The estate tax, also called inheritance tax or death tax, is a costly burden for small family-owned businesses. It is a tax that will not only affect children of the moneyed elite, but those who run successful businesses.
The estate tax is the tax charged on the passing of wealth to an heir upon death, including the transfer of property. The IRS defines estate tax as:
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. … The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
When you run a business and potentially could transfer your wealth to your children and heirs, it is important to think about this tax and plan for it.
What is Estate Tax?
Congress passed the estate tax in its modern form in 1916. The objective was to use the tax as an additional source of revenue while preventing the buildup of wealth in a concentrated number of families. However in this current day and age, not only the old money rich are hit with this tax. Chances are your heirs will owe tax on any money you give them when you pass away.
The estate tax expired for one year, beginning on January 1, 2010, and returns in full force on January 1, 2011. With the failure of Congress to plug the 2010 estate tax loophole, it means that inherited real property valued at $1 million could trigger big tax bills for beneficiaries, and taxed by as much as 55 percent rate. With this amount, even the moderately rich Americans – such as small family business owners – will be saddled with this huge financial hit.
How Does Estate Tax Affect Small Businesses?
There have been strong calls to Congress to repeal the estate tax once and for all to remove an unfair burden from the backs of American small businesses and their workers.
One of the main concerns of small business owners about the estate tax is that it punishes the growth of family owned and small businesses by making it difficult for them to succeed after the death of their owner. A study by Prince and Associates showed that “the need to raise funds to pay estate taxes” was cited by 98% of respondents as the reason for failure of such firms.
In the video below, small business owner Bruce Nevin talks about how the estate tax will affect his family. Nevin is the owner of Grande Harvest Wine, a family-owned wine retailer operating in Grand Central Terminal in New York City. Like many business owners, his dream is get his kids involved in the business and eventually takes over when he and his wife die.
But he considers the idea that children will have to take a huge financial hit when they die and inherit the business unacceptable. For one, the thought of finding a way to pay for the tax distracts from the overall goal of the business. He and his wife pay tens-of-thousands of dollars each year for life insurance policies, to help ensure that their children can inherit the business without having to sell it to pay for the estate taxes. Otherwise they could lose the business.
According to Nevin, a million dollars may sound a lot of money, but it’s not a lot for a business. Watch the video to learn how the estate tax can affect small business owners like you:
If you are thinking and dreaming of growing your business into a million dollar business – or if you are already there – then know more about death tax. Better yet, join the call for Congress to repeal the death tax forever. Doing so would lift a tremendous burden from countless family-owned businesses across the U.S. that fear a death tax liability could wipe out their businesses.