It is difficult for many in Tennessee who own businesses to create an estate plan that both benefits heirs and assists in maintaining the health of their business. In fact, during the estate administration process, many hope that their heirs and beneficiaries will be able to avoid many costs, such as the estate tax, as the assets of the estate are dispersed. However, if legislative changes aren't made soon, some say these hopes may go unfulfilled.

The estate tax is at the center of many people's concerns as they create an estate plan. The tax exemption is currently set at $5 million. When an estate is worth more than that amount, a tax is imposed up to a top rate of 35 percent. However, this is set to change at the end of this year, when the estate tax exemption is scheduled to be reduced to just $1 million.

For small business owners, this change is a major concern. With estates that include a small business, it is relatively easy to reach the $1 million mark. This fact may make it difficult for some small businesses to continue to operate after the death of an owner. Under current law, the business may have to be sold during the estate administration process to pay any required estate tax due to a potential lack of liquid cash available to pay the tax debts of the company.

Proponents of keeping the estate tax at the current rate, rather than making the change at the end of the year, say that failing to stop the change could result in a loss of capital formation for businesses. Prior to 2001, reports indicate that the estate tax diminished capital formation by approximately $847 billion, a staggering figure. The potential loss of similar capital to payment of estate tax obligations if the exemption is once again rolled back to $1 million may spell significant estate administration problems to affected small business entities in Tennessee.

Source: Fox Small Business Center, "Family Businesses May Not Survive 'Death Tax'," Kate Rogers, May 31, 2012