Estate Issues for Business Owners
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For today's business owner, death can mark the beginning of a significant estate tax problem. The investment and sweat that went into building your business year after year could add up to a whopping federal estate tax bill for your heirs -- up to 45% of the combined value of your company and other assets.
The 2001 tax law gradually increased the estate tax-free figure, from $1.5 million in 2004, topping off at $3.5 million by 2009. This amount, known as the “exemption equivalent,” may be large enough for you to pass on your entire business free of federal estate taxes. But after both you and your spouse die, estate taxes will be due if the surviving spouse’s estate is worth more than the exemption equivalent. Estate taxes above the exemption equivalent can be up to 45% (in 2007) on amounts over $2.0 million. While estate taxes are scheduled to be eliminated in 2010, the next year the tax rates return to 55% with an exemption of $1 million.
At first blush, the amount which is exempt from estate taxes -- currently $2.0 million -- may sound like a huge sum. Many business owners mistakenly assume they have less than that and figure no special estate tax planning is needed. Unfortunately, they tend to undervalue their assets or fail to take all of them into account. You may have accumulated several hundred thousand dollars of equity in your home. The value of your company, rental properties, your pension plan and other savings are also part of your estate, as is your life insurance policy if you own the policy or have incidents of ownership in the policy (such as retaining the power to change the beneficiary) at your death.
Even if you don't consider yourself wealthy, it's easy to see that $2.0 million-plus in assets is quickly accumulated. If you and your spouse had combined assets of less than $2.0 million when your will was first written, but now exceed that amount, it's likely you'll need some estate planning.
With careful planning however, there are still ways to reduce the tax burden on your loved ones, while keeping the business intact. Some of the most commonly used strategies are Qualified Personal Residence Trusts (QPRTs), Grantor Retained Annuity Trusts (GRATs), other trusts and Business Gifts.
Entrepreneurs tend to be do-it-yourselfers. But estate planning is an area where the solo approach could be risky. There are many ways to run afoul of the rules. In planning your estate, seek the advice of an experienced financial planner who is knowledgeable about closely held businesses.
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