Forbes recently provided an analysis of a research paper examining the impact of estate, wealth transfer taxes and other inheritance taxes on entrepreneurs and those considering starting a business in “How Do Estate and Inheritance Taxes Affect Entrepreneurs?” Do entrepreneurs spend a lot of time worrying about the impact of federal estate tax on their life’s work? Does the recent reduction in the number of taxpayers who will need to pay federal estate taxes mean an increase in new start-ups? Unfortunately, the answers are not simple.
The research shows two primary effects of wealth transfer taxes. One, it reduces the size of after-tax bequests, and makes heirs less likely to start or maintain a business. Two, the prospect of future estate or inheritance taxes appears to speed up a business owner’s retirement date, but also discourages labor force participation for wage earners. This indicates that there is no simple way to characterize the effect of the estate tax on entrepreneurship.
The estate might affect a business owner’s desire to start a business or a business owner’s desire to keep their business going. Additionally, it also plays a role in a business owner’s determination of whether to leave the company to their heirs or not. The estate tax is just one of many factors in these types of decisions but it certainly plays a role.
Yet, even though the estate tax plays a role in business decisions, most wealthy people don’t take full advantage of opportunities to transfer limited amounts of wealth through tax-free gifts during their lifetimes, which is a very basic tax avoidance strategy. Since the estate tax decreases the size of after-tax bequests for heirs, the continual transfer of wealth tax-free from parents would encourage heirs to start their business later on. The research finds that receipt of an inheritance raises the likelihood of having active business income by about 13%. The size of the inheritance is also a major factor but is usually less important than the fact that an inheritance exists.
For those employed at their own business, the thought of future estate taxation reduces the likelihood of remaining self-employed, but not because people elect wage employment over self-employment. It is actually because estate taxes makes employment less attractive. Taxing bequests reduces the payoff to working (and saving) for those with bequest motives, which makes both self-employed people and wage earners slightly more likely to retire early.
While, the research shows that the impact of wealth transfer taxes on entrepreneurship appear to be small, it is important to remember that if you work with an experienced estate attorney, a plan can be put in place early on to ensure the maximization of your bequests or inheritances and the minimization of taxation. This will open the door to have peace of mind whether you want to work longer or you wish to start a business with your incoming inheritance and take the risks of a savvy entrepreneur.
For more information on how Family Estate Law Planning Group can help you have the most effective estate plan, visit our website and schedule your consultation today!
Reference: Forbes (March 7, 2018) “How Do Estate And Inheritance Taxes Affect Entrepreneurs?”