American Family Business Institute

Statement on Benefit of Repeal vs. Step-Up Regime

Concerns that the expiration of the estate tax will cost some family business owners  more than if the estate tax  stayed at 2009 levels are misguided, says the American Family Business Institute (AFBI), an organization representing family businesses and farms, which are often hit hardest by the estate tax.  Family businesses are better off with no estate tax, despite the capital gains tax legislation that took effect upon repeal. 

“All too often the estate tax forces family businesses and family business owners to sell off  assets not because they want to, but because they have to – just to pay their death tax bill,” says AFBI President Dick Patten.  

Why?  The majority of a family business’ wealth is usually tied up in equipment, buildings and inventory, as opposed to cash-rich bank accounts, and heirs have to liquidate the business in order to satisfy the IRS.   

“Under estate tax repeal, owners of family businesses are only taxed if they choose to sell an asset. This allows businesses to continue operating, saves jobs and positions companies to grow for the future.”

Should an asset be sold, the family is then responsible for paying a 15 percent capital gains tax. 

“While the estate tax is levied upon the full value of all assets and the bill is due nine months after the owner dies, capital gains taxes apply only when an asset is sold, and then only on the amount the asset has increased in value since its original purchase (its ‘gain’),” says Harold Apolinsky, an estate tax Attorney and Planner who has been helping family business owners with estate tax planning for 40 years.

Apolinsky notes that with proper planning, couples who choose to sell an asset are still eligible for $5.6 million in exemptions before capital gains taxes set in.  He offers the following as an example:

A decedent owns a building that was bought for $4.4 million but that is now worth $10 million. She leaves the building to her husband who has no assets of his own.  The executor can apply the decedent's $1.3 million exemption – officially called his “step-up allowance” – plus an additional $3 million spousal exemption, giving the widower a tax basis of $8.7 million.

If the widower sells the asset for $10 million, he will recognize a gain of only $1.3 million and pay a 15 percent capital gain tax of $195,000. 

Rather than selling the asset, if he dies owning it, his executor can apply his $1.3 million step-up allowance giving his heir a tax basis of $10 million.  If his heir sells the asset for $10 million, he will pay no tax.

This means that $5.6 million of potential gain was eliminated.          

“It becomes increasingly clear that family businesses and family business owners are much better off with a 15 percent capital gains tax on assets they choose to sell when they want to sell them, as opposed to a 45 or 55 percent estate tax that is forced upon them at death,” says Patten.