Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Why the estate tax destroys businesses, farms, and families

Posted by sanityinjection on December 4, 2009

One of the most insidious forms of federal taxation is the estate tax, which is assessed on the estate of a person who dies before their assets can be passed on to their heirs. It may surprise readers to learn that such an estate is currently taxed at a whopping 45% tax rate.

The reason many Americans are unaware of the tax is that it is limited to estates worth more than $3.5 million. That seems like a lot more money than most of us will ever see. So who cares if rich people can’t pass on all their wealth to their children?

Aside from the philosophical question of whether we should be punishing people for being successful and trying to provide for the future of their families, what a lot of people don’t realize is that you don’t have to be rich to be affected by the estate tax. Here’s how.

Let’s say that your father owns a farm or small business worth $4 million. You and your four siblings work full-time for this farm or business. Other than your modest wages, any profits are re-invested into the business. So you and your family do not live like rich people at all.

Now your father passes away. In his will he seeks to give you and your siblings equal shares in the business worth $800,000 each. But wait – before you can inherit, your father’s estate must pay estate tax on the full value of the business. Assessed at the 45% rate, the estate owes $1.8  million to the federal government.

The problem is, your family does not have $1.8 million in cash or liquid assets to pay this tax.  The only asset worth that much is the business itself. The only way to pay the tax is to sell the business to someone else for cash, pay off the tax bill, and then distribute the remaining cash to you and your siblings – amounting to $440,000 each. So you end up with about half of what you should have received, but worse, the family business is gone and along with it your job and possibly your home if you lived on a family farm.

There are ways of avoiding the estate tax. Your father could have sold you the business before he died and only paid a 15% capital gains tax – very convenient if you’re fortunate enough to predict when you’re likely to pass away.

The issue is coming to the fore again because the House recently passed a bill extending the tax for another year. While the House and Senate quibble about what the estate tax rate should be, instead they should be raising the exclusion level higher than $3.5 million or repealing this punitive and unfair tax altogether.


2 Responses to “Why the estate tax destroys businesses, farms, and families”

  1. Jess Chapman said

    At one point, Sen. Russ Feingold proposed exempting all estates worth less than $100 million, and continuing to exempt family farms. How would you feel about that?

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