A Qualified Family-Owned Business Interest (QFOBI) refers to specific types of business interests that can provide significant estate tax benefits under U.S. tax law. This designation applies to family-owned businesses and is especially relevant for estate planning and wealth transfer strategies.
To qualify as a QFOBI, the business interest must meet several criteria, including:
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Ownership: The business must be owned by one or more family members. Generally, at least 50% of the business interest must be held by the family, which can be defined broadly to include parents, children, siblings, and their descendants.
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Business Type: The business can be a corporation, partnership, or other entity actively engaged in trade or business. It must not be a passive investment or a holding company whose primary purpose is to hold assets.
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Size Limitations: The fair market value of the QFOBI must be under a specified threshold (as of the last updates, this threshold was $11.58 million for individual estates in 2020 but is subject to change).
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Operational Requirement: The business must have been actively engaged in operation for at least five out of the eight years preceding the decedent’s death.
The primary advantage of a QFOBI in estate planning is the ability to exclude a portion of the value of the interest from the taxable estate, thus reducing potential estate taxes owed. For instance, if a family-owned business is valued at $10 million, and the decedent qualifies for the QFOBI exclusion, a significant portion of that value may not be subject to estate tax, allowing the family to retain more of the business.
In Texas, including Houston, the implications of a QFOBI can be especially important for families running local businesses, as it affects both state and federal tax obligations. Proper planning and documentation are crucial to ensure that the business qualifies for this designation, and families often seek legal and financial advice to navigate these complexities effectively.
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