Readers may have heard that the Housing of Representatives passed a bill last month that would repeal the estate tax. The bill, which passed on a vote of 240 to 179, is largely backed by Republicans, with Democrats mostly voting against the measure. Although the proposal is unlikely to pass all the way through the legislative process, it is interesting to ponder how it would affect small businesses.

Small businesses, and particularly family farms, are especially vulnerable to the estate tax, partly because of the lack of cash and other liquid assets. When most of a business’ financial resources are tied up in illiquid assets such as real estate and livestock, there may be little left over to cover estate tax.  

In cases were estate taxes are significant, passing a business on to the next generation is made more difficult. Too often, heirs have no other option than to liquidate parts of the estate in order to pay these taxes. In cases where this doesn’t shut a business down, this can at least weaken it financially. Unfortunately, business owners don’t always realize the value of planning around the estate tax, and choose instead to invest in their company rather than protect it from tax liabilities.

There are different strategies for addressing estate tax, but one popular way is to purchase life insurance. Using the life insurance proceeds to cover estate tax liabilities allows a business to avoid or at least reduce the possibility of having to cash out the estate. Whatever approach business owners use, they do well in coming up with a plan to protect their estate. For businesses owners looking to pass their business on to the next generation, a little estate tax planning can go a long way.