When a civic-minded family is forced to sell its business, most often to a big corporation, whose leaders have no roots in the region, the community tends to suffer the most.
As President of Family Enterprise USA, a nonprofit advocacy organization founded in 2007, Pat Soldano has made it her mission to help family businesses remain afloat and in the family. Soldano has no doubt as to the main threat to such businesses: the estate tax, dubbed the “death tax.”
Soldano is identified with the fight to eliminate the death tax and working with Frank Luntz invented the term death tax.
Whoever coined the term, it is definitely helpful in capturing what has happened again and again to family businesses that have been sold or gone under because they are unable to meet the estate tax deadline.
Soldano makes a moral argument against the death tax.
Still, the estate tax has its fans. When Republicans were attempting to eliminate the tax during the Obama years, liberal columnist E. J. Dionne dubbed it the “Paris Hilton Tax cut.” Several famous members of the very rich are the most vocal advocates for higher estate taxes. Bill Gates, Warren Buffett, and Michael Bloomberg reap enormous favorable publicity by calling for higher estate taxes. Indeed, when it comes to the estate tax, they seemingly echo Oliver Twist, begging, “More, please, sir, more.” But that doesn’t mean the virtuous billionaires themselves are actually going to pay the estate tax.
“It’s not the Bill Gates or the Warren Buffetts who are affected,” says Soldano. “First of all, they’re not going to pay it. Warren Buffett admits his family is not going to pay this tax, ever. He just thinks it’s good for other people to pay the tax. So, I get really incensed when I hear this from the very wealthy. Yes, the very, very wealthy often do pay this tax, but they are not the people that it really hurts. The people it really hurts are the people in this country who are creating businesses and generating jobs.”
According to a Heritage Foundation study, Buffett’s estate planning will help him avoid the estate tax. Buffett has given a vast amount of wealth to charitable foundations and plans to transfer resources to three charitable foundations that his three children will run. This does an end run around the estate tax. Heritage calls it “a savvy method of avoiding the death tax while ensuring his heirs’ financial well-being. Not a bad set-up and one that must make it pretty easy to assume the public role of mogul-cum-martyr.”
Many estates of the ultra-rich do pay the death tax, but their estates are more likely to have the liquidity to absorb the tax. “The people who are substantially hurt by this tax are the ones who don’t have the liquidity to pay the tax. And that’s the family businesses, many of which must be sold to pay the estate tax.”
Pat is a good ally in this fight. She is a forceful woman who divides her time between lobbying in Washington and her native California, spending a week a month in DC for over 20 years. She was born in North Carolina but the family moved to California when she was a child.
Soldano’s Marine father had a massive heart attack when he was 40 and could not work again. To support the family, Pat’s mother worked two jobs, as well as caring for Pat’s aunt, who suffered from mental illness.
None of this held Pat back. She was open to opportunity. “The first person I ever worked for, when I was 16,” Soldano recalls, “was kind enough to teach me how to do payroll and accounting work. It was at a five and dime store. And so, it seemed like I had an aptitude for it, so I went to school and got my accounting undergrad and went to work.” She has a B.A. in business administration from Cal State Fullerton and an MBA from Claremont Business School.
Soldano worked for Lucky Stores, a large company, in the accounting department, while going to college. “I realized maybe the corporate structure wasn’t really for me because I seemed to be more of a maverick and asked too many times why are we doing this this way? I determined that I really wanted to work for more of an entrepreneur. I was fortunate enough to be introduced to Ted Field of the Marshall Field family of Chicago, and I went to work for Ted and spent eight years working for him in what is now called a “family office.”
“Eventually, I left Ted because I wanted to work for more than one family,” she says. “The disadvantage of a single-family office is you are really captive to the family. I left and formed what later became called a Multi-Family Office.” A family office manages all the personal affairs of high-net-worth families and individuals, cash management, tax work, estate planning, investment management, family governance and more. I grew that business and had ten families as clients. These families were significant in size and grew that business over the course of 20 plus years. I sold my business in January of ’09 to GenSpring which was at the time one of the largest multi-family offices in the country and worked under Mel Lagomasino, who was an amazing woman.” She stayed on at GenSpring for eight years.
During her more than 30 years in the family office industry Soldano has seen what the estate tax does to families who own a family business. She watched a Bakersfield, Ca. family go through it when the daughter, who was married to a German citizen, complicating the process, died unexpectedly at 38. When the woman herself died five years later, the process had to be repeated.
“At that point I decided this is really not a good tax. It’s unfair. It’s wrong. It just hurts people. And I had some people who encouraged me to go to D.C. and talk to legislators about it. I was totally uninformed of the legislative process. I had only been to D.C. once in my life. And I just said, ‘Okay’, very stupidly and naively, I’m going to go to D.C. and I’m going to talk to these legislators and they’re going to listen to me and they’re just going to eliminate this tax. Well, that was 25 years ago.”
“The first person I ever worked for, when I was 16,” Soldano recalls, “was kind enough to teach me how to do payroll and accounting work It was at a five and dime store. I had an aptitude for it.”
That was also when Soldano formed Policy and Taxation Group, which advocates for the repeal of the estate tax, gift and generation-skipping transfer (GST) taxes, and the elimination of the destructive effect those taxes have on families, family businesses, job creation, the national economy, and government revenues.
The estate tax is beloved on the left of the political spectrum and is once again on the table for expansion under President Biden. Death tax advocates are likely to say that it is unfair for the plutocrat to escape this vale of tears without giving a last chunk of money to the commonwealth. And what does Pat say to the notion that her clients—all of whom are at least well off, even if their wealth is tied to a family enterprise—can well afford it?
“Let me tell you a story,” she responds. “I have a friend, whose name I can’t mention, and her brother ran a second-generation business. They employed 350 people. A manufacturing business. So, not a huge business, but a good-sized business, that has been around for 80 years. Her brother died of a massive heart attack one day. He did not have life insurance because his health did not permit it. So, his heirs got hit with a $60 million dollar estate tax bill from the IRS.
“And, oh by the way, you have to pay the estate tax in nine months after the date of death. Now, there are some provisions. You can get extensions and there are some exemptions for certain businesses, but generally that is the law. But the reason I can’t use her name, or the name of the business, is because she doesn’t want her 350 employees to worry that they’re going to lose their jobs because she’s has to come up with $60 million to pay the estate tax. So, she has borrowed, and sold stock, she is negotiating with the IRS, to get through it and not lay off employees. But that’s why this tax is so bad.”
But isn’t the exemption on the estate tax high enough that only the very rich get hit?
“When you die,” says Pat, “first of all you get an $11.5+ million-dollar exemption since 2017. That’s huge. When I started working on this tax, it was $650 thousand dollars. Think about it. In California that’s less than the average price of a home. And, oh, by the way, this tax is on all of your assets. It’s on your car, and your furniture, and your antiques, and your art, and your bank accounts, anything that you have it’s a 40% tax assigned.
“Whatever amount the deceased has that is not under the threshold, gets valued at market value and the estate tax is 40% tax on the full value of those assets. Not the appreciation, the full value. So, if you have $20 million dollars, you’re going to pay 40% on roughly $9 million dollars. Again, $11 million dollars is a huge threshold, but it is not permanent, it expires at the end of 2025. If you have a business that employs 100 people, you’re probably going to have a business that’s worth more than $11 million dollars. Your business will be valued by the IRS—you actually have to get it valued and then they have to agree to that value—but you get to pay the price to have it valued, which can be expensive”.
President Biden has plans to breathe new life into the death tax.
“And then the estate is taxed at 40% and it must be paid in nine months after date of death, which includes the time for filings and evaluations. Now, because you’ve paid a 40% tax on the full value of the assets, you get what is called a step-up in basis. So, whoever inherits the assets get this new “stepped up basis” since the descendant’s estate already paid a tax on the appreciation of the asset, as well as 40% on the cost of the assets. President Biden and members of the House and Senate want to eliminate the step up, but keep the rate of tax at 40%, and maybe increase it. This means that each generation will pay a 40%, or more tax, on the same appreciation over and over, generation after generation.”
As an example of why the estate tax is so destructive to communities, Soldano notes that a family in South Carolina has owned and operated a campground for a century. It is in Myrtle Beach, where property prices have skyrocketed. Thus, because highest and best use determines market value, the property will be valued for estate tax purposes as land available for development, not as a campground to determine value on which the family will pay a 40% estate tax. The family is not a wealthy family, and it is likely that the campground will not continue in their hands or as a campground, which is what the family wants, because they do not have the liquid assets to pay the tax. So, the campground will probably be sold to developers. It should be noted that the proponents of a higher estate tax, under the Biden administration, are likely to be able to lower the threshold and raise the rate for the estate tax. Despite its onerous rate for families, the estate tax brings in less than 1 percent of federal tax revenue.
When the left makes a case for the estate tax, it is on a moral basis: why shouldn’t the rich fork over more, dead or alive? Soldano makes what is urgently needed against the death tax: a moral argument, to counter the fans of the estate tax. She cites what has happened to the lumber industry in Arkansas, for example, where private lumber operations that employed thousands of Arkansans no longer exist, primarily because of the death tax.
Envy may well be the real reason we keep this tax that brings in so little money and harms so many families and communities. “The fact is, as I say to people, if you believe that the wealth in this country has grown then the estate tax has not worked, and it has been around for over 100 years, so it is not the solution and only hurts families and communities.”
Let’s hope that people in Washington heed her words today.