April 2005

ABCs of Accounting: Women Estate Tax

One of the concerns that successful independent business owners face is the problem of inheritance. This is not a topic that most of us are eager to consider since the plans always include the fact of our mortality. However, we cannot avoid this subject if we want to preserve as much of our business and estate as possible. One of the first questions is: “Can the business survive the transition from one generation to another especially if heavy estate taxes must be paid?” Fortunately for successful small businesses, the tax laws are changing to give these businesses a better chance to survive and continue.

This can be an extremely complex situation so if your estate is large, you must have specialized legal and accounting advice. But for those of us who have had some success but have not created Bill Gates size fortunes, here are the basic guidelines. Briefly, here is how estate taxes work. For 2005, if your estate has a value less than $1,500,000; there is no tax. (Actually tax is calculated but the tax law allows a credit of up to $555,800 not to exceed the amount of tax calculated. This credit shields the first $1,500,000 of the value of the taxable estate.) If your taxable estate value is between $1,500,000 and $2,000,000; the tax will be 45% of the amounts in excess of $1,500,000. If your taxable estate value is greater than $2,000,000; the tax will be 45% of $500,000 (the amount between $1,500,000 and $2,000,000) and 47% of the amount greater than $2,000,000.

The rates above are applied differently than similar taxes prior to 2004. Previously, estate and gift taxes were combined into a unified tax calculation. Now there is a limit for gifts made after 2002. The first $1,000,000 of gifts exceeding certain limits made during the taxpayer’s lifetime, are shielded from taxes. The new estate taxes are calculated as mentioned above. There is an additional tax which should also be mentioned. This is called a generation-skipping transfer (GST) tax. This is imposed to prevent a transfer skipping a generation without a transfer tax being assessed.

All of these taxes are designed to ensure that taxes are assessed on all transfers of property. The taxes are not assessed on the property but rather on the transfer of property from one taxpayer to another. The taxes do not limit or restrict any taxpayer’s right to receive the property whether it is a gift or an inheritance.

As you might have guessed, calculating the value of the estate and determining the best way to control the transfer of your assets, particularly the ownership of your business, can be extremely complex. The rules regarding community property, spouses who are not citizens, and property that has been transferred in the years preceding death can have a significant effect on the transfer process. If your business has been successful and you are concerned about its on-going viability, you should consult with legal and tax experts who specialize in estate and long-term family planning. After all, to the extent possible, we want our loved ones to benefit from our efforts not the IRS.