ESTATE TAX – THE GREAT DEBATE – Is It a Lion or a Lamb?


"...proper planning in most instances can navigate around any estate tax liability..."

There is a long history of debate regarding the federal estate tax. The implementation of the tax originally was to prevent the build-up of wealth that could lead to a creation of large estates and a permanent class of idle rich that would attempt to impose a monarchy.

While I am generally not in favor of raising taxes or the estate tax in general, there is a valid question as to whether the impact of the existence of the estate tax has any real negative impact on the majority of small business owners and family farms. Previously, President Bush tried to repeal the estate tax in his 2001 Tax Bill. President Bush succeeded to include provisions in the Bill that would phase the estate tax out of existence by the year 2010. The goal of the phase-out included in the Bill was to provide Congress with incentive to affirmatively decide the fate of the estate tax before its repeal in 2010. Now that President Obama has been elected, the fate of the estate tax has taken a different turn.

Under President Obama’s proposed new budget bill, there are provisions that freeze the estate tax at its 2009 level. The 2009 estate tax level provides for individuals with estates of up to $3.5 million to be exempt from estate tax which begins at a 45% tax rate, and married couples, with proper planning, can obtain an exemption of up to $7 million. In addition to using the aforementioned estate tax exemptions, there are additional estate planning tools which can, depending on the assets includable in an individual or married couple’s estate, provide for opportunities to possibly avoid estate tax on estates worth as much as $10 – 12 million or more.

The question then becomes is the estate tax a lion roaring down the path to chew up large pieces of individual’s estates, or is it a lamb in most instances avoidable and of no consequence?

According to a study by The Center on Budget Policy and Priorities, a Washington-based think tank, estate tax does not pose a significant problem to small business owners or individuals with family farms. That study claims that almost no small businesses or farm estates would owe any estate tax under the Obama budget bill. Based on the study’s analysis, fewer than .2% of all estates–2 of every 1000–will be subject to tax in 2009. Of the estates that are taxable, only about 1.3% are small business or farm estates. At the end of the day, the study purposes that only 3 out of every 100,000 people who die this year owning a small business or farm will be subject to any estate tax.

On the other side of the debate, the National Federation of Independent Business (NFIB) runs a separate organization, The Family Business Estate Tax Coalition, which primarily focuses its efforts to obtain a repeal of the estate tax. This organization argues that over the life of a business, the government collects income tax and other taxes. As a result, the group argues that the government has taken more than its fair share in taxes prior to an individual’s death. The organization further argues that the assets of a small business or family farm, including real estate, equipment, machinery and other business property can quickly add up to millions of dollars of value and yet only result in the production of a middle class income for the business or farm owner. While the individual, during their lifetime, may have paid for significant business assets, the group argues that the reality is that the individual only received a nominal return in income when compared to the overall value of the business assets.

The debate regarding estate tax will never cease as long as it is in effect. The lesson to be learned by an individual, small business owner or family farm owner is that proper planning in most instances can navigate around any estate tax liability.

Dan A. Penning
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