#4: Who Pays the Estate Tax

The Myth & Misconception: 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 farms in order to raise the money to pay the tax.

Wrong! The estate tax applies to a small fraction of 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. Since then, the exemption has risen to $5 million. This means that a husband and wife, each with a $5 million exemption, can leave $10 million to their family, friends, or any others, tax free.Also, a surviving spouse can receive an unlimited inheritance (even billions of dollars) from the 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 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.

 If the owner of the business or farm is worried about potential estate taxes, he can give interests in the business or farm 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.

If the Bush tax cuts are not extended by the end of the year, the estate tax exemption will fall to $1,000,000. But neither liberals nor conservatives expect that will occur. Most experts believe the exemption is likely to be at least $3.5 million, as it was in 2009.

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