Pay After I Die: The Estate Tax and the Payout Policy in Family Firms
52 Pages Posted: 21 Aug 2021
Date Written: August 19, 2021
We examine how incentives to minimize estate taxes affect family firms’ payout policies. Under high estate tax rates, family firms are less likely than nonfamily firms to pay out before owners’ deaths because paid-out profits that are inherited by successors are double-taxed. However, family firms may wait to pay out profits after the deaths of the owners to secure liquidity to make estate tax payments without losing family control. To document the causal impact of estate tax incentives on payouts, we exploit the 2001 U.S. tax reform, which eliminated the 55% federal estate tax rate. We find that after the reform, family firms increased their dividend payouts more than nonfamily firms. The reform’s effect on payouts was greater for family firms without family trusts and with founders who served as senior executives. Using sudden diagnoses of fatal diseases as another shock, we show that firms managed by ill executives reduced payouts after diagnosis but increased dividends after death. Our findings suggest that payout policies can be affected by owners’ incentives to reduce their personal tax burdens.
Keywords: family firms, family ownership, payout policy, dividend policy, estate tax, death tax
JEL Classification: G35, G38, H24
Suggested Citation: Suggested Citation