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University of Massachusetts Amherst

Family Business Center

You Ain't Seen Nothing Yet

by Ray Gianantonii, MassMutual

If you're a "typical" business owner, one of the things that really gets your goat is income taxes... after all, they are nominally as high as 39.6%. I say nominally, because they are actually higher because of the phase-out of certain exemptions at those levels. It reminds me of the late Senator Everett Dirksen who referring to the Federal Government's budget said " a billion here, a billion there... before long it amounts to real money !" No wonder our taxes are so high.

Actually, income taxes are not that high. At least in comparison with estate taxes. You see the lowest tax bracket for Federal Estate taxes (after exemptions) starts at 37% and escalates to 55%. Why aren't more people screaming about this ? Well, two thoughts come to mind: 1) the deceased party's estate pays the taxes and dead people (usually) don't talk too loudly 2) most living people think estate taxes are for the rich only and they don't think they're rich. Let's examine what rich is, at least according to the IRS.

There are no Federal Estate taxes on $600,000 (actually $1,200,000 if proper planning is done and this does not mean a simple will) so at first blush, it does look like a tax on the wealthy. But it's not hard to have $600,000 in your estate. Everything that you have an "incident of ownership" in would count towards the $600,000... your home(s), pension and profit sharing plans, fair market value of your business and face amounts of life insurance are just a few of the items that would be included as assets. Outstanding debts are subtracted from this sub-total, the tax computed and a credit of up to $192,800 applied (the tax on $600,000) . You can leave tax-free an unlimited amount to your spouse(the so called unlimited marital deduction). The tax is a minimum of 37% and is due 9 months after death.

What happens if there is not sufficient liquidity in the estate to pay taxes ? Well, if your business accounts for 35% or more of your taxable estate, that portion of your taxes are eligible for installment payments (this is Section 6166 of the IRS Code). This means the estate can enter into an agreement with the IRS to make those payments (with interest, naturally) over a 14 year period. Congratulations, the IRS has just become a partner with your children in what is frequently the single largest asset in your estate.

What then should you do about these taxes ? First, determine if you think you have over $600,000 potentially taxable assets less debts in your name. If the answer is yes, do they total over $1,200,00 ? If the answer is yes to either of these, you probably should visit an estate tax attorney and/or your CPA. A couple with a simple "I love you will" and $1,200,000 leaving everything to his/her spouse can save approximately $240,000 in taxes with some relatively simple steps. Second, if your taxable estate exceeds $1,200,000 and you're comfortable that you have enough assets to enjoy retirement, you might consider a gifting program to your children and grandchildren... you can see their enjoyment and give away up to $10,000/recipient/year ($20,000 if your spouse joins in the gift) without incurring a gift tax (yes, it can cost you money just giving it away !). Beyond this, it starts becoming a little too complex to cover in an article like this but suffice it to say that life insurance outside your estate ( you shouldn't own it) can solve a lot of problems.

We've developed some user friendly software for calculating estate taxes and showing what the life insurance premiums would cost to solve the estate tax problems. If you'd like a copy of the software for yourself or your accountant, just cut off the label and return it to Ira Bryck who will forward it to us. We'll have the disk out to you within 10 days... at no cost. You can then get a pretty good idea as to what the damage will be. If you need more help after that, call myself, Charlie Epstein or our other sponsors. It's not that we don't want to call you, it's that the rules are you have to ask us first.

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