EDITOR'S BLOG: Estate tax proposal casts a costly shadow
Nov. 22, 2016
by Bernard Shire
When the government decides to come up with new tax regulations in order to raise more money, small, family-owned businesses are often affected most. This month, small meat and poultry processors that are family owned, as well as family owned-and-operated businesses in every industry, are facing estate tax threats from Uncle Sam.
Actually, small businesses are not the only organizations facing these new challenges. Larger meat and poultry operations, as well as companies in virtually every industry and kind of business, are exposed to the same possible new regulations if they are privately held and not publicly traded. The threats come in the form of proposed changes in estate tax regulations.
The US Dept. of the Treasury has proposed new estate tax rulemaking and regulations under Section 2704 of the Internal Revenue Code. They would permanently change estate planning for families that own a controlling interest in a privately held business. The proposal is one of the most sweeping changes in estate tax policies in the past 25 years, and could be detrimental to businesses that employ millions of workers throughout the nation. The rules would impose significant new tax costs on family owned businesses, diverting capital from business investment, costing jobs, and threatening the ability of families to pass businesses on to the next generation of owners.
These proposed regulations would mean increased estate taxes on the death of owners of family businesses, including meat and poultry processing companies, possibly causing them to liquidate the business or sell big pieces of the business to outsiders. A tactic to pass on businesses to the next and future generation, called “valuation discounts,” would be eliminated by these new rules. Instead of selling the business at a discounted amount, say 35 percent, which makes it feasible to get the business down to the next generation already operating it, by waiting until the business owner dies, the business would be taxed at the full value.
This isn’t the first time the government has tried to raise more money this way. One of the few positive advantages that family owned businesses and privately held companies have going for them – as opposed to the built-in advantages large corporations have by being financed by shareholders and stockholders – is that they can pass those businesses on to future generations, who have vested interests in their company’s success.
If they go into effect as a result of the Treasury Dept.’s rulemaking, these new estate-tax regulations would eliminate or greatly reduce the marketability of smaller businesses, effectively discouraging families from continuing to operate or grow their companies and pass them on to future generations. Business owners could be forced into selling land or cattle or parts of their plants in order to pay the tax, and in some cases are completely forced out of business. Critics of the proposal believe the Obama Administration is actually causing unnecessary economic harm to family businesses – and to the American economy.
During the Presidential campaign, Donald Trump proposed ending the estate tax, which would remove the regulations that hurt small or privately-held business, and increase the economic output of business. Hillary Clinton proposed reducing the estate tax exemption and slightly increasing its rate, from 40 percent to 45 percent, which would increase the incentives of the tax, reduce the economic output of business, but also increase the revenues from the tax. Not that much revenue comes from it anyway – less than one percent of federal revenue. Analysts point out that the estate tax is one of the most economically harmful taxes, per dollar of revenue actually raised.
One thing there’s no doubt about, even if meat and poultry processors and producers, as well as other family and privately held businesses are able to fight off these proposed regulations by contacting Congress, estate lawyers are going to see their own hike in new business, like four years ago, when everyone thought the $5 million federal estate tax exemption might be cut down to $1 million. To avoid that, business owners made big lifetime wealth transfers to heirs up to the high exemption amount. It will be interesting to see what happens this time around.