The U.S. House is holding a hearing Thursday on the estate tax, which is scheduled to expire this year if Congress doesn’t step in.

Small business advocates say the “death tax,” which is owed to the government when transferring a business after the owner’s death, threatens succession plans in family owned businesses. The current federal estate tax exempts the first $5,000,000 of an estate’s value, and any assets of the estate beyond $5,000,000 are taxed at a top rate of 35%. If Congress does not act by December 31, 2012, the federal estate tax will return to the level it was at in 2000 with a $1,000,000 exemption and a top rate of 55% -- which some argue could mean “death” to many family business chains.

“Many small companies have non-liquid assets – capital that is tied up in real property, machinery and equipment – so heirs do not have cash to pay the estate taxes. Sometimes, a business must be sold – even at ‘fire sale’ prices – so the estate tax can be paid,” said Chairman Joe Walsh (R-IL). “A Joint Economic Committee study found that, prior to 2001, the estate tax reduced capital formation by about $847 billion. Capital that must be paid in estate tax is capital that is not available to be invested back into the business, to create jobs or to grow the economy.”

Entrepreneurs from across the country testified at the hearing on how these hikes would impact their own businesses. Michael Flesher, president of the American Rental Association and owner of Taylor Rental Center, which has 16 employees, said the estate tax returning to its pre-recession levels would counter all of the work he has put in over the course of his career.

“Under current law my heirs would be able to continue to operate the business… [and] would continue to invest in new equipment and to provide services to the community where it is located,” Flesher testified. “If the estate tax reverts to the levels of 2000… the economic security of my heirs will be uncertain. Of course, I can mitigate some of this effect by doing exactly what I am doing right now, buying large amounts of life insurance. But all that does is create a current expense out of a future liability, and it takes money away from my business, money I could use to hire employees or buy more equipment. “

Neil Katz, managing partner of Katz, Bernstein & Katz, LLP, testified how time consuming and costly estate planning can be for small businesses, especially if the rates increase. Katz said individuals can pay between $5,000 and more than $50,000 to design and implement estate tax plans. Estate planning and taxes place a burden on businesses, but more so, the constant rule changes further complicates the situation for owners, he said.

“If Congress could establish rules that business owners could be assured would survive for a period of 10-15 years, then they would at least have a chance -- albeit a difficult battle -- to plan for the tax burden,” Katz said.

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