Estate Tax Implications

If you die owning a business, the business you leave behind becomes part of your estate. If the value of your small business makes up more than 35% of your adjusted gross estate, your executor may elect to pay the estate tax attributable to the business interest over a 14-year period. Under this provision, there is no limit on the amount of tax that may be deferred. However, your estate will also have to pay interest to the government on the deferred amount (the interest rate has varied since 1990, to rates as high as 11%). In effect, the government will own a "mortgage" on the estate.

The easiest way to avoid estate taxes is to die poor. However, assuming you cheat an early death and die reasonably successful, here’s a little something to think about. It is possible that Congress may act and repeal the estate tax completely, set the estate tax exemption at some figure going forward, set the exemption at some figure (possibly less than $1 million) that will be retroactively effective in 2010, or do nothing in 2010 in which case the exemption amount returns to $1 million in 2011. A $1 million estate tax exemption may seem like a lot, but it really isn’t. For example, if you die shortly before retirement, your accumulated savings may easily exceed this amount. The same applies if you die shortly after you experience a sudden increase in wealth, for example lottery winnings, civil lawsuit judgment/settlement or an inheritance. Also, if not structured properly, life insurance proceeds could be included in your estate. Therefore, in addition to the applicable exemption amount, you always want to have a back-up plan or strategy in place to minimize the impact of taxes on the estate.