Abstract: Paper No. 194

Estate Taxes, Life Insurance, and Small Business

Douglas Holtz- Eakin, John Phillips, and Harvey Rosen

October 1998 

One criticism of the estate tax is that it prevents the owners of family businesses from passing their enterprises onto their children. The problem is that it may be difficult to pay estate taxes without liquidating the business. A natural question is why individuals with such concerns do not purchase enough life insurance to meet their estate tax liabilities. This paper examines whether and how people use life insurance to deal with the estate tax. We find that, other things being the same, business owners purchase more life insurance than other individuals. However, on the margin, their insurance purchases are less responsive to estate tax considerations and they are less likely to have the wherewithal to meet estate tax liabilities out of liquid assets plus insurance.

A revised version of this paper appears as CPR Working Paper No. 10. Those interested should see that version.