The estate-tax toll on small firms

Nation's Business,  August, 1997  by Joan Pryde

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Another popular estate-planning technique involves the annual gift giving that is tax-free as long as it doesn't exceed $10,000 per recipient. The gifts can be in the form of stock or other assets.

Another popular tax-minimizing technique involves tax-exempt charitable bequests of business interests.

Business owners can also shelter assets from estate taxes by creating one or more trusts. While there are numerous ways to structure trusts, all offer the benefit of removing taxable assets from an estate.

A Demanding Task

To hear some estate planners talk, all a small-business owner needs to do is pick the best tax strategy, put it into place, and forget about the estate tax. But advocates for small business and many owners themselves say it's not that simple.

The level of estate planning needed to minimize estate-tax liability significantly "generally requires a business to have a lot of discretionary cash to hire attorneys and accountants who can mastermind a plan to thwart the punitive nature of the estate tax," says Karen Kerrigan, president of the Small Business Survival Committee, a lobbying group based in Washington, D.C. And that amount of discretionary cash is not always available.

Grafton "Cap" Willey knows. Not only is he a small-business owner, but his business handles other people's finances. He is a co-owner of Rooney, Plotkin & Willey, an accounting firm in Providence, R.I. "You can create trusts, and you can create other vehicles, but they're very costly to administer, and they're very prone to being overturned by the IRS if you don't dot every `i' and cross every 't,'" Willey says. Trying to get around the estate tax "creates wonderful work for accountants and lawyers, but that's not really to the benefit of the small business."

For many small-business owners, the demands of developing their companies are so great that estate-tax planning catches them unawares.

When Ron Deabler and his father, John, a manufacturers' sales representative in Brookfield, Wis., visited an attorney three years ago to set up a succession plan for John's business, they didn't realize that they were going to have to plan for the estate tax.

Until then, "I never really knew what the implications of the estate tax were," says Ron, who owns American Technical Services, a small employment-placement firm in Brookfield.

John's sales business, which he started in 1959 with $100, has grown to a net worth of $1.5 million to $2 million, his son estimates. John's other wealth should push the value of his estate to several million dollars. Ron guesses that if the Deablers had not developed an estate plan, it would have become necessary eventually to sell the business to pay the estate taxes. But their lawyer created several trusts to shield the estate's assets from tax. The set-up cost was about $10,000.

That's not the end of it. Ron says the family will have to spend considerable time and money every year completing tax returns on the trusts to make sure they are legal. "Why should we have to jump through these hoops?" he asks.