O Death, Where Is Thy Sting?

With a little planning, you can protect the family business from the ravages of estate taxes

Death and taxes may be unavoidable, but there's nothing preordained about death taxes--even if President Clinton vetoes, as promised, the repeal Congress passed in late July. "With planning, it's relatively easy to pass a business to the next generation," says H. Allan Shore, a certified public accountant and lawyer at Ackerman Senterfitt & Edison in Miami. The problem is, few people plan.

Case in point: John Kearney. When his father died last November, Kearney, 52, planned to take over the family auto dealership in Ravena, N.Y. But first, he had to raise $400,000 to cover the tax bill on his father's $1.6 million estate. The family's funds were so depleted that when business slowed during the winter, Kearney dipped into his son's college money. Determined to spare his heirs a similar fate, Kearney bought a term life-insurance policy. The cost: $3,000 a year.

But Kearney is in the minority. According to a recent poll by Arthur Andersen, only 14% of small businesses purchased insurance to cover potential estate tax liability, and just 15% sought help from a lawyer or accountant. It's easy to see why--no one likes contemplating mortality. Besides, such strategies mean tying up capital. But it has to be done.

Here are some tips to make the task less forbidding and less costly.

-- Find an accountant and a lawyer who specialize in succession planning. They'll tell you what laws apply to your estate, draft a will, set up trusts, and make other arrangements. Professional fees can run into the tens of thousands of dollars. You may also need a business valuation, which can cost about $20,000.

-- Buy life insurance. Some policies cover estate taxes, but if it's in your name, it's part of your taxable estate. A way around that is to set up a life-insurance trust owned by your beneficiaries. The payout will be outside of your estate, and can be used to pay the tax bill.

-- Make gifts. The Internal Revenue Service allows individuals to make tax-free gifts valued at up to $10,000 a year. So one way to reduce the value of your estate is to transfer ownership of your company to your heirs slowly in chunks worth less than $10,000.

-- Sell at a discount. This involves selling stock to your heirs at a discounted price. One way of doing this is to set up a family limited partnership (FLIP). Under such an arrangement, your children become limited partners in your business. But because they have only limited control over company affairs, you can sell them stock at far less than book value. Although you still must pay gift taxes on the transaction, the hit should be less painful because of the lower price.

If small-business advocates have their way, the entire discussion will someday be irrelevant. But for now, one thing is certain: Pay now, or your estate will pay later.

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