Wealth - Transfer Taxes Hit Small Firms

Jim and Lisa Miller became wealthy the old-fashioned way. They worked hard for it. Then, in a sudden traffic accident, they lost their lives, never having an opportunity to enjoy what they had accumulated. The Millers' two sons, Peter and Dave, were devastated when they heard the news about their parents. Peter and Dave Miller both worked in key positions at the electronics equipment distributorship their dad, Jim, helped build from scratch some thirty years ago. With their dad now gone, their business troubles had just begun.

Before the dust had even settled, and as if to add insult to injury, the executor of the Miller estate came to a grim conclusion. The business had to be put up for sale to pay estate taxes due! The topic of business succession had come up when the family got together every so often, but Jim never seemed to find the time from his hectic work schedule to get down to some serious estate planning. Unfortunately, there was none in place when the accident happened.

Potential Safeguards

One of several possible steps Jim Miller could have taken would have been to relinquish part of his ownership and to have transferred it to his two sons, using certain gifting or sale techniques. Handing over control, and becoming a minor stockholder in the business he had built and run so successfully, may not have been an easy thing to do. But, it might have helped shrink his assets and reduce the crippling tax bite. Additionally, he could have set up appropriate trusts to ensure the net estate passed on without hindrance to his heirs, as well as to help pay for taxes that came due.

In the year 2007, the applicable exclusion amount is $2,000,000. Estates exceeding this amount are liable for gift taxes if assets are transferred while the owner is alive (and the gifts exceed the annual gift tax exclusion of $12,000 per donee and $24,000 for gifts made by married couples in 2007), and for estate taxes after the owner's death. Estate taxes are due within nine months, and a six-month filing extension is available, but the Internal Revenue Service (IRS) allows qualifying farms or closely-held businesses to defer taxes and then pay by installments (with interest) over as long as 10 years. However, according to IRS records, very few businesses choose to defer estate tax payments. Family-held businesses need to take estate planning steps to avoid a likely drain on valuable assets and the possibility of a closely-held ownership coming to an abrupt end.

Team Work

You'll need to hire an attorney and accountant in order to devise an effective strategy to move assets out of your taxable estate. This is an ongoing process that might involve the setting up and administration of trusts and other instruments. While there are obvious costs involved in implementing an estate plan, there is no doubt that it is well worth the effort.

One effective tool estate planners often use to help fund estate tax payments is the irrevocable life insurance trust (ILIT). The ILIT purchases and owns a life insurance policy on your life (the donor). The policy premiums are funded by annual gifts you make to the ILIT. You could use your annual gift tax exclusion to fund the ILIT. In more advanced uses, the ILIT can be strategically employed to help ensure continuity in a closely-held business.

You've worked hard to build your business and will want to avoid finding yourself in the situation the Millers faced, although actual estate planning experiences will vary. Since the future operations and/or growth of a family-owned business could be severely affected by its estate tax obligations, it is important to set up and implement an estate plan before it's too late. Call on your financial professionals to help you put together a suitable plan that works for you, your business, and your family.

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