Estate-tax changes make planning a challenge
The government also takes steps to mitigate the pain: Qualifying estates can be granted a five-year deferral and given an additional 10 years after that to pay off the tax in increments. Other special benefits for small-business owners can help lower the final bill; for example, businesses can value their land as it is currently used, rather than at full market value.
But plenty of business owners with little risk of actually incurring the tax remain firmly opposed to it. "My experience has been that even those Americans who do not fall within [the estate tax], who are way under the limit, are still against having a lower [exclusion] limit because they envision themselves as being within the target category," said California estate planner Judith Perez. "They still have very strong opinions, because they see themselves as in a position to achieve it."
Zogby's poll findings back that up: While the majority (81.7%) of the survey's respondents have businesses with $1 million or less in annual revenues, nearly half (46.9%) said they believe that they are "very likely" or "somewhat likely" to be affected by the tax.
Of course, ideological opposition also plays a role. "It's the idea of visiting the undertaker and the IRS in the same day - you think, 'I paid taxes on this already,'" said Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce, a pro-business lobby that opposes the tax.
Chris Walters, manager of Senate legislative affairs for the National Federation of Independent Businesses (NFIB), points to the disproportionate toll of estate planning: "It's a lot easier for a big business to plan their estate, versus a small business," he said. "The expense of lawyers and the financial planning takes time away from growing a business."
But estate planners warn that a full repeal might not be as financially advantageous as estate-tax critics assume. One potential tripwire: the estate tax includes a unique "stepping up" provision for valuing inherited property that has increased in value since being acquired by the deceased, initial owner. The "basis" value of the property - which could include a business - is set to its fair-market value on the deceased's date of death, rather than its initial cost. What that means in practical terms is that beneficiaries can avoid capital-gains taxes on some of their inherited assets. (Step-up provisions will undergo a one-year modification in 2010, when the estate tax is slated to disappear for the year.)
"If you leave [your business] to your children, they get a stepped-up basis," explained Kathryn Jackson, a New York attorney specializing in estate planning. "So if [the children] turn around and sell it, there's little profit and little capital gains tax. If you repeal the estate tax, that benefit will go away. ...If all of your assets are in equipment, where is the cash to pay the capital gains tax?"
If the estate tax and its stepping-up provisions went away, calculating capital gains tax on a business created or purchased long ago could be a giant financial headache, Jackson added.
With so many issues coming into play, the only estate-tax certainty is that the next president will inherit a complex problem in urgent need of a solution. All sides agree that the current status quo - a full repeal in 2010, followed by a reversion to 2001-level tax rates in 2011 - can't be allowed to stand.
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