Property must be valued at its fair market value for purposes of the estate tax. In turn, fair market value normally is determined by a property's "highest and best use," that is, the use which would make the property the most valuable. This is true even if the property currently is not being employed in its highest and best use. For example, if the deceased was using a gold bar as a paperweight, you'd have to base its value on the price of gold per ounce, not on the going rate for heavy paperweights.
A significant exception applies to closely held farms and other family-owned businesses. If all the requirements are met, the property will be valued in accordance with its actual (current) use. However, this special use valuation tax break cannot reduce the decedent's federal gross estate by more than $800,000 in 2001 (formerly $770,000 in 2000). This amount will periodically be indexed for inflation.
Although we're not going to delve into all of the technical requirements for obtaining a special use valuation, here are some of the most important ones: