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Engaging in death tax planning to help a business survive

Taxes and creditors can make it hard for a business to stay alive after its owner dies. When a person dies, his or her business may have to be sold in order to pay federal estate taxes and any creditors.

An international study conducted by Bank of America Private Wealth Management, Prince and Associates, U.S. Trust and Camden Research Statistics shows that only 15 percent of all family businesses pass successfully to the next generation, and even fewer survive to be run by members of the third generation.

The federal estate tax does not apply to all assets - including any business - with a net worth of less than $5.25 million. The current federal estate tax rate is 40 percent, so assuming that an estate has an original total value of $25 million and does not increase in value, it will be worth $5.4 million after its transfer to a third generation and death taxes have been deducted.

Without death tax planning, the transfer of business interests can be challenging. Such transfers sometimes cause rifts among heirs and ill will toward the decedent who set up the transfer. To avoid such repercussions, a business owner should seek financial and estate planning advice as early as is practicable.

Because business appraisal is a process that takes time, it should be started as soon as possible. After the future value of the business has been determined, choosing the best estate tax and trust strategy is the next step to take. Gifting and using generation-skipping taxes can be helpful, as can assigning trusts and funding them through the owner's lifetime.

An established and profitable business is a proud legacy that one can leave behind. Because time is money, anyone who needs to do estate planning should start right away to preempt succession problems.

Source: The Atlanta Journal Constitution, "Odds are your family business will not pass to the next generation," George D. Menden and Lawrence H. Freiman, July 27, 2013

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Larmore Scarlett LLP

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