#4: Who Pays the Estate Tax
The M & M: The estate tax is truly a death tax. It applies to a significant percentage of all estates, and it commonly forces heirs to sell small family businesses or small family farms in order to raise the money to pay the tax.
In fact, the exemption is scheduled to rise to $3.5 million in 2009; the estate tax is to disappear in 2010; and the estate tax is to reappear in 2011, with its former exemption of $600,000 for each estate. We can ignore these developments for our purpose here, which is to consider the impact of the estate tax today. We also can expect that Congress, prior to 2011, will, at a minimum, raise the exemption amount far above $600,000.
Wrong! The estate tax applies to less than 1% of all estates each year; the remaining 99%-plus of all estates are exempt from tax. And it is rare for heirs of a small family business or farm who want to continue operations to be forced to sell the farm or business in order to pay the tax.
When President Bush took office, estates worth up to $600,000 were exempt from estate tax. But with the 2001 tax cuts, that exemption has been rising. This year, estates worth up to $2 million are exempt from tax. This means that a husband and wife, each with a $2 million exemption, can leave $4 million to their children or others, tax free. Also, a surviving spouse can receive an unlimited inheritance (even billions of dollars) from his or her deceased spouse free of estate tax.
What's more, when a small family business or farm is part of a decedent's estate, the estate is given special relief provisions that raise the exemption and allow a low valuation of the farm or business. And if the estate owes any estate tax, the share of the tax allocable to the value of the business or farm may be paid over 15 years at a low interest rate. The owner of a business or farm--let's say a father--can give shares of it to children and other family members over the years, which can greatly reduce the percentage he owns, and its value, when he dies. Finally, life insurance on the decedent's life usually can fund all or most of the estate tax, and the insurance, if owned by someone other than the decedent, will be exempt from estate tax as well.
To sum up: The cases are rare, and usually avoidable, in which a small business or farm must be sacrificed because of the estate tax. If, however, Congress wanted to guarantee that no small business or small farm ever had to be sold to pay estate taxes, it could do so without abandoning the entire estate tax.