Unfortunately, that is not always possible. In fact, your heirs may be forced to sell off assets, such as the company's building, to pay the federal estate-tax liability on the value of the inherited business.

To avoid this result, establish the groundwork for "special use valuation." If a timely election is made by your executor, it may reduce the value of the estate by a sizeable amount. Depending on the particular facts, it may even eliminate the estate tax the family must pay.

Background: The fair-market value of property owned by a decedent at death must be included in his or her taxable estate. As a general rule, the fair-market value is determined by the property's "highest and best use." In other words, if the property is raw land that would be worth a small fortune to real estate developers, the higher value as real estate development property is treated as the "fair-market value" for estate-tax purposes.

However, the circumstances may differ for real estate of a closely held business or a farm. As long as certain requirements are met, the business owner's property is valued according to its current actual use upon the owner's death -- not the "highest and best" use.

Note: The reduction in the estate-tax value under this election cannot exceed $940,000 for decedents dying in 2007 (up from $900,000 in 2006). This figure is indexed annually for inflation.

To qualify for special use valuation on closely held property, three key requirements must be met.

1. The adjusted value of the business property (both real and personal) must be at least 50% of the decedent's gross estate and the real property must be at least 25% of the decedent's adjusted gross estate (the gross estate reduced by certain deductible debts, expenses, claims and losses).
2. The decedent must have transferred the business to a qualified heir or heirs (i.e., close family relatives).
3. The business must have been owned and operated by the decedent or a close family relative for five out of the last eight years before the earliest of the retirement, disability or death of the decedent.

Although these requirements may not be daunting for some, there is still another catch: If the owner's heirs sell or otherwise dispose of the property to outsiders within ten years of death or they begin using the property for another purpose, the estate-tax savings must be recaptured. Therefore, it is important that all parties fully understand the ten-year restriction and comply with the rules.

Finally, the appropriate forms must be accompanied by a written agreement signed by each person with an interest in the real property. Once the election is made, it is irrevocable.