The year 2004: It is the best of times; it is the worst of times.... And so it is for owners of closely held businesses who are contemplating their own mortality--and the mortality of their family businesses.
It is the best of times: For heirs of people who die between now and Jan. 1, 2010, more can be transferred free of estate tax, and the top estate tax bracket will be reduced. For people who die during January 2010, there will be no estate tax at all. In fact, the amount that can be passed tax-free was increased so much that a special deduction for family business owners was repealed as of Jan. 1, 2004. As the threat of estate taxes is reduced or eliminated, business owners can concentrate on what makes the most sense for their families and their businesses rather than concentrating on what reduces Uncle Sam's share the most.
It is the worst of times: The complexity, unpredictability and arbitrariness of the federal estate tax law has increased exponentially. The present law concerning transfers at death provides that the rules will be different every year from now until 2011, as the advantages peak for heirs of taxpayers who die in 2009 or 2010 (depending upon their assets and their basis in their assets), and steeply decline for taxpayers who die in 2011 or thereafter. The uncertainty in the tax code means that business owners need to plan for even more contingencies than usual.
Thus, business owners must plan as if there still will be an estate tax at their death and therefore should consider all of the options traditionally considered in an estate tax regime, including:
* Family limited partnerships.
* Special valuation rules.
* Qualified family business exclusion (which would come back in 2011).
* Section 6166 deferral of estate tax with respect to certain closely held businesses.
* Marital trusts or marital distributions.
* Life insurance trusts to pay the estate taxes.
* Planned charitable giving options.
Business owners must also plan for the possibility that there will be no estate tax at their death and therefore should consider new techniques:
* Special kinds of trusts that will qualify for additional increase in basis.
* How to hold the assets in case the estate tax is reinstated before the surviving spouse dies.
* Different kinds of...