Estate (Death) Taxes
 
Federal estate taxes are due nine months after death, and the IRS wants payment in cash-not stock, real estate, etc. Your business, while quite valuable, is a highly illiquid asset. Your heirs may not have ready access to the funds needed to pay estate taxes and other final expenses. In the worst case scenario, they may be forced to sell the business to raise funds needed to pay estate taxes. Starting in 1998 the estate tax exclusion will increase to $625,000, up from $600,000 in 1997. It will increase to $650,000 in 1999, and keep rising until it tops off at $1 million in 2006.

 
Year Exempt Amount

1998 $625,000

1999 $650,000

2000,2001 $675,000

2002,2003 $700,000

2004 $850,000

2005 $950,000

2006 and after $1 million

 

Important new rules also apply to family-owned businesses and farms. Beginning in 1998, they receive a special $1.3 million exclusion from estate tax. This amount is not in

addition to the amount listed above, which is available to everyone. For example, when you die if the general exempt amount is $700,000, then a business that qualified for

the increased exemption would get another $600,000 exemption, for a total of $1.3

million. To qualify for this special increased exemption, the business must meet several rules:

It must be more than 50 percent of your estate.

Its principal place of business must be in the United States.

You must meet IRS participation requirements in the business before

your death.

You must leave your interest in the business to family members or people

who have been actively employed by the business for at least 10 years

before your death. (More rules apply if you leave the business to non-U.S.

citizens.)

If the people who inherit the business stop participating in the business for at least five of any eight-year period within the 10 years following your death, they will have to pay

back some of the tax that was avoided at your death.

 

An additional option that business owners have is found in IRC Section 6166: A Deferred Payment Schedule. The IRS created Section 6166 of the Internal Revenue Code because of the burden estate taxes place on business owners and their families. If your business qualifies, Section 6166 permits the executor of your estate to pay the portion of the estate tax attributable to your business in installments, as opposed to one lump sum. On the surface, a deferred payment schedule may seem attractive. Your estate avoids the immediate burden of a lump sum payment, allowing your business to run its normal course of operations. In the long run, however, there are several potential pitfalls that must be closely examined. The IRS places a tax lien on your business to ensure that all installment payments are met. Your estate will remain open and unresolved for the duration of the installment period. The greater debt may hurt the company's credit and hinder its ability to raise funds. If the executor of your estate misses one scheduled installment payment, the IRS can demand the immediate payment of all unpaid taxes. The sale, exchange, distribution, or withdrawal of one­half or more of an interest in the business also terminates the conditions of Section 6166 and triggers the acceleration of any unpaid taxes and interest due.

 

Other options- If your total value exceeds the exclusion, you should look into what a few simple planning techniques can save your family at estate time. In addition, there are some very effective estate planning ideas that can also cut your current income tax bill.

Some planning possibilities:

 

Current tax law allows you to give away $10,000 per year per recipient. Your spouse may join in the gift even if he or she is not an owner in the transferred asset. This means that you could transfer up to $20,000 per year to each of your heirs.

To double the annual exclusion yet again, you may want to include spouses of your children. The person receiving the gift does not need to be related to you. These annual gifts do not reduce your once-in-a-lifetime exclusion.

If it is a large income-producer, the future income will be taxed to the new owner and not to you, plus the property will be out of your estate.

You can make unlimited transfers to your spouse either during your lifetime or through your estate. There are no taxes on spousal transfers, regardless of size. But leaving everything to your spouse may not be a good idea, since doing so fails to

utilize the lifetime exclusion amount in the estate of the first spouse to die. Planning will allow you to use the exclusion in both estates, and you'll be able to transfer twice as much to your heirs free of estate tax.

Related Web Sites

http://www.nolo.com/ChunkEP/EP.index.html – This site provides information on wills and estate planning. It has extensive information on estate and gift taxes.

http://www.rbvdnr.com/te/1.htm - This site focuses on estate planning and looking at ways to minimize estate taxes.

http://www.newyorklife.com/viewer/wsh-nyl.hts/nyl/bfreet.html – This site examines the small business owner’s option to defer estate taxes when dealing with estate planning.

http://www.irs.ustreas.gov/prod/news/supp-gen.html#8 - This site provides information from the IRS tax supplements. There is a specific section dealing with estate planning and taxes.

http://www.dtonline.com/pfin/gtfarms.htm#generate – This site looks at farms and closely-held businesses and gives owners a guide to estate and gift taxation.