Franchise Lawyer Blog

Death, Taxes and You

The Wall Street Journal has reported that President Obama and congressional leaders plan to take steps to resuscitate the estate tax, also known as the death tax, despite years of efforts by various political interests to have it repealed. Why is this of interest to anyone reading this blog? It could be of enormous importance if you are a small or mid-sized business owner, as many franchisees and some franchisors are. Bear with me briefly and I will explain.

As commentators have noted , many small business groups, including the National Association of Small Business, have long fought for the repeal of the estate tax. But those efforts may ultimately prove to be unavailing.

President Obama reportedly will propose that the estate tax be maintained at its current levels, rather than be permitted to expire. Current levels call for a 45% tax rate on individual estates valued at more than $3.5 million. Historically, the rich have found various means of avoiding the estate tax. But small and mid-sized business owners have been less successful, in part because they do not have access to the tax planning resources that the rich do and in part because the asset in question, the family business, can be difficult to manipulate to a tax advantage.

Here is how the estate tax can affect you. Say you are the sole or principal owner of the entity operating a franchised business. You own 750 shares of XYZ Corporation, which owns and operates four franchised Salty Sea Dog seafood restaurants. The other 250 shares are owned by your two daughters, who work in the business. Let’s assume you are divorced and the four restaurants all are doing relatively well.

Now you die (sorry). Your will provides that the 750 shares of XYZ Corporation pass to your daughters. The restaurants are valued at a total of $7 million dollars fair market value by a hired appraiser. Subject to some limited deductions and whatever else is in your estate, that valuation alone creates an estate tax liability of $1,575,000, even if your daughters do not sell the businesses. Where will your girls get that much money? They’ll have to sell some or all of the Salty Sea Dogs. And there goes your family business.

The inclusion of a divorce in that scenario was crucial. There is an unlimited tax exemption for the value of the estate that passes to a spouse. But there is no escape for those who are divorced or widowed.

There are various planning techniques that can be used to diminish the impact of the estate tax, which an informed trusts and estates attorney can help you with. These steps can help you retain control of your business while developing it for the next generation.

Keep an eye on the news on this topic and think about getting in touch with your Congressman or Congresswoman. This matter has not yet been resolved and your input could matter.

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