[mbid]

I've heard the argument that, with high inheritance taxes, the heir of a family-owned company has to sell parts or all of the business in order to pay the tax. I don't know enough about the issue to say whether there is some truth to it.

[ChefDenominator]

The one direct exposure I have had to the issue of inheritance tax was with a small Midwest-based distributor. The owner was very old and wanted to pass the company to his daughters, who had actually been running the business for decades (and when I came along, his granddaughters were working the office).

His issue was that what the government decided his business to be worth could only be paid with more cash than his business generated in 5 years. This meant that his heirs would have to mortgage their shares to cover the inheritance tax, which places ownership into a different category of investment.

[dmckeon]

The owner could have gifted a small interest in the company to each daughter, grand-daughter, and perhaps their spouses in each year of those decades, letting subsequent value growth and inflation accrue to the surviving family members.

And also, perhaps transformed the company ownership structure into a limited partnership as well, claiming a lower market value for the shares owned by limited partners.

tl;dr: First rule of US estate planning: Die broke.

[shermanyo]

This is exactly what should have been done, but requires a longer term commitment, as well as releasing _some_ control while still alive. (both of which I think are a good thing in context)

[ChefDenominator]

I asked the same question, and his response was, "do you really think the government hasn't thought of that already?"

[dmckeon]

Well, the government has thought of it, and, at this point, appears to think it is legal.

Look up "family limited partnership" or see:

http://scholarship.law.marquette.edu/cgi/viewcontent.cgi?art...

https://www.forbes.com/sites/brianluster/2014/03/18/why-form...

Note especially the discount from fair market value for shares of interest in an FLP.

[usual disclaimers - not a lawyer, not legal advice, see a qualified professional in your jurisdiction, etc.]

The problem with tax/estate planning is the same problem as insurance - the time when you really want to have done it is often the time when it is too late to get it. (e.g., founder/owner is dying, building is flooding or on fire, etc.).

[kspaans]

That sounds like a failure of tax & estate planning. If you wait until you are very old to give away your assets you are putting yourself in the pay-the-most-inheritance-tax position. If the daughters had been running the business for decades already, they would have had lots of time to shift the ownership. This isn't an argument against inheritance tax, it's an argument for better education about personal finances.

[ChefDenominator]

Yes, the primary focus of a business owner must be on tax planning, because this generates efficient operations, undoubtedly.

Also, laws change all of the time. My impression, every time I dig down with real people, IRL, is they have the same general opinion as you and others like you here, but have no actual exposure to the actual laws, as they implemented. The only occasion I come across this and I see that the business owner, with a small team tax attorneys and CPAs, can't seem to spend enough money to escape huge taxes.

I can only assume that the business owner is clueless and the Internet anons are the experts he should have hired.

[beagle3]

Actually, a primary focus of a business owner must be on tax planning, because (assuming a successful business) it is going to be their largest expense by far.

Unfortunately, the way tax laws are applied usually makes it impossible to apply in retrospect - you have to build it into the business structure from before day 1; and often the non-monetary cost is prohibitive -- e.g., you can reduce your tax burden by 70% by moving to a different state / country.

As a successful business owner, tax is going to be one of your largest expenses. Makes sense to a major optimization target.

[mbid]

So you're saying it this is not an example against inheritance tax because the family could've used loopholes in the legislation to circumvent paying the tax?

[samfisher83]

If they sell it other investors are buying it so I don't get this argument.

[colefichter]

I think the idea is that capital gets broken up into smaller chunks. When we're talking about creating middle-class manufacturing jobs, you obviously need to build, say, a factory to create those jobs. That factory requires a very large investment of capital, which becomes less likely when you start breaking up large estates.

I've no idea if it actually plays out this way in the real world, but that seems to be implication here.

[gonvaled]

Huh? The buyer would not pay inheritance tax, the seller would, with the proceedimgs from the sell.