Estate tax repeal: boon for private, smaller companies.

Most family-run and smaller companies are understandably concerned about the estate tax and are hard at work to convince Congress of the need for a permanent repeal. Most notably, family-run and privately held companies are impacted not only because of the costs generated by the estate tax, but also because of their interest and need for succession planning.

FEI's Committee on Private Companies' Policy Subcommittee has been working hard on this issue for its members, and in the first few months as FEI's Director for Private Companies, this writer has been actively involved with the Family Business Estate Tax Coalition. The coalition is a grassroots group dedicated to the full and permanent repeal of the estate tax.

Unless the full Congress passes new legislation, the tax will be fully phased out in 2010, only to be completely reinstated in 2011. On April 13, 2005, the House of Representatives passed H.R. 8 by a vote of 272-162. The House legislation would allow for the permanent repeal of the estate tax and eliminate the tax's reinstatement in 2011. The focus for the Estate Tax Coalition and for those who favor full repeal is therefore now on the Senate, since the House has already passed the legislation and has generally been more supportive of the legislation in the past.

Sen. Jon Kyl (R-Ariz.) is an influential voice in this debate because he has co-sponsored S. 420, the Senate legislation to repeal the estate tax. Kyl, a leader of the repeal movement in the Senate, has identified the economic issues created by the bill, explaining that the financial impact could be the main obstacle to passing the legislation.

S. 420, known as the Death Tax Repeal Permanency Act of 2005, was introduced by Sens. Kyl and Bill Nelson (D-Fla.) This legislation, and other, similar bills introduced by other senators, are not moving as quickly in the Senate because the repeal issue does not have the same level of support that it generated in the House. Without the guarantee of passage, there is no rush to call the legislation to a vote.

Moreover, the legislation could face a Democratic filibuster, forcing supporters of the repeal to search for 60 votes to overcome a potential filibuster. Republicans are generally interested in completely repealing the tax, while most Democrats have suggested the tax be changed to have higher exemptions and lower top rates.

So, what does this mean for private companies and smaller family-run businesses that are trying to establish their succession planning? Many argue that such smaller businesses are the most heavily impacted by the estate tax--so much so that it could imperil many of them. It is important that organizations know exactly how the estate tax will affect their business, no matter if the company is large or small.

Companies should plan their businesses accordingly and monitor the status of the estate tax as best as possible. Successful succession planning should include some consideration of the tax's impact; it could have serious financial implications for small businesses once an older executive of the business passes away and others that remain with the company are left with a sizable tax bill to pay.

Some have argued that a so-called "carve-out" that would exempt farms and small businesses would be a fair compromise. However, many including Sen. Kyl, don't believe this is an appropriate remedy. Kyl recently commented that such a carve-out would be unworkable, because of the difficulty in defining a small business. Similarly, carve-outs would not likely do much to help FEI's small-business members.

The best hope, therefore, lies with either gaining the 60 votes necessary to forestall a filibuster in the Senate or a compromise bill, which has yet to be discussed with Democrats and Republicans. Without a compromise, it is essential that members of companies lobby their elected officials, because that can certainly influence how their legislators vote.

Now is the time to focus on getting the law changed by actively contacting your senators and making them aware of the impact of this tax on your business. If you are interested in joining the FEI Committee on Private Companies' Policy Subcommittee and helping to repeal the estate tax, please contact Serena Davila at FEI at 202.626.7809.

Serena Davila ([e-mail]) is FEI's Director for Private Companies and is based in the Washington, D.C., office.

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