Small Business Face Death Tax Dilemma

About 5,500 estates -- about one quarter of 1% of all estates -- paid death duties in 2009, says Policy Center in Washington. But 44,000 estates could be hit by the tax next year if Congress doesn't change the law before then , And some small businesses have such limited cash flow that they couldn't withstand the hit.
One small business-owner watching the debate is David Castillo who owns a wine store. Castillo says he has been forced to purchase expensive life insurance to ensure that his four children, three of whom he employs, can inherit the business without having to sell it to pay the estate taxes. "There are only four years left on the policy, and then it becomes absurdly unaffordable," says Castillo, who hopes the estate-tax law changes before then.

Uncertainty over the tax gives business owners a chance to take advantage of other estate-planning tools, says Richard Emmons consultant Richard@mymarketingvp.net to business"s on Estate Planning.

One strategy is for owners to give some assets to their children. The gift tax has a $1 million exclusion this year, so a married couple could give their children $2 million tax-free this year. For amounts of more than $1 million per person, the gift-tax rate is 35%, making it a better deal than the estate tax. Another strategy recommended: establishing trusts that let businessmen pass some assets to their heirs tax-free. In one such plan, a business owner would deposit assets in a trust, which pays the owner back over a fixed period. During that time, appreciation of those assets -- which can be substantial -- passes to children tax-free.

Still, such estate-planning tools are beyond the reach of most small business owners. "We don't have that kind of money, we don't have those kinds of assets," Castillo says. "Our net profits aren't millions of dollars. For most small businessmen, the only way to raise liquid assets is to liquidate the business."

Bill Page , who owns a Lumber company in Arkansas, says that while his business is large enough to create trusts to shelter the estate, the tax is still so high that his business will probably have to be sold to pay the "death duties." "It's futile to build a business over 100 years," Page says.

TO CASH OR NOT CASH BUSINESS CHECKS

If you receive a payment from a debtor on business account and the words “acceptance of this check denotes payment in full” should you cash the check? The answer differs depending on the state law and the facts of the situation. One of the main issues in determining whether a satisfaction of a debt exists is whether there is a “bona fide” dispute between the parties regarding the amount owed. Generally, when there is a bona fide dispute between the parties as to the amount of a balance owing, one party can offer to pay a specific amount in full payment of that debt. The other party can accept the offer in cash or check — which is referred to as “accord and satisfaction”. This is essentially like a new contract. It should be noted that a dispute does not have to be based on a solid foundation but there must be some justification to it.

Note, however, that a business who receives such a check may not simply cross out the language and write “under protest” in order to get around the “accord and satisfaction” concept.

It should also be noted that while some companies process thousands of checks, nevertheless, some courts have held that when a creditor’s accounting department cashes a debtor’s check in ignorance that it was an attempt to “accord and satisfaction”, a subsequent timely protest by the creditor defeated a finding of that “accord and satisfaction”. In some states, however, where a claim is disputed and a check is offered for settlement, the retention of a check constitutes an “accord and satisfaction” settlement regardless of any protest by the creditor. Also, under Uniform Commercial Code 3-311 a creditor has the right to revoke an “accord and satisfaction”.