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June 2, 2006 7:40 AM CDT

Family Owned Business - Closed Due to Death Tax

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Small and Family business owners work their whole lives to build a legacy to pass on to their children and grandchildren. Unfortunately the Death Tax sometimes referred to as the "Estate Tax," threatened that legacy up until 2001 and will again in 2011.

In 2001 Congress voted for temporary repeal of the Death Tax, which would occur during a 10 year gradual phase out. In the year 2010 the death tax will be fully repealed, disappearing entirely. However, merely one year after the full repeal of the death tax, due to a sunset provision included in the current law, the death tax will revert back to its original rate of up to 55 percent in the year 2011. Meaning the government could potentially take up to 55 percent of your estate.

Under the Current Law "2001 Tax Act" - Estate Tax Changes
Calendar Year Estate Tax Applicable Exclusion Amount Highest Estate, Gift and GST Rates
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 TAX REPEALED 35% (gift tax only!!)
2011 $1 million 55% - SUNSET

In January during a speech to the Chicago Board of Trade, President Bush again called for permanent repeal of the estate tax. The President stated "We thought it was unfair to say to a farmer and a small business owner, the government is going to tax you twice, so we put the death tax on the road to extinction...to keep this economy growing, to keep the entrepreneurial spirit alive, to make sure that the United States of America is the most productive nation in the world, the United States Congress must make the tax cuts permanent."

Because the death tax is a tax that requires substantial planning, and because it is impossible for business owners to plan for what year they might die, some in Congress and the majority of the small business community believe it is critical that repeal of the death tax be made permanent. Until these important changes occur, family businesses will be forced to continue to spend many thousands of dollars annually on planning and life insurance - money that could be much better spent on needed investments in the businesses and on growing jobs in local communities.

In addition to the rising costs of operating and maintaining a small business, the burden of the death tax is one of the largest challenges facing family-owned businesses. Contrary to arguments by opponents of permanent repeal, this tax does not result in the redistribution of wealth, but in its further concentration. Because of the death tax family owned businesses are often forced to sell either in anticipation of the tax or in order to pay it. These businesses - owned by many entrepreneurs - are made easy targets for larger, non-local, publicly traded companies to swallow up - at greatly reduced values.

The majority of Construction companies and particularly Masonry Contracting firms are small family-owned businesses and are particularly hard hit by the death tax burden, since the value of these businesses is not in liquid assets. When the owner of a Masonry Company dies, the value of the company is added to the owner?s estate and is taxed after exemptions. The individuals who inherit the family-owned business are forced to pay the government up to 55 percent in taxes on all assets received including: Land, Buildings, Equipment and all other forms of property. Due to these circumstances, almost one-third of all small business owners today will be forced to sell outright, or liquidate a significant portion of their company to pay taxes owed after the death of the owner. According to the Small Business Administration, 77 percent of failed family businesses entered into bankruptcy following the death of the founder.

Critics of permanent "death" tax repeal argue that because of a growing deficit and the recent devastation by hurricanes Katrina and Rita, that repeal of the "death" tax would be detrimental to our economy. However, it is a fact that, this tax brings in less than 1.1 percent of total federal revenues. In addition, it costs the federal government almost as much to enforce as is collected.

On April 13, 2005 the House of Representatives passed H.R. 8, "The Death Tax Permanency Act of 2005," with broad bi-partisan support, which would permanently repeal the death tax for good. The companion measure in the Senate S. 420, sponsored by Senators John Kyl (R-AZ) and Bill Nelson (D-FL) is currently being considered by the Senate.

This is a very contentious issue, which cannot be defined clearly along partisan lines.

Although, a majority of Senators support permanent repeal of the tax, supporters of permanent repeal fear that there are not enough votes in the Senate to achieve a victory on permanent repeal. Senator Kyl one of the Senate leaders on estate tax is now proposing a compromise. The small business community continues to lobby for permanent repeal, however, they would be willing to support a reasonable compromise should it be presented. Parties on both sides of the aisle are eager to get this issue out of the way since this is an election year. Neither side can afford for this to be an issue during the mid-term elections.

It is important that you and your family are aware of how the estate tax affects you, your businesses, your children and your employees. Repeal of the estate tax is supported by over 60 national business organizations. Family businesses spend hundreds of thousands of dollars on lawyers, accountants and insurance for the purpose of estate tax planning. These resources could be put back into the business to hire new employees or modernize equipment to help the business become more competitive. It is no surprise that the most vocal groups opposing repeal and promoting reform of the estate tax are estate tax accountants, estate tax lawyers and term life insurance companies, those who stand to profit by keeping the estate tax law on the books.


About the Author

Jessica Johnson Bennett was the Director of Government Affairs for MCAA. She has an extensive background in public affairs and government relations. Her expertise in strategic planning, PAC management and operations help on key policy issues.

 

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