The Qualified Family-Owned Business Interests (QFOBI) deduction is a valuable tool for Washington State estate tax planning. It allows a deduction for the value of a qualifying family business in determining the taxable estate. This deduction can significantly reduce or eliminate Washington's estate tax liability for those who meet the specific requirements.

This is a summary of the key features and requirements for the QFOBI deduction:

The Key Features

• Deduction Amount: As of July 1, 2025, the maximum deduction for a qualified family-owned business interest is $3,000,000. This amount will be adjusted annually for inflation for deaths occurring in 2026 and later years.

• Layered on Top of Standard Exemption: This deduction is in addition to Washington's standard estate tax exemption, which is also $3,000,000 as of July 1, 2025. This means that a qualifying estate could potentially shelter up to $6,000,000 from the Washington State estate tax.

• Purpose: The deduction is designed to help small and family-owned businesses continue operating across generations by reducing the tax burden that can force a sale to pay estate taxes.

The Requirements to Qualify

To take advantage of the QFOBI deduction, the decedent's estate must meet several strict criteria:

1. Ownership Threshold: The value of the qualified family-owned business interests must exceed 50% of the decedent's Washington taxable estate, before the standard estate tax exemption is applied.

2. Material Participation: For at least five of the eight years leading up to the decedent's death, the decedent or a family member must have "materially participated" in the operation of the business. This means a hands-on, active role in the business.

3. Passing to a Qualified Heir: The business interests must be acquired by, or passed to, a "qualified heir" from the decedent. A qualified heir includes the decedent's spouse, lineal descendants, parents, or a spouse of a lineal descendant.

4. Value Cap: The total value of the decedent's qualified family-owned business interests cannot be more than $6,000,000.

5. Three-Year Continuation: For at least three years after the decedent's death, the qualified heir must "materially participate" in the business. If this requirement is not met, an additional estate tax may be imposed, equal to the tax savings originally gained from the deduction.

6. Active Business Requirement: The business must be an active trade or business, not a passive one. This means the deduction cannot be used for passive real estate investments or for a business that primarily generates passive income.

7. No Publicly Traded Interests: The deduction is not available for interests in a business where the stock or debt was publicly traded within three years of the decedent's death.

How to Claim the Deduction

To claim the deduction, the estate must file a Washington State Estate and Transfer Tax Return. The return requires a specific addendum (Addendum #3 - Qualified Family-Owned Business Interests) and a detailed statement that explains how the estate meets all the eligibility requirements, including a description of the material participation.

Due to the complexity and stringent requirements, Washington residents with a family-owned business should collaborate with a qualified attorney or CPA to ensure proper estate planning.

For further reading, see:

https://evergreensmallbusiness.com/washingtons-qualified-family-owned-business-interest-estate-tax-deduction-updated-for-2025/

https://app.leg.wa.gov/rcw/default.aspx?cite=83.100.048

https://app.leg.wa.gov/wac/default.aspx?cite=458-57-175

https://dor.wa.gov/taxes-rates/other-taxes/estate-tax-qualified-family-owned-business-interests