Small Business Accounting:

Effects of the Death Tax on Family Businesses

A family-owned business stands to lose 55% of all its assets when it passes from one generation to the next. This is due to the federal "death tax" that is applied to the portion of estates that exceed $650,000 (This amount is increased to $675,000 in 2000 and will continue to rise until it reaches $1 million in 2006.) The estate tax ranges from 18 percent to 55 percent. Because of this outrageous tax, 70% of families choose or are forced to cash out or abandon their business after only one generation of ownership.

Unfortunately, the fact remains that people cannot afford to pass their businesses on to family members. Following are some facts related to the death tax and its affect on American businesses:

• More than 70% of all family businesses do not survive through the second generation
• More than 87% of all family businesses do not make it to the third generation.
• Nearly 60% of business owners say that they would be able to add more jobs if death taxes were eliminated
• 61% of the National Federation of Independent Business members say that the payment of death taxes will limit their business growth, while 13% say that the death tax makes growth virtually impossible
• In a survey of black owned-businesses, nearly one-third said that their heirs will be forced to sell the business to pay the death tax and more than 80% report they do not have sufficient assets to pay the death tax
• A 1993 study by the National Life of Vermont and the Small Business Council of America found that 77% of failed family businesses that entered bankruptcy went bankrupt after the unexpected death of an owner.