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 to this general rule applies to certain real property of closely held family 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" cannot reduce the decedent's federal gross estate by more than $940,000 in 2007 or by more than $960,000 in 2008. Thereafter, the amount will be indexed annually for inflation.

The estate of Tommy Tombstone, who died in 2008, contains qualifying real property valued at $1,900,000 based on its "highest and best" use. The same property's value under the special use valuation provision is $800,000. Although the difference between the two valuations is $1,100,000, the maximum reduction allowed is $960,000 (i.e., the limit for 2008).

Without delving into all of the technical requirements for electing the special-use valuation, here are some of the most important ones:

• The net value of the business property must be at least 50 percent of the decedent's gross estate and at least 25 percent of the decedent's adjusted gross estate (the gross estate reduced by certain deductible debts, expenses, claims, and losses)
• The decedent must have transferred the business to specified close family relatives
• The business must have been owned and, to a certain degree, operated by the decedent or a close family relative, for a specified period of years before the decedent died.

For more details on how to make the special-use valuation election, consult the instructions for IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.