The Estate Tax

Since 2002, the much-maligned estate tax rate has gradually decreased while the exemption level has increased—giving small and family-owned businesses some temporary relief. However, unless Congress acts soon, the estate tax is set to increase significantly, back to its 2001 levels, stripping from small businesses any sense of confidence in their ability to hand-down the family business.
 
Unfortunately, the legislation that made this temporary phase-out possible included a sunset provision that would limit all of the tax relief to 10 years, with only one year, 2010, free of estate taxes on small businesses. In 2011, the estate tax will once again include a meager $1 million exemption and a top tax rate of 55 percent.
For 2009, the estate tax exemption amount is $3.5 million ($7 million for couples), and the top tax rate on inheriting family members is 45 percent on all assets received—including land, buildings, equipment and all other forms of property. Federal estate and gift taxes harm family-owned businesses on an ongoing basis because the owner of the business must take various—and often very costly—estate planning measures such as purchasing insurance and/or the creation of trust funds to ensure the future viability of the business. If families do not take these steps, they may have to liquidate the business to pay the estate taxes. The temporary nature of the estate tax repeal may result in more confusion and complexity for small businesses, and therefore may increase estate planning costs.  
 
President Barack Obama and congressional Democratic leaders plan to move early in the 111th session to block the estate tax from disappearing in 2010, and instead institute a more permanent reform. It is expected that their proposal will freeze the estate tax rate at its 2009 top level of 45 percent and use the 2009 exemption level but index it annually for inflation. The cost over 10 years, according to the Joint Committee on Taxation, would be around $324 billion more than if the 2002 levels were restored.
 
As neither party wishes to see the 2001 law remain in effect through 2011, conditions seem ripe for a compromise. While it is unclear if the Senate will have the 60 votes necessary for any estate tax reform, Senate Democrats seem more anxious to address the issue now, while they have control of both the White House and Congress, and eliminate it from being an issue during the 2010 elections.
 
While NSBA continues to support full repeal of the estate tax, NSBA members have agreed to a five-point compromise plan that would permanently repeal the estate tax on small and family-owned businesses—including farms. It would exempt estates of $7.5 million with a tax rate set at 15 percent with it tied to the capital gains tax rate to ensure a more fair method of passing-down a business—regardless of what event triggered the transfer. The estate tax exemption would be fully-indexed for inflation and calculation of estate tax owed would include a step-up in basis, allowing heirs to use the higher basis to figure their gain when the property is ultimately sold. This compromise is necessary to make sure that small businesses can invest in the future and not in estate planning.  
 
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