The federal estate tax is a levy on an individual’s transfer of property enacted at death. Family businesses, farms, and ranchers are hit disproportionally hard by the federal estate tax. Family business owners tend to be “asset rich and cash poor” which often leaves them with large estate tax liabilities but no cash on hand to pay the tax.
Many family businesses must keep inventories valued in the millions to service customers. This inventory often accounts for a vast majority of the family’s assets. When the owner of the business dies, the family may be forced into selling equipment or liquidating the entire business in order to raise the cash for the estate tax. Selling the business to pay the estate tax bill could mean selling at a deep discount to find potential buyers.
Estate Tax Studies
See a list of studies about the estate tax on our Studies page.
Estate Tax Repeal
Senator John Thune (R-SD) and Congressman Jason Smith (R-MO-8) have both introduced a bill that will permanently repeal the federal estate tax and generation skipping tax. The Family Business Coalition will be working with our member organizations to gather cosponsors to the bills. Check back in the future to see if your Congressman or Senator is a cosponsor.
We don’t believe death ought to be a taxable event. If you look at what families go through in the grieving process, its really ironic that we penalize and punish them through the tax code after they have worked really hard over a lifetime to build up some equity, some assets, that they hope to pass on to the next generation.
History Of The Estate Tax
The estate tax has been used four different times in American History. The first three times the tax was imposed for defense purposes and repealed shortly after.
The First Three Estate Taxes
Starting in 1797 a stamp tax was imposed on wills and estates to raise funds for an undeclared war against France. This tax was used for five years before being repealed in 1802. The second death tax was imposed to raise funds for the Civil War starting in 1862 and was repealed in 1870. The third imposition of the estate tax was in 1898 to pay for the Spanish-American War and was repealed four years later in 1902.
The Modern Federal Estate Tax
The federal estate tax was reinstated in 1916, to pay for the U.S. involvement in World War I. Unlike the previous impositions of the estate tax, this one was not repealed after the war and remained in place until a brief one year repeal in 2010.
In 2017, the Tax Cuts and Jobs Act doubled the amount of assets businesses, farmers, and ranchers can protect from the estate tax by raising the exemption level to $11.2 million or $22.4 million with spousal portability. Unfortunately, this exemption increase is only temporary. In 2025, the exemption level will return to the previous $5 million at the current 40 percent tax rate.
Skipping Generation Tax and Gift Tax
In 1976 Congress ensured that the transfer of any significant amount of assets was taxed through the estate tax, generation skipping tax, and gift taxes. The gift tax applies to any gifts above $12,000 in a year (and any gifts in a lifetime over $1 million) and the generation skipping tax applies to any gifts that “skip” the first generation (children) and go to grandchildren. This cadre of taxes ensures the federal government collects any large transfer of assets.