In fact, the inheritance tax figured prominently in the transfer of two different well known entities. The Cubs are no longer owned by the Wrigley family because the estate couldn't afford to keep them when their inheritance tax bill came due.
The problem here is making sure that your assets actually go to the people you would like to will them to, rather than those assets being sold to cover estate taxes. The Chicago Cubs are no longer owned by the Wrigley family, because upon the death of the family patriarch, several family assets had to be sold in order to pay the estate taxes.
Then there is the case of the Robbie family. They not only lost the Miami Dolphins but the stadium that had their name on it because of the bill that came due as a result of the inheritance tax.
In the 1800s, George Sand remarked, "to have no cash means, absolute powerlessness." In wealth transfer planning, no cash can be devastating. Particularly if your family wealth includes large real estate holdings or a business. Estate taxes can mean the loss of treasured family assets. Ask Joe Robbie’s family: they lost the Miami Dolphins and Joe Robbie Stadium due to the need for cash to pay estate taxes. In a recent survey among successors of successful family businesses whose businesses failed after they were passed on to the next generation, 97.9 percent had to sell the business to raise the cash to pay estate taxes.
Let's look at a scenario.
Family Home $1,000,000
Vacation Home $500,000
Checking & Savings Accounts $100,000
Stocks, Bonds & CDs $1,000,000
Business Property $1,700,000
In such a scenario, the total value of the estate is $9.7 million. If we go back to an inheritance tax level of $4 million, the family would be looking at paying an inheritance tax on $5.7 million. The tax is usually about 55%. This means a bill of about $3 million. Even after liquidating the stocks and using all their cash, the family wouldn't have enough. As such, this family would likely be forced to sell the business.
Of course, for every tax there are also lot's of loopholes. In fact, a large part of the field of estate planning involves using the tax laws to help clients avoid or minimize the onerous nature of the inheritance tax. There are many tried and true techniques of avoiding the inheritance tax.
One of the simplest ways to avoid the inheritance tax is to leave your estate to your family members in the right amounts. That means that, while you and your spouse are still alive, you should equally divide your assets between the two of you so that the value of each of your possessions does not surpass the nil-rate band.
It is true that you can avoid inheritance tax payments if you leave your assets to your spouse after you die, since spouses do not pay inheritance tax for the goods that they have inherited from the other spouse. However, once your spouse dies too, your children will not be able to avoid inheritance tax payments.
If you divide your assets between you and your spouse before you die, you can each leave your children an amount of money that is below the nil-rate band. This way, your children can completely avoid inheritance tax payments
If you do not want to pay inheritance tax, you can reduce the value of your estate until it is under the nil-rate band. You can do this by giving small gifts to a large number of people, giving large wedding gifts to your children or anyone else in your extended family and making donations to charitable organizations.
These three categories of gifts are excluded from the inheritance tax law. If you cannot reduce your estate enough to avoid inheritance tax payments, at least you can reduce the value of that tax.
In fact, the story of the Wrigley and Robbie family is the exception. The rule usually involves hiring lawyers and accountants and paying them hundreds of thousands of dollars in order to avoid paying millions of Dollars in inhertances taxes.
So, in the end for most successful business owners, they face one of two options. Either they hire professionals for hundreds of thousands in order to navigate the complicated tax codes in order to avoid having to pay the estate tax, or their families are left with such a massive bill that the business needs to be liquidated. This pernicious tax at best complicates the tax code exponentially and needlessly setting up a cottage industry and billions of Dollars in fees and expenses to navigate it. At worst, this pernicious tax causes families to lose their businesses and other illiquid assets. Either way, such is the pernicious nature of successful small businesses and the inheritance tax.