legislation: Splitting Heirs Over New Estate Tax Law

At the fall meeting of a state waste haulers' trade group, members listened intently while a lawyer explained tax legislation signed by President Clinton in August.

Mostly family business owners, the audience smiled as the lawyer discussed the long-sought-after estate tax benefits.

The clamor over estate taxes has gotten louder in recent years. Inflation has eroded the value of the $600,000 estate that is exempt from gift and estate taxes, which can climb as high as 55 percent.

Particularly hard hit are family-owned businesses where, in some cases, heirs have had to sell part of the business to pay estate taxes. The new law raises the amount exempt from gift and estate tax from $600,000 to $1.3 million when qualified small-business owners pass their business to family members or relatives.

Now, these same owners are no longer rejoicing. As it turns out, qualifying for the exemption is far more difficult than anyone initially believed.

"Dealing with a complicated tax law usually doesn't bother me," says a St. Louis tax attorney. He notes, "this is beyond comprehension. It's so poorly crafted, it's very difficult to work with."

Other tax experts agree. In fact, the general perception of the new law is so bad that the American Bar Association's probate and trust law committee passed a resolution calling for repeal of the family-business estate-tax provision.

"It short changes taxpayers," says the St. Louis lawyer. "It's misleading. Business owners are led to believe they're getting a terrific benefit, but it's not likely to materialize." Under the old rules, about 1 percent of U.S. residents who die each year - about 30,000 - left estates subject to federal estate taxes. Many of these individuals had assets that included small businesses.

The goal of an estate plan is to cut tax liabilities by shrinking how much is passed on to heirs. For example, life insurance can be removed from an estate by transferring ownership to an irrevocable trust. Meanwhile, a couple need not own everything jointly. Some assets can be in the husband's name, some in the wife's. Trusts can give a surviving spouse the benefits of the deceased's assets, and when that spouse dies, the children or anyone else can inherit the assets.

The new law was fashioned to exempt several thousand more estates a year from the tax. However, the implementing rules turned out to be so burdensome and unwieldy that relatively few heirs get any advantage from the law.

A tax specialist in Houston figured out that small business owners would have to deal with 14 different variables before deciding whether they qualify.

Lobbyists who represent small business insist that the changes more than compensate for the trouble and annoyance. "It's something to build on and certainly a major improvement over [when we fought] Democrats who wanted to reduce the exemption to $200,000," says a spokesman for the National Federation of Independent Business, the principal representative of small business owners in the United States. He also notes that everybody qualifies for the regular estate-tax exemption, which gradually will rise to $1 million by the year 2006 from the current $600,000.

Nevertheless, lawyers who represent family business say that individuals who seek eligibility face a daunting obstacle: An estate's business assets must not be less than 50 percent of its total assets. Thus, an estate with, say, $2 million in total assets is disqualified automatically if less than $1 million is attributable to the business.

A special problem exists for waste hauling businesses trying to position themselves for a take-over: If the surviving family members decide to sell the business to non-family members within 10 years after the owner dies, they may end up paying a portion of the taxes from which the estate originally was excused. This "recapture" includes taxes and interest on any capital gains on the sale.

Other problems include the law's strict requirements that family members participate "hands on" in the business and that 50 percent of the business be owned by one family, 70 percent by two, or 90 percent by members of three families, which can exclude third and fourth-generation businesses.

The complications in the new law have meant increased business for accountants and tax attorneys. "It just takes more time to sort things out," says a Richmond (Va.) tax specialist. "Sometimes almost twice the time I used to spend on estate planning for business owners."

Test Your Retread Knowledge

1. Pulling tires for retreading should occur when the remaining tread gets to ____.

a. 2/32nds

b. 4/32nds

c. 6/32nds

2. Retreaded tires require less energy to produce than new tires.

a. True

b. False

3. A retreaded tire saves ____ gallons of oil when compared to a new truck tire.

a. 10

b. 15

c. 20

d. 25

4. Retreading diverts ____ tires from North American landfills each year.

a. 500,000

b. 15 million

c. 25 million

d. more than 30 million

5. Retreads are not allowed to be used on federal gov-ernment fleet vehicles.

a. True

b. False

Loans The California Integrated Waste Management Board, Sacramento, has approved $2,221,134 in loans for Evergreen Glass, Stockton, MBA Polymers, Richmond, and Vision Recycling, Alameda County, as part of its Recycling Market Development Zone program's effort to spur recyclable markets in California.

Name Change The 90-year-old automotive unit of Rockwell, Troy, Mich., soon to be an independent, stand-alone company, unveiled its new name, Meritor Automotive Inc. Meritor employs more than 16,000 people at 58 manufacturing, research and sales facilities in 15 countries. Its 1996 sales reportedly were $3.1 billion.