Many small business owners work their entire lives to build a legacy to pass on to their children and grandchildren. Unfortunately, the federal estate tax often referred to as the "death tax" threatened that legacy up until 2001 ... and will again in 2011.
In 2001, Congress voted for temporary repeal of the estate tax, which would occur during a 10-year gradual phase out. In the year 2010, the estate tax will be fully repealed, disappearing entirely. However, merely one year after the full repeal of the estate tax, due to a sunset provision included in the current law, it will revert back to its original rate of up to 55 percent in the year 2011. This means that the government could potentially take up to 55 percent of your estate.
In January, during a speech to the Chicago Board of Trade, President Bush called for permanent repeal of the federal estate tax. Bush stated, "We thought it was unfair to say to a farmer and a small business owner, the government is going to tax you twice, so we put the estate tax on the road to extinction ... to keep this economy growing, to keep the entrepreneurial spirit alive, to make sure that the United States of America is the most productive nation in the world, the United States Congress must make the tax cuts permanent."
Because the estate tax requires substantial planning, and because it is impossible for business owners to plan for what year they might die, some in Congress and the majority of the small business community believe it is critical that repeal of the estate tax is made permanent. Until these important changes occur, family businesses will be forced to continue to spend many thousands of dollars annually on planning and life insurance money that could be much better spent on needed investments in the businesses and on growing jobs in local communities.
The majority of construction companies in particular, masonry contracting firms are small, family-owned businesses that are extremely vulnerable to the estate tax burden, since the value of these businesses is not in liquid assets. For instance, when the owner of a masonry company dies, the value of the company is added to the owner's estate and is taxed after exemptions. The individuals who inherit the family-owned business are forced to pay the government up to 55 percent in taxes on all assets received, including: land, buildings, equipment and all other forms of property. Due to these circumstances, almost one-third of all small business owners today will be forced to liquidate a significant portion of their company, or sell outright, to pay taxes owed after the death of the owner.
Critics of permanent "death tax" repeal argue that, because of a growing deficit and the recent devastation by hurricanes Katrina and Rita, repeal of the estate tax would be detrimental to the U.S. economy. However, it is a fact that this tax brings in less than 1.1 percent of total federal revenues. In addition, the revenue is often a wash, as it costs the federal government almost as much to enforce it as is collected.
This is a very contentious issue, which cannot be defined clearly along partisan lines.
On April 13, 2005, with broad bipartisan support, the House of Representatives passed H.R. 8, "The Death Tax Permanency Act of 2005," which would permanently repeal the estate tax for good. The companion measure in the Senate, S. 420, sponsored by Senators John Kyl (R-Ariz.) and Bill Nelson (D-Fla.), is currently being considered by the Senate.
Although, a majority of senators support permanent repeal of this tax, supporters fear that there are not enough votes in the Senate to achieve a victory. Therefore, Kyl is now proposing a compromise. While the small business community continues to lobby for permanent repeal, most would be willing to support a reasonable compromise should it be presented. Also, parties on both sides of the aisle are eager to get this issue out of the way since this is an election year; neither side can afford for this to be an issue during the mid-term elections.
In closing, it is important that you and your family are aware of how the estate tax affects you, your businesses, your family and your employees.
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