Estate Tax Implications
If you die owning a business, the business you leave behind becomes part of your estate. If the value of your small business makes up more than 35% of your adjusted gross estate, your executor may elect to pay the estate tax attributable to the business interest over a 14-year period. Under this provision, there is no limit on the amount of tax that may be deferred. However, your estate will also have to pay interest to the government on the deferred amount (the interest rate has varied since 1990, between 7-11%). In effect, the government will own a "mortgage" on the estate.
"Only the Little People Pay Taxes . . ."
(Leona Helmsley, hotel owner & prison inmate, 1989)
The easiest way to avoid estate taxes is to die poor. However, assuming you cheat an early death and die reasonably successful, here’s a little something to think about. For 2004 and 2005, the individual estate tax exemption is $1.5 million. A $1.5 million estate tax exemption may seem like a lot, but it really isn’t. For example, if you die shortly before retirement, your accumulated savings may easily exceed this amount. The same applies if you die shortly after you experience a sudden increase in wealth, for example lottery winnings, civil lawsuit judgment/settlement or an inheritance. Also, if not structured properly, life insurance proceeds could be included in your estate. Therefore, in addition to the applicable exemption amount, you always want to have a back-up plan or strategy in place to minimize the impact of taxes on the estate.