Death and Taxes

There’s good news and bad news for jewelers and other longtime opponents of the federal estate tax—the tax assessed on a taxpayer’s net assets after death and paid by the executor, administrator, or heirs. The good news: Congress, in late spring, approved elimination of the tax, and it was signed into law by the President.

The bad news: The provision calls for a decade-long phasing out of the tax, rather than erasing it immediately.

“This is not ideal but is a very big step [toward getting rid of the tax],” says Nathan Olsen, legislative counsel with Haaken Associates, Jewelers of America’s lobbyists in Washington, D.C. “Jewelers should be very pleased, especially considering the evenly distributed political situation in Congress and the opposition to repealing the estate tax.”

In April the House of Representatives voted 274 to 154 to repeal the estate tax. In May, the Senate approved a similar provision and included it in the tax package of the 2002 budget bill, which Congress later sent to the President.

A proposed amendment to the Senate bill that would have weakened estate tax legislation was voted down 55 to 43. Senate Finance Committee chairman Charles Grassley (R-Iowa) told the Associated Press that the vote was a “critical test” of the Senate’s bipartisanship. It also showed that other efforts to make major alterations in the bipartisan tax package would be difficult.

The phase-out raises the tax-exempt amount of an individual’s assets from the current $675,000 to $1 million in 2002, $1.5 million in 2004, $2 million in 2006, and $3.5 million in 2009. It immediately reduces the top tax rate for non-exempt assets from 55% to 50% now, and then to 45% in 2007. The estate tax (which accounts for less than 1.5%—$30 billion—of annual federal revenues, according to the Congressional Budget Office) and the generation-skipping transfer tax (see sidebar) would be repealed in 2010. The gift tax would remain but at a rate of 40%.

Die-hard opponents of the tax in Congress and the business community favored immediate elimination. They warned that what one Congress or administration gives, another can take away. And in fact, the new tax law says the tax changes, including estate tax repeal, are good only until 2011—unless Congress renews them. For that reason, suggest some sources, anti-tax politicians and lobbyists may push for speeding up the exemptions or shortening the phase-out period.

Nine out of 10. Most jewelers would favor that. According to a national poll of hundreds of jewelers (conducted this year by JCK), nine out of 10 (87.4%) want the federal estate tax repealed. Almost all have family-owned businesses, half of which were bought or inherited from parents.

Two-thirds (65%) of respondents complain that the tax represents double taxation on assets. “How many times should we be taxed on the money we earn and [already] paid taxes on?” asks jeweler Ron Leitzel of Mountz Jewelers in Carlisle, Pa. “Why should we be taxed on ‘property’ that has already been taxed, and in most cases passes on in the family?” wonders Chase Holland of Holland Jewelers Co., San Angelo, Texas.

“Over the years, profits are retained in businesses in the form of additional inventory,” notes jeweler Paul Bischoff of Earth Treasures Jewelers, Eatontown, N.J. “Those profits have already been taxed [so estate taxes] penalize the family that wants to develop a business for their efforts.” Mark Hogeboom, owner of James Avery Craftsman, Kerrville, Texas, agrees. “Double taxation destroys the incentive to succeed,” he says.

Succession woes. The other big reason most jewelers support repeal is that the estate tax hinders succession. Jewelers say it jeopardizes the successful transfer of a family business, because owners or their heirs must sell all or part of the business to pay the tax. Almost half of those polled by JCK (47%) say this is a real possibility for them. “We are a third-generation business,” says John Ballew, of Ballew Jewelers, Freehold, Me. “We won’t make it to a fourth without some kind of legislative change.”

“An heir has to sell off large parts of the business to be able to pay estate tax, [even though] the business paid taxes for years,” says Scott Ayres, Ayres Jewelry, Casper City, Wyo. Eileen Eichhorn, Eichhorn Jewelry, Decatur, Ind., notes that “many small businesses have assets that aren’t cash and need to be sold to pay the estate tax.” A Virginia jeweler agrees: “Small family-owned businesses are under such heavy competitive pressures, an inheritance tax liability can easily be their death knell.”

Repeal of the tax, therefore, will aid family succession, say many jewelers. “There would be a greater chance of a business continuing through the generations, instead of being liquidated to cover the cash demand of estate taxes, which can be punitive,” says Bischoff.

Indeed, many jewelers see repeal as a virtual guarantee of their children’s future. “I could offer my children an opportunity to use this business as a career,” says Manuel Alvarado, Alvarado Jewelers, Ontario, Ore. Jeweler Dale Robertson of Norris Jewelers, Milford, Ohio, said he “could pass the company on, allowing my children to remain successful. They won’t have to liquidate it just to satisfy the government.”

Many jewelers also oppose the tax because it increases business costs. One Southern jeweler cited “the need to spend more on lawyers and accountants” for estate and tax planning. Many businesses also carry large life insurance policies on major stockholders, partners, or owners, in part to cover estate tax costs. Repeal or reform of the tax would free some of those premium payments for other business purposes.

Senior Associate Editor Jennifer Heebner provided research for this story.

Yes No
Source: The JCK Retail Panel, March 2001
Is your jewelry business family owned? 94.6% 5.4%
Did you buy or inherit your jewelry business from parents or other relatives? 54.6% 45.5%
Do you favor repeal of the federal estate tax? 87.4% 12.6%

Number of estates, by worth, subject to the estate tax in 1999

Source: Internal Revenue Service Statistics of Income Office
*Note: There were 2.4 million deaths in 1999. The total number of estates subject to the estate tax represents 2% of that number.
$600,000 to under $1 million 19,136
$1 million to under $2.5 million 22,233
$2.5 million to under $5 million 5,217
$5 million to under $10 million 2,046
$10 million to under $20 million 770
$20 million or more 467
Total 49,869*

Federal revenue from estate taxes in 1999*

ESTATE VALUE
* Most recent available figures
Source: Internal Revenue Service Statistics of Income Office
$600,000 to under $1 million $804 million
$1 million to under $2.5 million $5.33 billion
$2.5 million to under $5 million $4.57 billion
$5 million to under $10 million $3.89 billion
$10 million to under $20 million $2.85 billion
$20 million or more $5.45 billion
Total $22.89 billion