There are 9.1 million women-owned businesses in the United States. They employ 27 million workers, more than all of the Fortune 500 companies in the world. Women are starting businesses at twice the rate of men and so they are becoming more aware of the death tax and the terrible effect it could have on their families, their employees and their businesses. Patricia Soldano explains the implications of the current rules on estate tax and stresses the need for women to take charge of their affairs.
The estate tax, known by its opponents as “the death tax,” taxes the assets of the second-to-die spouse (in the case of a married couple) because the law provides for a marital deduction that allows the transfer of assets from one spouse to another without a tax being incurred. In other words, the marital deduction does not eliminate the death tax. It merely defers the tax until the second spouse dies, and since women typically outlive men; the children usually pay the tax from the assets of the wife.
The tax of 41- 48 % on all assets is due nine months after the date of death. To pay the tax, children may have to liquidate businesses, terminate jobs, or sell personal assets. The first $1.5 million of assets for each spouse are not taxed if the proper estate planning is done while both spouses were alive, but once these lifetime exemptions are used, the tax rate graduates rapidly.
Risk to your business
If a family owns a small business, a home and a car, the asset size can reach the $3 million level very easily. Many small farms and family-owned businesses have land, equipment, inventory, and supplies that are illiquid and make it very difficult for the children to pay the tax without selling the whole operation. So, often the requirement to pay the tax causes an elimination of the family business and family legacy. It may also terminate the opportunity for the children to continue the business. The ownership structure, or type of asset or business does not change the requirement to pay the tax.
Homes, cars, furniture, stocks, bonds, pension plans, CDs, cash, and businesses are all subject to the death tax. Owners of assets, shareholders, partners, and individuals pay the death tax; corporations do not pay a death tax. So families are responsible for hiring attorneys and accountants, buying insurance and spending thousands of dollars planning to pay the tax. As previously stated, since women typically outlive men, they are left to plan and prepare to pay the tax. Unfortunately, many women are unaware of the tax, or only become aware after the husband’s death, when planning becomes more difficult.
Not only is a tax due at death but, if you wish to gift these assets during life to anyone, including your children, the same tax on the value of the gift will be due from you. There is a provision that you may give $10,000 per person, per year, without a gift tax and you can use your $1 million lifetime exemption either during life or after death.
In addition, if you wish to give to your grandchildren, during life or after death, you may pay an 80% rate above and beyond a $1,000,000 lifetime exemption. The purpose is to prevent family members from passing their assets on to other generations or skipping a generation of estate tax.
It takes time
Women business owners are becoming more aware, that it takes about three generations to create a standing in the community and to create a legacy for the family. The payment of the death tax can eliminate that legacy because the business must be sold to pay the death tax.
Too many women leave the family’s financial planning to their husband and are totally unaware of the family’s assets, or the fact that a 48% tax on all their assets may be due at their death. As explained earlier this can lead to great harm to children, employees, community organizations and others. Women need to make sure that planning for the death tax has been done and that they understand it.
Patricia M. Soldano is President of the Policy and Taxation Group