TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, December 31, 2010

New Estate Tax Law Exposes 65,000 Small Businesses and Farms to Estate Tax

American Family Business Institute, Tax “Compromise” Exposes 65,000 Small Businesses and Farms to Estate Taxes:

With family businesses and farms accounting for a significant percentage of the “wealth” of elderly Americans (those 65 years of age or older), the return of the estate tax starting on January 1st will force many families to divert resources into measures to minimize the tax, rather than grow their businesses, according to a new report released today and authored by Duquesne University Economist Antony Davies.

Published by the American Family Business Foundation (AFBF), the report finds that up to 67% of estates subject to the estate tax in 2011 would own small business assets, with more than 22,000 farms, 29,000 private corporations and 14,000 real estate partnerships likely to be affected if the owner dies. 

Under the “compromise” tax plan signed into law just before Christmas, the estate tax will be reinstated next year at a rate of 35%, with a $5 million exemption.

“The more assets small business owners need to redirect toward preparing for the impact of the estate tax,” Davies stressed, “the fewer assets they have to create jobs.”
Indeed, he said, the historical data show that the size of small businesses increases as the size of the estate tax exemption increases – meaning that “higher exemptions encourage entrepreneurs to shift assets into small businesses rather than reserving the assets to protect against estate tax liabilities.”

While nearly 200,000 total U.S. households’ net wealth will exceed the $ 5 million threshold and could pay if the owner dies, Davies predicts that nearly 10,000 households will actually pay estate taxes in 2011, based on age and assuming a 5% mortality rate. 

Antony Davies (Duquesne University, Donahue Graduate School of Business), The Effect of Estate, Inheritance, and Gift Taxes on the Survival of Small Businesses: A Panel Data Analaysis:

Proponents of estate, inheritance, and gift (EIG) taxes claim that the taxes prevent wealth from becoming concentrated in the hands of “generational dynasties” and so help to promote economic equality. This paper presents evidence that EIG taxes can have the reverse effect – encouraging the concentration of wealth – via a greater propensity for small (versus large) businesses to be liquidated for the purpose of paying the EIG tax. This study examines business census data for 50 states over the period 1988 through 2006. Applying generalized method of moments estimation in a panel data framework, the study finds a significant negative relationship between EIG taxes and the number of small firms. The relationship steadily declines as firm size increases such that the relationship becomes positive for the largest firms.

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Where to begin.

1. The article linked is from Gosh, I wonder how objective they are?

2. The article says the 2010 legislation reinstates the Estate Tax for 2011. It does not. The Estate Tax was scheduled to go to the 2001 levels because of the legislation proposed and enacted by Republicans in 2001. The 2010 legislation does not reinstate the Estate Tax. Instead it reduces it substantially by reducing the rates and increasing the exemption.

3. The article talks about the $5 million exemption. For many estates this is $10 million because of the marital deduction.

4. The article cites an estimate that 10,000 Estate Tax Returns will be filed in 2011. The article does not say how many of those will be small businesses, or farms.

5. The Estate Tax has been in place for many years. Still with articles like this that imply large numbers of business are liquidated to pay the tax, we still have no citation of the number of businesses that are liquidated to pay the tax, or studies thereof. Could this be that there are none? Probably not, but it is sure is hard to find them.

6. The Davies article linked is dated, and uses the $1 million exemption in its analysis. As such it is pretty much useless and brings no value to the discussion.

Once again we have proponents of tax reduction for the wealthiest citizens putting forth a position of reducing taxes on those folks, but no discussion of the impact on government finance. If you eliminate the Estate Tax one of three things will happen. Government spending will go down (can you tell us which programs will be eliminated? Based on the last election that answer is no), other people’s taxes will go up (can you tell us whose?) or the debt will increase. Since this last option is most likely, it means that over the years the U. S. will borrow tens of billions of dollars to give tax reductions to the wealthiest of the wealthy.

Sigh! So many mistakes, so terrible the analysis and so little time and space to answer.

Posted by: Sid | Dec 31, 2010 12:15:22 PM

300,000,000 million people in the US. 69,000 will be subject to the tax. To me, that is a relatively small number.

Even if you take the number of people that die, the percentage will be very small.

In sum, 69,000 is just not a big enough number to worry about.

Posted by: Allan | Jan 2, 2011 7:29:55 AM

1. The IRS estimated that 9,000 estate tax returns would be filed for decedents dying in 2009, when the $3.5 Million exemption applied, so fewer returns may be filed for those dying in 2011. (By comparison, about 60,000 returns were filed each year, about half of them paid tax and of those paying tax, about half (15,000) reported taxable estates in excess of $2.5 Million.)

2. It may not be possible to know how many of the estimated 10,000 returns filed for decedents dying in 2011 will include interests in small businesses or farms, but as an estate planner who prepares and files such returns, I would guess more than half. The article may be right at 67%.

3. The IRS estimated that the Federal Estate Tax would generate $50 Bn in revenue for deaths in 2011 if the exemption returned to $1 Million and the rate went to 55%. Not much revenue, in the scheme of things.

4. The FET is really a policy tool to reduce inherited wealth, not to raise revenue for the government.

Posted by: Tim | Jan 2, 2011 7:34:13 AM


Do you have the stats on approximately how much total taxable economic activity a business owner would have to engage in to have a reasonable chance of retaining $5 million of value in their business over, say, 40 years of business?

Would it be $50 million, $500 million, $5,000 million? of total economic activity that has already generated tax revenue so that the business owner can retain $5 million in the business?

Maybe it's just me, but I don't think that $5 million in value plops out of the sky fully formed. There HAS to be some pretty serious financial transactions...mostly taxable...flowing through that business to allow the owner to retain that value.

I guess the question it always is when it comes to leftists and much is enough?

I don't know were you stand, but how is it 'right' that the last person standing by the casket of a business owner is the Tax Man picking their pocket for one more tax payment given all of the taxes their work had generated over the years for every taxing authority that could get their paws on them?

Actually, I do know where you is NEVER enough...

A person can risk it all...generate millions in all sorts of tax revenue for all sorts of tax authorities...and there you will be, shooing the family away so you can scream in their face "IT WASN'T ENOUGH YOU SELFISH BITCH/BASTARD!...IT WASN'T ENOUGH"

Pitiful Sid...just pitiful...

Posted by: MJN1957 | Jan 2, 2011 7:39:37 AM

I don't trust advocacy groups much but I trust what I know personally. Most of the small business owners I know gross over a million a year. That's what it takes to bring home $60k, and keep 2-3 crew employed in a business built around retail sales and service. The construction boys gross a lot more than that, but that's only because their margins are much lower. I suspect most of my friends' businesses would be valued at >$1mil, though valuation is a tricky thing across industries. $1Mil is what the Democrats were shooting for as the cap (never mind the deal they settled on, let's stick to what they tried to do). How my friends' families - getting along alright but by no means wealthy - are considered Teh Eevil Rich and deserving of a good 55% tax on a business built up over 20 or 30 years, is beyond me. To vote for the Democrats if you own a business is self-directed class hatred. Of course voting for Republicans is akin to getting the the car with a well-meaning but unthinking drunk driver, but hey, at least the drunk isn't affirmatively trying to kill you, and you have a chance of coming through it unscathed...

Posted by: Joe Blow | Jan 2, 2011 7:43:14 AM

You tell em' Sid.
The only way we can get money is to take it from the others that have it.

Posted by: OneVoice | Jan 2, 2011 7:46:45 AM

Lets compare and contrast: Paul Caron, a tax law professor, who lists much of his work and who, in this analysis, provides links. "Sid" is much more anonymous, provides no links and clearly wants the "wealthy" to give ever more of the money they've acquired to those who haven't been able to acquire much of anything. Of course, some of that money will be used by the government to fund more studies of cow burping, learning how to help frogs and turtles to cross the road... valuable studies without which we might not need to tax estates -- and maybe not even incomes.

Posted by: Greg | Jan 2, 2011 7:56:00 AM

" give reductions to the wealthiest"

[Emphasis mine.]

GIVE, Sid? Oh puhleeze! Oh, how wondrous and benevolent is the great State who GIVES its lowly citizens a tax break so they can keep more of what is rightfully theirs.

Any death tax is TAKING, on estates created by income that has already been through the tax mill, or on the wage taxes created by the jobs the estate generates.

Even if one has bought into the propaganda about the evils of "generational dynasties," history has shown that as wealth is divided among a larger and larger pool of heirs, the wealth is exhausted anyway (generally by the third generation). If this weren't the case, Gloria wouldn't have needed to design jeans and her son wouldn't need the anchor job. But that's true of liquidated capital. On capital that is difficult to liquidate without destroying the entirety of the estate (such is the case of family farms), many times, the act of complying with the tax requires that the asset be sold off entirely, which was the point of the Tax Professors post, was it not?

But if this is truly the small number you allege will be taxed by this effort (less then 10,000), then it won't cause the U.S. to "borrow tens of billions of dollars" would it? What it will be, is another minority being trampled on by the majority. But hey, if it is only a small number of people who have their wealth destroyed, and only a few thousand jobs that are lost, we should look the other way?

It is always a good idea to be concerned about how reliable a source may be, but questioning if "" is impartial doesn't provide evidence that they are not. Would you like cheese with that ad hominem, Sid? Evidence of their screwing with the facts would be most welcomed.

You don't like the age of the citations used. Maybe you'd prefer more recent analysis of the effect of the Death Tax on the economy. There is always: The Economic Case Against the Death Tax, Published on July 20, 2010 by Curtis Dubay on or any number of articles at Heritage. Or, are we to assume that Heritage isn't a reliable source and dismiss them out of hand, too?

Posted by: Mrs. du Toit | Jan 2, 2011 7:58:17 AM

The estate tax is immoral. Where is it written in the Constitution that the government has the right to tell you when you have enough money?

All your life, you pay your income tax. If you have money left after expenses, you invest it. You pay capital gains on the increase in value.

Then the government wants almost half of it?

To do what? Waste it on programs to keep us unproductive?

"Government spending will go down" "other people’s taxes will go up" "or the debt will increase"

How about a fourth option? We cut spending.

Posted by: Stick | Jan 2, 2011 8:02:10 AM

This is a pretty poor analysis by Sid. Sid seems to believe with a wave of his hand he can dismiss anything written by He cannot unless he can find some way to challenge the statistics of 65,000 small businesses exposed to the death tax and can answer the argument that money spent protecting the business from the estate tax is money that is not spent in growing the business and creating new jobs. Sid does not even try, so we can assume he has no response.

Second, since the death tax has been suspended for 2010, yes, we can say, it is being reinstated. Play as many word games as you wish, Sid, but you cannot avoid the fact the tax is was $0 on Friday and it is 35% today.

Third, The marital deduction is not additive. Where did you ever get that idea. If a business is owned by a husband and wife, if the wife dies this year and the husband next year, on the death of the husband the deduction is still $5 million.

Fourth, Sid seems overwhelmed by the idea that if their are 65,000 businesses exposed, the author neglects to tell him how many of those will actually be hit with the death tax in 2011. Tell us Sid, how many of the deaths in 2011 will be small business owners and we will do the simple math for you.

Sid must have purposely misread the article which points out the owners of small business take both time and expense to prevent the liquidation of the business upon their death. That is time and money that is not spent on growing the business and hiring more people. That was the point o the article.

Finally, Sid is horrified the Davies article is not less than two weeks old, so the assumptions used were what would happen if no changes were made to the pending reinstatement of the death tax. Get a grip Sid. Extrapolate.

Posted by: Rick Caird | Jan 2, 2011 9:01:45 AM

The argument, often made: "Why should we care because the tax is only on the rich?" has always made me angry. If the government decided the population was too large so everyone over 6'8" would be executed, would it not bother you because you are only 5'8"?
The Estate tax is government confiscation.

In addition, the tax encourages the creation of foundations which produce no wealth and often spend their money lobbying the government to spend OUR money.

Posted by: Rob Ives | Jan 2, 2011 9:59:10 AM

300,000,000 million people in the US. 1 person (Sid) should be subject to a 100% tax. To me, that is a relatively small number.

Even if you take the number of people that die, the percentage will be very small.

In sum, Sid is just not a big enough number to worry about.

Posted by: Steven | Jan 2, 2011 10:06:53 AM

Why should death change tax rates? Seems to me that the percentage tax rate should be the same for the sale of a business after death as it would be just before death. How about trying to apply the same capital gains tax rates for capital gains to both the living and the dead? Any time politicians use tax law to try to pick winners and losers, they create a tax avoidance industry and a compliance cost mess.

Posted by: George B | Jan 2, 2011 11:54:54 AM

The death tax gives corporations an advantage over people, as it always has.

Posted by: Kevin M | Jan 2, 2011 12:34:04 PM

Well the one thing about the Estate Tax is that it generates emotional rather than logical responses. Let me try to respond to a few of the more rational comments.

1. My experience is that the weaker one’s argument, the more vitriolic the comments. Once again the responses here bear out that observation.
2. I requested that opponents of the Estate Tax tell me what programs they would cut or what other taxes they would raise to offset the revenue. The answer here, no response, leaving the situation that those who oppose the Estate Tax want the U. S. government to borrow money to give tax benefits to the very wealthy. How is this good economic policy?
3. The reason people trot out the “immoral” argument is that it is a subjective argument and thus cannot be objectively refuted. As such it is pretty useless in a serious discussion of tax policy.
4. Does someone who compares support for the Estate Tax to the government executing everyone over 6’8” really expect to be taken seriously?
5. The tax encourages crating charitable foundations and charitable contributions, which I find a good thing. I think NGO’s in general are more effective in working with social problems then the government.
6. The individual who commented that the marital deduction is not “additive” obviously is not familiar with the Estate Tax. I find that most people who have strong opinions in opposition to the Estate Tax are generally mis-informed.

Government services and purchases must be paid for. Taxing the transfer of an Estate of extremely wealthy individuals seems to me to be a reasonable way to raise some of the revenues need to make those payments. The deceased has not lost anything because the individual is, well, deceased and the heirs still end up inheriting millions of dollars.

Posted by: Sid | Jan 2, 2011 1:13:45 PM

Sid is a socialist who doesn't grasp the idea of economic liberty on which this Republic was founded. This is not a vitriolic comment, merely an objective observation.

Posted by: Jake | Jan 2, 2011 3:36:20 PM


You ridicule because people don't have all the answers you request...especially when it comes to identifying programs to cut?

How about we simply require the politicians we elect and the bureaucrats they pay (on our behalf) to live within the means of the citizens of the country, just as the citizens themselves must live?

Require THEM decide where to reduce spending and/or find savings...

Tell THEM, "This is is all you must make do..."

Have THEM make both the extremely easy and the extremely difficult decisions that must be made as they are the ones closest to both the problems AND the answers...

If they can't do that, maybe the first question we..the people paying the bills...need to be asking is "Why are we paying them?"

Posted by: MJN1957 | Jan 2, 2011 4:23:09 PM

Overlooked in all of this discussion about whether we should have an estate tax, how big a business can be and still be a small business, etc. is the principal point that the estate tax doesn't do what it's intended to do. It does not break up concentrated wealth and doesn't target higher levels of wealth.

If there must be a death tax (mainly for political reasons rather than those of revenue), then an inheritance tax would accomplish the goal of breaking up concentrated wealth better than an estate tax.

Furthermore, an inheritance tax regime that excluded specific items rather than amounts would help put an end to the tug-of-war over exclusion amounts and tax threshholds. Such excluded items might include shares in closely-held businesses and inherited houses that will be used as principal residences, as well as the traditional charitable donations. This will eliminate much of the need for intricate planning vehicles to protect businesses and farms.

While I side with those who wish to eliminate death taxes, I don't believe that it would be possible to do so as a matter of politics. Therefore, we will either continue to see the tax vary with the vicissitudes of electoral majorities, or a compromise will be forthcoming. Compromise is unlikely to occur under the estate tax system.

Posted by: JDFlanagan | Jan 2, 2011 4:25:23 PM


Here's how it breaks down.

On the competence and benevolence of government: The Left is highly optimimstic and wants people to forefeit more decisions, more resources, and more responsibility over to it. The Right is highly skeptical of any alpha-class that presumes superior wisdom and morality over the unwashed masses. Given the long worldwide history of rulerships, how does the evidence weigh in? Is optimism or skepticism in government most warranted?

On the morality of profit: The Left seems to assume all or most financial gain is a form of theft, extracted from society at direct cost to some exploited and unwilling victim class. The Right recognizes that the ability to generate profit is directly proportional a person's capacity to first add value into society by assessing and meeting a real need or demand. What does the evidence show? Is there a fixed set of assets from which members of society can benefit or are benefits (wealth) continuously created by the good efforts and ingenuity if her citizens?

On freedom: The Left considers the essence of freedom to be security--freedom from hardship. The Right considers the essence of freedom to be the ownership of consequential decisions--possession of the power both to succeed and to fail. Which definition is most yearned for in the human heart?

On justice: The Left considers justice to be synomonous with fairness--equality of outcome. The Right considers justice to be freedom from force or fraud--equality of treatment. How much hope is warranted in trusting government to overcome the fundamental unfairness of life? Might a popularly elected government be able to manage equal treatment?

On being our brother's keeper: The Left believes generosity and compassion can be installed on a society by force of law. The Right believes genuine human freedom begets more generosity and compassion in one day than force of law begets in a lifetime.

I lean decidedly right. Convince me I'm misguided.

Posted by: Keith | Jan 2, 2011 5:45:04 PM

My father was an entrepreneur (though he didn't know what that word meant) and over 42 years built a manufacturing company and employed 100 people. He died in 1983 and almost all of his estate was in company stock. He didn't have all the expensive estate planning advice and started to divest too late. The IRS took the lion's share and the estate took ten years to pay them off with interest. I refer to that as the "lost decade" because every dime we might have used to grow the company, buy machinery, develop products, create jobs and attract new talent went to pay off that debt to keep the company intact. Mom died in 1984 so the marital deduction was little help. The four children got to keep what they already had and 20 years later 17 grandchildren got a small inheritance each (concentration of wealth?). I cannot help but wonder how much better off the company and the country would be if not for that onerous tax.

The greedy pols don't care about that. They just see another source of taxes.

Posted by: Cincinnati Bob | Jan 2, 2011 8:21:44 PM

The Davies article published by AFBF is slanted and deceptive.

Posted by: Will McLean | Jan 3, 2011 7:00:06 AM

The fact that estates worth ten million dollars plus may have 22,000 farms, 29,000 private corporations and 14,000 real estate partnerships in them doesn't at all imply that those businesses will in fact have to be liquidated.

Unless those assets include 65% of the estate in excess of $10 million for a married couple (and most of the wealthy are married), are illiquid and the estate does not generate sufficient income to pay estate taxes in installments at a statutory low interest rates over ten years, their presence does not imply a need to liquidate.

In reality, a large share of all closely held businesses in large estates are small tax shelter investments that are part of an overall portfolio of investments, most of which are readily marketable securities in which the owner is not an active manager. Many of those farms have four or five figure gross revenues and are mostly valuable because the make owners eligible for property tax breaks (Colorado, for example has several "farms" in the gated subdivision of Cherry Hills for that purpose). Many of the real estate partnerships kick out depreciation deductions while generating cash flow for many years, and are mere limited partner interests with no management involvement and not even voting rights for the general manager, or are family limited partnerships created for the express purpose of obtaining discounts in estate tax valuation. Many of the private corporations are "pet projects" of people whose primary source of income is elsewhere.

The number of estates realistically facing the need to liquidate a business per other statistics is in the hundreds or less.

Posted by: ohwilleke | Jan 4, 2011 9:06:38 AM