-owned business interests (QFOBI) deduction.

For decedents with dates of death on or after Jan. 1, 2014, the value of a family-owned business interest may be deducted from the taxable value of an estate as long as certain requirements are met. The QFOBI deduction is limited to the lesser of the value of the QFOBI or $2,500,000. Any amount of QFOBI already included in the farm deduction may not be deducted under QFOBI.

An heir to the QFOBI must continue the trade or business for three years from the date of death. If the heir does not continue the trade or business as it relates to the QFOBI for three years, an additional tax is due.

If you are eligible to take the qualified family-owned business interest deduction:

Complete the Washington State Estate Tax Addendum # 3 – Qualified Family-Owned Business Interests form. This addendum can be completed electronically if you file your return using our My DOR services.
Include a detailed statement how the estate qualifies for the deduction. The statement should address the requirements listed below and specifically describe the material participation in and define the activities of the trade or business.
Attach both items to the Washington State Estate and Transfer Tax Return.

Requirements for the QFOBI deduction

All of the following requirements must be met in order to qualify for the qualified family-owned business interests (QFOBI) deduction:

During the eight-year period prior to the date of the decedent’s death, there were periods totaling five years or more during which such interests were owned by the decedent or a member of the decedent’s family. There also was material participation by the decedent or a member of the decedent’s family in the operation of the trade or business to which such interests relate.
The QFOBI is acquired by or passed to any qualified heir from the decedent.
On the date of death, the decedent was a citizen or resident of the United States.
The QFOBI is $6,000,000 or less.
The QFOBI must exceed fifty percent of the decedent’s Washington taxable estate (not including the applicable exclusion amount).

Qualified heir requirements

A qualified heir must continue to meet all of the following requirements for three years from the date of the decedent’s death:

Continue to materially participate in the operation of the trade or business to which the qualified family-owned business interests (QFOBI) relates.
Cannot dispose of any portion of the QFOBI to anyone other than one of the following:
- A member of the qualified heir’s family.
- A person with an ownership interest in the QFOBI.
- Through a qualified conservation contribution.
Keep the principal place of business of the QFOBI located in the United States.
Maintain United States citizenship.

Rules regarding ownership

The determination of “ownership of an entity” for qualified family-owned business interests (QFOBI) purposes is:

Ownership of a corporation will be determined by the holding of stock possessing 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 the classes of stock.
Ownership of a partnership will be determined by the owning of the appropriate percentage of the capital interest in such partnership.
In a tiered entity, each tier’s interest is looked at separately to determine the rules regarding ownership for QFOBI.
An interest owned, directly or indirectly, by or for an entity will be considered as being owned proportionately by or for the entity’s shareholders, partners, or beneficiaries. A person will be treated as a beneficiary of any trust only if such person has a present interest in such trust.

Limitations

A qualified family-owned business interests (QFOBI) does not include:

Any interest in a trade or business where the principal place of business is not located in the United States.
Any interest in an entity, if the stock or debt of such entity or a controlled group of which such entity was a member was readily tradable on an established securities market or secondary market at any time within three years of the decedent’s death.
Any interest in a trade or business (other than a bank), if more than 35% of the adjusted ordinary gross income of such trade or business for the taxable year which includes the date of the decedent’s death would qualify as a personal holding company income if such trade or business were a corporation.
That portion of an interest in a trade or business that is attributable to all of the following:
- Cash or marketable securities, or both, in excess of the reasonably expected day-to-day working capital needs of such trade or business.
- Any other assets of the trade or business (other than assets used actively by a bank), which produce, or are held for the production of, personal holding company income or income from certain other transactions.

Qualified heir additional tax

If the qualified heir does not meet the three-year requirements above, an additional estate tax is imposed on the qualified heir.

This additional tax is equal to the amount of the tax savings realized from the qualified family-owned business interests (QFOBI) deduction.
The qualified heir is personally liable for this tax.
The tax is due six months after the taxable event occurs.

Definitions

Qualified family-owned business interest defined

In general, qualified family-owned business interests (QFOBI) means one of the following:

An interest as a proprietor in a trade or business carried on as a proprietorship.
An interest in an entity carrying on a trade or business, if at least:
- 50% of such entity is owned (directly or indirectly) by the decedent and members of the decedent’s family.
- 70% of such entity is so owned by members of two families and at least 30% of such entity is so owned by the decedent and members of the decedent’s family.
- 90% of such entity is so owned by members of three families and at least 30% of such entity is so owned by the decedent and members of the decedent’s family.

A decedent will be treated as engaged in a trade or business if any member of the decedent’s family is engaged in such trade or business.

Member of the family defined

A "member of the decedent's family" or “member of the qualified heir’s family” means any one of the following:

An ancestor of the individual.
Spouse or state registered domestic partner of the individual.
A lineal descendant of the individual, of the individual's spouse or state registered domestic partner, or a parent of the individual.
The spouse of any lineal descendant.
A legally adopted child of an individual.

Qualified heir defined

A "qualified heir” means any one of the following:

A member of the decedent’s family who acquires the qualified family-owned business interests (QFOBI) or the QFOBI is passed to from the decedent.
If a qualified heir disposes of any interest in a QFOBI to any member of the qualified heir’s family, such member is treated as the qualified heir.
A qualified heir includes any active employee of the trade or business to which the QFOBI relates if such employee has been employed by such trade or business for a period of at least ten years before the date of the decedent’s death.

For additional information, see ETA 3239.2023, RCW 83.100.048 and WAC 458-57-175.