Owners of family-held banks had better read the fine print if they want to use the bigger estate tax exemptions that President Clinton will sign into law today.

The legislation increases the inheritance exemption for family-owned businesses and farms to $1.3 million, from $600,000, beginning Jan. 1. The change was included in a balanced budget passed by Congress last week, and also increases the standard inheritance exemption to $1 million by 2006.

Tough eligibility requirements, however, will add wrinkles for families trying take advantage of the higher exemption. "It's hard to know right off the top who's going to benefit from this bill," said Harvey J. Berger, a partner with Grant Thornton's Washington office.

For instance, family members must hold onto the bank and actively participate in the business for 10 years after inheritance. If the bank were sold sooner, owners would have to repay the tax break. The entire deduction would have to be repaid if the bank were sold within five years. The bill would fall between years 6 through 10.

"A family may not be getting great relief," said John R. Ziegelbauer, senior manager in Grant Thornton's Washington office. "Ten years is a long time in a consolidating environment for banks. A lot of people will want to cash out."

Other eligibility requirements include:

The bank must account for at least half the owner's estate.

One family must own 50% of the business. If two families own the bank, their stake must total 70%. With three families, ownership must equal 90%.

The owner or family members must have participated in the business for at least five of the eight years before inheritance.

The business was not listed on a stock exchange during the three years before inheritance.

Mr. Berger said many owners of closely held institutions will have to alter their estate plans to maximize the benefits. "People are going to have to rethink all of this," he said. "Owners must make sure assets are owned appropriately."

But bankers said they weren't worried by the tight eligibility rules.

"They shouldn't be a problem," said Alice M. Dittman, chairman of Cornhusker Bank in Lincoln, Neb. "Making sure that families hold onto the bank is the whole objective."

The $145 million-asset institution has been in Ms. Dittman's family since 1948. "My son John is the president and I hope he'll run it for 20 years," she said.

Without the higher exemption, many families couldn't pay taxes without selling the bank, she said.

"I would think there are a great number of rural banks that would benefit," said Larry A. Sorenson, executive vice president at Arlington (Minn.) State Bank.

The exemption would help Arlington State preserve 100 years of family ownership, he said. The $40 million-asset institution is chaired by Marion M. Lynch, whose father founded the bank. "I could see this bank going to its third generation," he said.

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