Study of Nearly 1,000 Family Business Owners

• Study Contents

B. The Impact of Estate Taxes on Family Businesses

• Table 2 - Total Cumulative Estate Planning Costs
• Table 3 - Current Annual Estate Planning Costs

Business-owning families spend considerable amounts of money planning for estate taxes:

• Collectively, the 967 firms have already spent more than $114 million on estate planning.
• They also continue to spend more than $25 million each year.
• Their collective expected estate tax liability exceeds $1 billion - and this is only for the 290 firms who could estimate their estate tax liability.
• More than 70% of the firms studied here either could not or would not provide an estimate of their expected liability.
• On average each firm has already spent more than $118,000 and continues to spend more than $26,000 per year in estate planning. These figures are based on the very conservative assumption that an individual's non-response reflects "zero expense."

While the families surveyed spend significant time and money preparing to pay estate taxes, the data indicate that liquidity planning is often not knowledge-based:

• More than two in three responding owners (68%) have purchased life insurance to fund their anticipated estate tax liability.
• Yet, more than 7 in 10 firms did not report an estimate of their estate tax liability.
• More than 4 in 10 firms did not report on estimate for their firm's market value. While some of these firms may have refused to respond, it seems reasonable to assume that the majority could not estimate this information.

These findings illustrate that the majority of business-owning families are not adequately prepared to face the burdens of future estate tax liability. Without a well-grounded estimate of estate tax liability, any efforts to plan for liquidity are less than optimum. At one extreme, the business owner may be spending money to pay an estate tax debt which may never come due. At

the other extreme, this liability may greatly exceed the value of life insurance, perhaps placing the business at risk despite a feeling of adequate preparation.

• Thirty-three percent of responding firms (n = 311) anticipate the need to liquidate at least part of their business when estate taxes next come due.
• Of these, the average owner expects that fifty-four percent of the business will be sold to pay estate taxes, resulting in an average of 70 lost jobs.
• Estate taxes also make most family business owners more risk averse, with more than one in three firms (36%) being less willing to wait for a major investment to pay off than they would be in an environment free of estate taxes.
• More than two in three firms (68%) are less willing to invest in a risky project than they would be if there were no estate taxes.
• Nearly 6 in ten firms (59%) would employ more people if estate taxes were eliminated.