Estate Of Affairs

Get relief in estate taxes under the new tax law.
Magazine Contributor
5 min read

This story appears in the February 1998 issue of Business Start-Ups magazine. Subscribe »

Q: From what I understand, the tax bill Congress passed last year really helps . What do I have to do to benefit from it?

A: Considering you have to die before the act's estate tax relief kicks in, I'd keep the enthusiasm in check. Still, there may be some solace for your heirs under the Taxpayer Relief Act of 1997--especially if yours is a worth between $600,000 and $1.3 million.

To know if your heirs will benefit greatly from the act's provisions, you have to know what your business is worth. "That means getting a real valuation," says CPA Arthur D. Levy, senior partner of Arthur D. Levy & Co. and chairman of the board of the New York City-based Family Business Council of Greater New York. "I've had someone tell me his business is worth $300,000 because that's what the annual sales are and someone else tell me the business supports his $400,000-a-year lifestyle so that's what it's worth," Levy says.

Neither appraisal is valid. "There are accepted valuation techniques done by people skilled in the field," says Levy. "They cost somewhere in the neighborhood of $5,000, but they're well worth it."

The new law states that starting in 1998, family farms and businesses can exempt up to $1.3 million, up from $600,000, from estate and gift taxes under certain circumstances (although this may not actually go into effect until 2006). To qualify, one of three conditions must exist: 50 percent of the business must be owned by you and members of your family, 70 percent must be owned by members of two families, or 90 percent must be owned by members of three families. In addition, the business must be worth at least 50 percent of your total estate and must be left to family members or someone who has worked for you for at least 10 years. Also, the individuals who inherit the business must work in it for five of the 10 years following your death. (If that condition isn't met, the will recapture the tax savings.)

Estate planning for family businesses is complex, so you'll need to call your accountant and attorney for counsel. You may find you'll need to revise your will. Or you may be able to cut the amount of insurance you need to help pay estate taxes. Small family businesses should take the time now to examine how the tax revision impacts their estate.

Q: My son has been working for me for 12 years and is upset because he thinks he should earn more than he does. I disagree. I'm paying him a fair market salary. What's your opinion?

A: For the first five or 10 years an adult child works in a family business, it's best for the offspring and best for company morale if he or she is paid the going rate for his or her position.

But the rules change once the son or daughter has been with the company for roughly 10 years, says Paul Frishkoff, a family business advisor and a professor of entrepreneurship at the University of Oregon's Lundquist College of Business in Eugene. "By that time," he says, "this person should have moved into upper , and then the family can ignore fair market salaries." He warns that if the son or daughter hasn't risen into some leadership position in that length of time, then the family has larger issues to resolve than how much their children's salaries should be. But since your son has put in a 12-year stint, that doesn't seem to be the case. Maybe you should consider re-evaluating his compensation.

Q: What are some of the better Internet sites providing information on family-owned businesses?

A: There are scads of them, but many are so blatantly sales-oriented that you wonder why anyone would trust their advice. Still, there are some informative ones you might want to try logging on to, especially if you're looking for something specific.

  • News affecting family businesses. For news, recent studies or reports that have an influence on family businesses, log on to NetMarquee's Family Business NetCenter ( Its archives can be searched easily, and it has dozens of links to other Web sites offering family business resources.
  • Networking or looking for an advisor. The Family Firm Institute ( has a broad listing of the family business educational programs affiliated with universities and colleges nationwide and those groups that stand alone as forums, centers, councils and the like. It also lists its members (who are advisors, educators and consultants to family-owned businesses) and tells you how to contact them.
  • Case studies and reading material. For monthly case studies (recent ones included how to deal with the poor work performance of a child and what to do when the head of a business dies unexpectedly) and a good list of books (with synopses) that focus on family-business issues, try Family Business Roundtable Inc.'s site, "Resources for Family-Owned Business" (

Patricia Schiff Estess writes family business histories and is the author of two books, Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).

Contact Source

Arthur D. Levy & Co., (212) 684-7999, fax: (212) 545-7902


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