Will the federal estate tax be repealed? That hasn’t been decided. But for owners of successful closely held corporations, the prudent course is to assume the worse and plan for the possibility of an estate tax.
Where will be money come from to pay the estate tax? Since your corporation will probably be the biggest single asset in your estate, that’s a natural place to look for funds to pay the tax. Fortunately, the tax law does contain some relief provisions that allow an owner’s estate to tap corporate funds for estate taxes without wreaking financial havoc on the corporation and the owner’s family.
Here are some of the options:
- Spreading out the tax payments. When a closely held business makes up more than 35% of an owner’s estate, the estate can choose to spread out the estate tax due on the business. The tax can be paid in installments over 10 years, beginning five years after the owner’s death. This may enable the corporation to make payouts from operating funds that are sufficient to cover the tax bill.
- Buyback of shares. A corporation can redeem corporate shares from the owner’s estate. To the extent that the redemption proceeds don’t exceed the estate tax liability, the redemption is treated like a sale. And the estate’s basis for computing its taxable profit on the sale is the fair market value of the shares on the death of the owner’s death. Thus, the estate may owe no income tax on the stock redemption.
- Corporate-owned life insurance. The corporate can buy life insurance on the owner’s life to fund its payouts on the owner’s death. While the insurance premiums are not deductible for income tax purposes, the death proceeds are free of income tax and are not included in the owner’s estate. (Different tax consequences may result if the corporation names someone other than itself as the beneficiary.)
- Employee stock ownership plan (ESOP). An ESOP is a tax-qualified employee retirement plan that invests primarily in the stock of the sponsoring employer. The plan can provide a ready market for the sale of stock on the owner’s death, without the owner’s family necessarily giving up control of the corporation. The proceeds from the sale can be used to pay the estate tax.
We have just hit the high spots here. If you would like more information on how your corporation can help your family meet potential estate tax liabilities, please contact us.