I want to pass my business onto my children after I pass away but want to avoid death tax. Any advice?

Question: I have a small business ($5mm) of which I am the sole owner. I’d like to pass it to my children but don’t want it to be subject to the death tax. What can I do?

Response: The “death tax” is more properly called the “estate tax,” since you’re not being taxed because you die. Instead, a tax is levied on your estate—or what you own at the time of your death. Your estate is everything you own at the time of your death, typically valued at its then-fair-market value. There’s always a certain amount excepted from the estate tax; that is, below a certain dollar amount (which is $3.5 million in 2009; it does change periodically, however), no taxes are charged against the estate. Taxes are only charged on estate values over the threshold.

The best way to protect assets from the estate tax is to not have them in your estate in the first place. That means, in a nutshell, that you don’t own them at the time of your death. Assets in certain kinds of trusts, for example, would not be considered part of your estate. Anything you’ve given away while alive, with no strings attached (so they’re no yours anymore) would also not be part of your estate. (Though you would then have to deal with and plan around the gift tax.)

In fact, THE big mistake most people make about the estate tax is trying to have their cake and eat it, too: they want to own and control  everything up until the very moment the Grim Reaper comes, then have their belongs be tax exempt. Instead, if you plan ahead of time, you can remove significant assets from your estate and avoid having them taxed on your passing. You just have to be willing to give up control while still alive.

Estate planning is enormously complex and is customized to your situation. Rather than get any more specific, I’ll close by saying that if you don’t want your estate to pay taxes, you need to reconcile yourself to a loss of control now—and start some estate planning with an experienced local estate attorney, one with whom you work fairly closely to position matters for your heirs best benefit.

Answered by Steven Zweig

Additional Resource: Death Tax Overview

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