Estate tax hits small-biz owners most
By Mike Clowes
I know a 60-year-old woman who should arrange her own death between now and 2010.
She inherited the largest share in a small firm that today has annual revenue of about $5 million, and she would like to leave her share to her two children, who have helped her quintuple the size of the company since she began to run it about 15 years ago.
If she died between now and 2010, her estate would owe no taxes because the estate-tax exclusion now is $2 million and rising.
Thanks to the U.S. Senate's recent rejection of the bill raising the minimum wage and increasing the estate-tax threshold, however, if this woman dies after 2010, her children could be forced to sell or liquidate the company to pay the taxes on their mother's estate.
That is because her share is worth about $2 million, and in 2011, the estate tax is scheduled to revert to pre-2001 levels. That means her estate would be liable for about $500,000 in taxes.
Where are her children going to get that money without selling the firm?
Of course, she could sell the company before 2011 and leave the money to her children when she dies-money that could pay the estate taxes. But that would take the company out of family hands-hands that have helped to build it.
There are estate-planning techniques that could reduce the estate-tax bite. She earns only about $70,000 a year and, because any spare cash goes into the business, there isn't money available for expert help.
So she has a dilemma, as do, I suspect, thousands of owners of small, privately held companies.
Does she gamble that she can sell her business before she dies, to ensure that money is available to cover the estate taxes? Does she spend time and money on estate-planning advice and techniques-time and money her company needs? Does she gamble that the estate tax battle isn't over and will be resolved in her favor sometime before 2011? Or does she have to die sometime before 2011?
That is the pity of the Senate vote. It hit mainly small-business owners and those of moderate wealth-not the very rich.
The opposition was focused on the 8,000 richest Americans, who would see their theoretical estate taxes cut by the lower rates proposed in the bill.
I say ``theoretical'' because these are people who are multimillionaires, even billionaires, such as Warren Buffett, Bill Gates and a host of others who generally don't pay estate taxes because they can afford estate-planning advice and techniques to avoid them.
Although he has campaigned in favor of retaining the estate tax, Mr. Buffett practiced some estate tax avoidance recently by arranging to give the bulk of his wealth over a number of years to the Bill and Melinda Gates Foundation in Seattle.
In the process, he was able to avoid millions in income taxes and provide for his children by establishing billion dollar-plus charitable foundations for each of them that give them secure jobs running those foundations at comfortable salaries.
He thus kept the bulk of his estate out of the hands of the government. If only the small-business owner I know could do the same.
Mike Clowes is editor at large of Investment News, a sister publication of Tire Business.