Succession planning could almost be a full-time endeavor for the owner(s) of a privately held HVACR distributor or manufacturer. Planning on the management/strategy side of the list of succession issues is a complicated and massive undertaking unto itself. However, often the most significant barrier many firms face to thorough and effective succession planning is navigating the black hole that is U.S. estate tax policy past the year 2010. While HARDI has become very active on a number of legislative fronts, few issues demand more proactive efforts from the business community than achieving estate tax certainty and reason.

The major tax reforms earlier this decade that were to phase out estate taxes by 2010 and greatly reduce capital gains taxes are set to expire on Dec. 31, 2010. Republican majorities in Congress failed in two efforts to make permanent these reforms during their reign, and the swing in party power in Washington has only added to the uncertainty of the situation. A handful of bills has been introduced in the House recently to establish some form of estate and capital gains tax policy beyond 2010 (some good, some not so good), but none have been aggressively pushed to date. In the Senate, the Finance Committee recently held its first of what most expect to be at least two and possibly three hearings on the estate tax. HARDI submitted written testimony for the first hearing, featuring several testimonials from HARDI distributor members, making an extremely compelling case for estate tax repeal or, at the least, significant reform (a copy of HARDI's testimony can be found in the November archives of the “News” section of www.hardinet.org).

Reforming U.S. estate tax policy requires the reconciliation of a few key issues. First, nearly every organization representing small to corporate businesses is calling for a full repeal of estate taxes, citing their regressive and duplicative nature. The indifference that traditional business constituents expressed toward many Republicans in the 2006 elections was undoubtedly due, in part, to the former majority's inability to make permanent 2010's full estate tax repeal. Before losing control of Congress, the Republicans also tried, and failed, to achieve some long-term estate tax certainty through compromise bills whose fates were almost certainly doomed by a lack of consensus on the specifics of a compromise, namely exemption limits (referred to as the “unified credit”) and tax rates.

The unified credit is the amount exempted from estate taxes (given to heirs at time of death) and gift taxes (given while living). For 2008, the unified credit is $2 million (per spouse, if married), increasing to $3.5 million in 2009. In 2010, there is no unified credit, since the estate tax is fully repealed (but not the gift tax) for that year only before reducing to the 2001 level of $675,000 in 2011. The estate tax rate for 2008 and 2009 is 45 percent, 0 percent in 2010, then regresses to the 2001 level of 55 percent in 2011 if nothing is done between now and then. Annual tax-exempt gift limits are $12,000 per spouse (and might increase in 2009 and 2010). There is a capped lifetime exemption equal to the unified credit (and back to $1 million in 2010 and after).

The 2011 deadline has provided some impetus for those in Washington to get something done soon. Staunch opponents of estate taxation fear a regression to 2001 rates, while estate tax proponents fear a revenue-free 2010. This would suggest an environment conducive to compromise; however, neither the pro-tax nor the anti-tax lobbies are internally in agreement with what those compromises might look like.

The last serious attempt to reform estate tax policy beyond 2010 found opponents of estate taxation falling into three distinct camps. First were the hard-core, full-repeal-or-nothing advocates that opposed anything other than a complete repeal, thereby splitting the anti-tax lobby. Second, larger businesses and estates favored plans with greatly reduced estate tax rates but lower unified credits, while third, smaller businesses and estates were willing to negotiate on tax rates but only in exchange for higher unified credits. On the other side, those who favor estate taxation do so largely due to the “Trust Fund Baby” factor, simply unable to reconcile why wealthy heirs and heiresses should get so much “free money.” And herein lies the real issue: There is no division between estates owning businesses and estates built on trust funds. To the fiscal purist, it doesn't matter (either way, it's double taxation), but to the political realist, it is all that matters.

The time is right, however, to seize an opportunity. Frankly, when Whoopi Goldberg is making a strong case against the estate tax on national television on a show like “The View,” the tide is turning. What is obvious is that legislators need to know more intimately what their family business constituents are dealing with. HARDI considers a $40 million, family-owned company a pretty typical member. Assuming married ownership, that's a max of $24,000 in exempt annual giving per year to one family member. They could successfully transfer that business to a son or daughter tax-free in 1,666 years, 833 years if they have two kids, or only 166 years if they have 10 sons, daughters, grand-children, etc.! And this all assumes that they spent so much time planning their estate that they've not had time to grow the company one cent in 166 or 833 or 1,666 years. No wonder Ted Williams needed to go into cold storage.

These are the kinds of stories your House and Senate representatives need to hear. Unfortunately, these days, lobbying needs to be an integral part of your succession and estate planning. HARDI members facing the estate tax crunch must engage with the association because it is likely that 2008 or 2009 will present some decisions for the business community. Doing nothing is not an option, and, sadly, a complete repeal of the estate tax has become less likely than it was after its last debate. Deciding what lies in between is the responsibility of those most affected by the future policy.

While the focus of HARDI's first Congressional Fly-In, April 30?May 1, 2008, is on the HVACR industry and its distributors, the central business issue will most likely be estate and capital gains tax policy. Family business owners literally cannot afford to miss this.

Talbot Gee is vice president of HARDI. Contact him at 614/488-1835 or tgee@HARDInet.org.

Editor's Note: Always be sure to consult with your personal accountant and attorney whenever you begin the process of succession and estate planning.