The Economic Growth and Tax Relief Reconciliation Act of 2001 did a number of good things for small companies. For example, the act calls for the estate or “death” tax to be phased out by 2010. During the next eight years, this means that should a business owner die, his or her family won’t have to pay as much in taxes on the assessed value of the business. In 2001, the estate tax exemption was $675,000; it is $1 million this year and will be $3.5 million in 2009. The top estate tax rate, originally 55%, dropped to 50% in 2002 and will decline to 45% in 2009.
In June, however, the Senate voted down a proposal to make the estate tax repeal permanent. As a result, after just one year of no estate tax, it would come back in 2011. Watch for this to be a campaign issue in the fall.
Meanwhile, it’s a good idea to have a plan in place for paying estate taxes so your family won’t be forced to sell the business to cover the taxes. According to Paul Feiger, vice president of investments for Salomon Smith Barney, possibilities include:
- Life insurance: Some plans can be used to provide liquidity in order to pay estate taxes.
- Lifetime transfer of business interests: Transfer part of the business to a family member during your lifetime. The appreciation on the asset after the gift is made should not be subject to estate or gift taxes.
- Family limited partnerships and limited liability companies: With this kind of business structure, you can transfer part of your business to family members at a discount, reducing the value of the gift. Theoretically, this lets you retain control over your business while minimizing the size of your estate but still protecting your family’s wealth.