I am not an estate planner, financial advisor, or any other type of legal advice dispenser. These are simply my observations and you do with them what you will.
Every couple of years we see big stories in the press about how the estate tax burden forces family businesses out of business when someone dies. People keep trying to “raise the tax free cap” claiming most businesses do not have enough cash on hand to pay such a transfer tax. While portions of their statements might have some manufactured data to back them up, the reality is if the person running the business hadn’t been such a power hungry control freak, they would have never been in that situation to begin with.
Let’s ask some questions and look at some realities.
If the CEO of GM, IBM, or some other Fortunate 500 company eats one too many lobster dinners and dies of a heart attack, do the heirs of that CEO pay inheritance tax on the entire corporation or only on the assets actually in the name of the CEO?
As Mr. Romney’s finances have shown us, if you want to run a U.S. based corporation that never pays any U.S. income tax, you need to start an off-shore division in a country which has no corporate tax rate and preferably no extradition treaty with the United States. The U.S. division then “loans” massive amounts of money to an off-shore division which is nothing more than a post office box and an electronic bank account. Currently there are no rules in place stating the off-shore division ever has to repay the loan or make payments on it. Some corporations even “forgive” the loan almost as fast as it happens. This is how we end up with a trillion or more dollars waiting to come back and corporations demanding it be taxed at a nearly non-existent rate.
So, the correct answer seems rather clear. If you really want to pass on your farm or business, you need to have some form of closely or privately held corporation with bi-laws which either forbid selling shares outside of the family or requiring a unanimous vote of the officers to allow. Get authorized for as many shares as physically possible, but only hand out/sell a few shares to each family member.
Delaware seems to be a popular place with a lot of good advice.
When someone dies and bequeaths their shares, it is up to the IRS to determine a share value. The more of your assets held in the name of the corporation instead of your name the better. The more authorized shares the better. If your corporation is authorized a million shares and the IRS determines it to be worth $10million dollars, the NAV (Net Asset Value) per share is $10.
Talk to a financial planner and your heirs. I have personally met people who are worth millions, but own as little as a street vagrant. All that is in their name is the clothes on their back and a few pieces of jewelry. Their homes, contents of the homes, cars, other real-estate, stocks, bonds, etc., are all in the company name. When they die, a handful of shares pass from them to their children or other heirs.
If you really wanted to pass things on to your heirs, you would already have talked with an estate planner and put some kind of corporation in place and what congress does with the estate tax will be of little concern to you.
What if your company suddenly has assets over $100Million due to land or some other price skyrocketing? Get authorized for more shares.
I personally hold shares in a pink sheet company that has near zero tangible assets and a lot of debt. They are “authorized” for 300 million shares. The only thing they really do have is the rights to some patents that may one day be worth money when they sue someone like Google for patent infringement just like that little company who sued RIM and got $600million. Spread over 300 million shares an award like that would be worth at most $2/share…assuming they weren’t forced to pay off a few debts first. My brokerage account currently classifies these shares as worthless and charges my account a monthly fee for holding them. (I refused to let them be dumped. They were a long term lottery ticket when I bought them.) If I died today though, they would be a “worthless” asset transfered with my estate.
My personal view is that only control freaks make their heirs pay estate taxes. If we all followed Mr. Romney’s lead, the federal government would collect 1/10th of what it currently does in boom year taxes because we would put all of our assets into corporations and bury all profits in our non-taxed off-shore divisions.
