The estate tax provides no incentive for small and family-owned businesses to expand their business or create new jobs. In fact, it can tax the family right out of business. Much of the cost of the estate tax occurs before the tax itself is levied. Thirty four (34) percent of NFIB members have incurred expenses in the last five years in order to protect themselves and their heirs from estate tax liability, and another 15 percent expect to do so in the future. This tax applies to property transferred at death if the value of the property exceeds the estate tax exclusion. While the owner of the estate is responsible for the tax, their heirs often are responsible for the actual payment of the tax upon the death of the owner. The value of the estate to which the tax is applied includes all property the owner has an interest in at the time of death, including life insurance, annuities, and business assets. The threat of this tax actually forces small business owners to pay for expensive estate planning if they want to keep their business in their family.
In 2013, Congress passed the American Taxpayer Relief Act of 2012 (ATRA), which included a permanent extension of the $5 million exemption and a 40 percent rate is a significant step forward towards the eventual full repeal of the estate tax. By making estate tax policy permanent, family-owned businesses can finally have certainty about planning for the estate tax, which reduces planning costs and prevents the number of family-owned businesses hit by the estate tax. With a lower exemption level and a higher tax rate, many more family-owned businesses would have to plan for the estate tax in order to prevent the loss of crucial business assets after the death or retirement of the owner. While the ATRA’s estate tax provisions represent progress, the estate tax is still a drag on economic growth because it forces small businesses to undertake extensive planning that takes cash out of the business. Full and permanent repeal remains the best option for small businesses.
Watch NFIB member Patricia Baldwin, owner of Reliable Contracting in Millersville, MD talk about how the estate tax affected her family’s business after one of the principal owners passed away.