Death Tax

DEATH TAX
Will Kill Family-owned Businesses

The death tax, otherwise known as the estate tax, is all about wringing the last drop of blood-tax from family businesses when the owner dies – that is, those families that still have a business after the gutting of the US economy by the Washington politicians (Democrats and Republicans alike) and the special interest groups!

Some basic facts about family businesses:

Yet only about 30% if family businesses successfully transition to the second generation of ownership; 12% successfully transition to the third generation and only about 3% make it to the fourth generation.

One of the major problems that contribute to why so many family businesses fail to survive to the next generation of family ownership – estate taxes. The death tax.

Can family businesses do a better job of tax planning to help mitigate the damages done by the death tax? Absolutely! We urge every family business to do a better job of estate tax planning. Working with the tax advisors of our family business clients is part of the succession management services provided by the Family Business Institute

The American Family Business Foundation (AFDF) is not related to the Family Business Institute. It is an organization of family business owners and farmers. Recently they released two studies that help to illuminate the consequences of the death tax.

Released today at a Capitol Hill policy briefing, the first of the two studies found that the estate tax, because it discourages the expansion of small businesses and causes a drag on the economy, generates virtually no net government revenue and, in fact, appears to produce a “net revenue decrease.” The second study found that the overall economic impact of the tax “is negative, statistically significant, and far stronger than the impact of … income taxes.” Both studies showed that small business owners expand their companies more slowly and add fewer employees when estate tax rates increase – and increase investment and add more employees when rates drop.

According to Dick Patten, AFBF President:.

“The story they tell is simple: Eliminating the estate tax would cost the federal government virtually nothing, but would produce as many as one-and-a-half-million new jobs.” Compare that, Patten said, to the stimulus package approved earlier this year, which will cost $787 billion to generate or ‘save’ an estimated 3 million to 4 million jobs. “On the one hand we have 1.5 million jobs at zero cost; on the other hand we have 3 to 4 million jobs at a cost of $787 billion. You do the math.

“Put another way, a low estate tax rate provides an incentive to grow the family business,” said Patten. “A high estate tax rate provides the opposite.”

American Family Business Foundation

An even playing field? The U.S. death tax (estate tax rate) is one of the highest in the world. Countries that do not have a death tax include China, India, Russia, Australia, Canada, Mexico, and Sweden.

Some argue that the death tax is another form of “class warfare” that has been going on since the Johnson Administration. The latest attack – a proposal to limit discounts on minority shares, has been made by Democrat Earl Pomeroy from North Dakota.

We asked our Family Business Valuation Expert, Brad Davidson, to comment:

"The valuation discount has long been a thorn in the side of the IRS and revenue-seeking politicians. Congressman Pomeroy's bill is just the latest in a long line of proposals that seek to eliminate valuation discounts for shares in family businesses and especially family limited partnerships.

"Congressman Pomeroy (D-North Dakota) is a "back-bencher" and his bill has no co-sponsors, so the scuttlebutt is the Pomeroy bill is unlikely to pass. But other legislators with more clout -- such as Sen. Max Baucus (D-Montana), Senate Finance Committee Chair, are rumored to be sponsoring similar bills that will have a greater chance of becoming law. Given the current composition of the Administration and Congress, I think it is reasonable to assume greater hurdles lie ahead for family business owners who wish to transfer discounted shares to loved ones.

"Valuation discounts are real: buyers are not willing to pay as much to own a minority interest in a private business as they are to own shares in a public company with equivalent characteristics. But business owners and their advisors should make sure stock transfers and gifts are accompanied by a current valuation prepared by an experienced, credentialed appraiser. A good valuation doesn't cost much but it can save a lot of time, money and heartache down the road."

Brad Davidson, CEO, SPARDATA

If you have a question about valuation and your family business, you can pose that question to family business valuation expert Brad Davidson using the ASK THE EXPERT form located at the bottom of this page.

From an IBD editorial:

"By and large, the death tax is borne by people who own small businesses, who haven't had the benefit of big corporate lawyers and big corporate accounting offices to prepare them for paying this tax," says William Beach, a senior fellow in economics at the Heritage Foundation.

Clearly, if you are family business, you should be contacting your Senators and Representatives in Washington DC – let them know how you, a family business owner or a member of a family in business together, think about the death tax!

But don't expect help from our elected officals - contact your business valuation expert, your CPA and/or your tax attorney to make sure you have an estate tax strategy that will protect your money and your family's business from the IRS!

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