On The Hill: Death, Taxes And Your Small Business

You're self-employed and have built a solid business over the years. Your children work for you, and in your will, you've bequeathed your business to them.

Unfortunately, they might not be able to keep it. What you see as a business, the government sees as a personal asset. And without careful financial planning, your children might have to sell the business just to pay exorbitant estate taxes on its value.

It has long been argued that the estate tax is designed for the ultra-rich, created to ensure that the distribution of wealth will never be consolidated in a few hands, especially in the same family. But now the estate tax needs to be drastically modernized. Today, people subject to the tax are no longer ultra-rich. The exemption from estate taxes has not been raised since 1977. It is not indexed for inflation. The assessment no longer taxes estates, but death itself.

Currently, the tax exempt limit is $600,000, $1.2 million for a couple (although the preliminary budget agreement reached in May proposes to increase this). Beyond that, the tax increases progressively reaching a high of 55 percent on estates valued over $3 million.

NASE Director Bob Pool, a small-business person who also owns a family farm in Minnesota, sees the unfairness in the current estate tax. "It is the rare small business or family farm that is not worth much more than the present $600,000 exemption," says Pool.

Small-business people often own their own homes. They most likely participate in retirement savings. Add to those assets the value of their businesses, and business owners often accumulate more than $600,000 in assets by the time of their death.

What type of reform will best help small-business owners preserve their family businesses? The estate tax is not likely to be repealed, so at the very least, the exemption limit needs to be increased. Too many family-owned businesses have been broken up by the low exemption rate. "It is time to rethink, readjust and reform our approach to estate taxation and stop breaking up small businesses and family farms," commented Pool.

Not only are small businesses disappearing under the weight of estate taxes, they are also suffering from the legal maneuvering necessary to avoid the unfair taxation. Pool noted that many small-business people spend countless hours and dollars setting up family limited partnerships or family "S" corporations in an attempt to lessen the impact of estate taxes. Other small-business owners fund generational transfers with "second to die" insurance or establish trust companies to avoid the "death" tax. Still others hire attorneys who specialize in wills, trusts and estates - all in an attempt to save their businesses for their children. For business owners who can't spend the time and money fighting estate taxation, the tax rate should be lessened to help save their small businesses and farms.

The NASE understands the estate tax dilemma and its impact upon our members. We are working with the Estate Tax Reform Coalition and are carefully monitoring the progress of numerous bills that would reform estate taxes in the best interest of our members.

Return to the table of contents

"It is time to rethink, readjust and reform our approach to estate taxation . . .".

-- Bob Pool
NASE Director

Bob Pool, NASE director, shares a peaceful moment on the family farm with his grand-daughter, Sara Rose.