Successful entrepreneurs should think twice about what’s in the Christmas ham this December. Why? From the perspective of expectant heirs, 2010 is a great time to die. It's the first year since 1916 that there has not been a tax on inheritance, or what's known as a “death tax.” In 2001, legislators voted to phase out the steep tax on estates, but on January 1, 2011, that repeal will sunset, and the death tax will come back to haunt us.
A lot of people shrug about the tax because they believe it applies only to the wealthy. True, the wealthiest people will be the most directly affected. President Obama has proposed a tax rate of 45 percent on estates in excess of $3.5 million. In other words, after that threshold, heirs will lose nearly half of their inheritance to the federal government.
To start, taking half of someone’s honestly-earned life’s work is just inherently wrong. Most individuals who leave death taxable inheritances have spent years and years working, saving, and contributing greatly to America’s economy. The wealth they leave to their heirs has also already been taxed, often multiple times. They have paid income taxes and taxes on the gains realized through investments. Any homes, cars, farms, land, jewelry, or other goods purchased were bought with after-tax dollars, and they probably paid sales taxes on those goods too.
Individuals most likely to get hit with the death tax are hard-working entrepreneurs who have worked and saved with the hope of making future generations better off. That's supposed to be part of the American dream, and the government shouldn’t penalize people for their success.
Many who are hit by the death tax aren't billionaires, but are small, family business owners. A tree farm owned by a family with an average income of $50,000 per year, for example, could be valued at millions of dollars because of the value of the land, farm equipment and timber. To tax this inheritance between generations would require heirs to break up and sell the land and the business. Overwhelmingly heirs cite “needed to raise funds to pay estate taxes” as a reason why their family-owned businesses ended up dissolved.