If you want to leave a small business or professional practice to your children, you should be transferring ownership to them while you're still alive. You can even establish a very low value for the company. "Hey, son ... let's say that this law firm that generates $5 million in annual revenues is worth $100,000 for ownership transition purposes."
Alternatively (or supplementing this), you can have the children buy life insurance for the parent(s) so the "death tax" is paid by the insurance settlement (which is tax free).
I have heard a number of complaints over the years from business associates who claim their families got screwed by estate/inheritance taxes in the past under the exact scenario you laid out. I had no sympathy for even a single one of them because they all fell into one of two groups:
1. They were morons who were advised repeatedly over the years to plan their succession accordingly, and refused to do so. This is the type of person I would describe as a "low-IQ peasant in a professional body."
2. They were situations where the parent(s) died and the children had no interest in taking over the business anyway. "We had to sell the family business to pay the estate taxes" is a silly complaint when the next generation wasn't going to be taking over the business under any circumstances. I'd find myself saying variations of this a lot: "It wasn't the estate tax that took your family farm away from you, idiot. You were going to be forced to sell it anyway because you and all your siblings are working as professionals and living 500+ miles away from the farm."
At an absolute minimum the wealthy individual should be gifting $15,000 a year (tax free to both parties) to all relatives (or any other individuals) that will be in the will.
If the wealthy person lives a long time (say 20 years plus) that avoids a _lot_ of taxes for everyone.
They probably should gift a lot more than that, because the gift is not taxed by the recipient and they can include any extra amount in their lifetime gift exemption.
As usual, you are right on the mark AC. I’ve been in the process of doing similar things for my children over the last couple of years. I am going to look dirt poor in a year or so.
Is there any threshold to this proposed estate tax?
Example, someone owns a house worth a million dollars TOD’d to an heir**, and has accounts (401k, IRA, brokerage, checking, savings) totalling almost a million TOD’d to that heir and another heir.
How badly will the heirs get hit when the owner passes on?
(** In California this is possible.)
The inter vivos transfer of an apreciated asset causes the grantors original cost basis to “carry over” to the grantee. The assignment of a nominal price is not binding on the IRS.