Understanding Estate Tax: What It is and What Your Family Business Needs to Know

Estate taxes are levied on the fair market value of an estate passed to heirs upon the death of its owner. As they pertain to a business, ownership (title) of a family business is an asset of the estate and is included in the overall estate on which tax may be due.  If there is a surviving spouse, the federal government and most states allow a marital deduction for the estate to pass to them without additional taxes. This is merely a tax deferral and possibly postpones the tax that may eventually have to be paid by the estate of the surviving spouse. If there is a large family business at stake, there is also the potential for a large estate tax.  An inability to pay the taxes may exist if funds are all tied up in non-liquid assets. Any estate tax paid also means less capital for investment in the business and less to be distributed to the ultimate beneficiaries. With the potentially high price of the federal and state estate tax itself, there are many considerations for planning.


Following are some aspects of estate tax planning that you should know in order to protect your family business and your family’s interests before it is too late.


Understand the laws that pertain to your business. There are federal laws that affect the estate tax (e.g., the American Taxpayer Relief Act of 2012 that went into effect this January 2013), and states have their own laws that affect how an estate and the family business transfer is taxed.  If the most recent American Taxpayer Relief Act had not been passed, businesses would be looking at a 55% tax (with a $1 million exemption), up from 2011’s 35%. However, the new law increased the tax rate for 2013 to 40% with a $5.25 million inflation adjusted exemption. It is possible the estate tax can be changed again since new IRS tax acts have passed every year since the turn of the century except 2000, 2007 and 2011. Regarding estate tax laws by state, currently New Jersey has an exemption of $675,000 while New York’s exemption is $1 million – so there are also differences depending upon where the decedent is located.


Plan to reduce your estate taxes. Of course, the primary goal is to reduce (or eliminate) the amount of estate tax that would have to be paid upon the passing of the family business to the heir(s). There are state and federal exemptions which are also affected by any monetary gifts that have been bestowed during the living years. Gifts, stock transfers, trusts and other tools may be utilized as part of the estate tax plan.


Plan to handle payment of estate taxes. The passing of a family business’ leader is of itself difficult for all involved; being hit with a huge estate tax especially when the passing was most untimely could be the end of the business as well. If the value of the business is tied into machinery, equipment and other assets that cannot quickly and easily be turned into money to pay the taxes, the business may have to be sold to cover it. This is a tragic and all-too-real result for many unprepared family businesses. Having an understanding of what would be required upon the passing of the owner, as well as managing the company’s assets to provide access to easily liquefied capital could save your family business.


Determine succession/transfer of ownership. There cannot be a discussion of family business estate tax without one of succession. As possibly the most crucial plan in a family business yet missing from so many firms, the formal succession plan provides for the passing of the business with advanced notice, with the goal of ensuring the successful continuation of the business. Although not the focus of this particular post, succession planning must be considered as part of the estate tax plan.


Work with an expert to navigate estate taxes. All of the items mentioned above confirm the need for estate tax planning specialists, specifically CPAs or attorneys and other financial experts who practice estate law. These experts can help, utilizing tools such as stock transfer prior to death and establishments of trusts with a goal of reducing the heirs’ liabilities and making planning easier. Whether it’s navigating the state and federal laws, determining how and when to make financial gifts and charitable deductions prior to year-end, or suggesting a mix of liquid and non-liquid assets – your estate tax specialist can lead the way.


We firmly believe that family businesses are better served with the short-term cost of a well thought out and periodically reviewed succession plan and estate plan in order to allow the most value to pass to the next generation, as well as the peace of mind that comes with planning.


Contact me at lconover@curchin.com or 732.747.0500 with questions or to receive a complimentary consultation with our family business advisors.