WSJ: Tax Court Blesses Tax-Free Technique for Parents to Transfer Family Business, Wealth to Their Children
Tax Court Logo 2Following up on last month’s post, Defined Value Clauses and FMV: Wall Street Journal Tax Report, Shielding the Family Business, by Laura Saunders:
Small-business owners often complain of feeling caught in the cross hairs of the tax code. For a change, here’s good news.
The Tax Court has just blessed a new technique that owners of closely held businesses—and wealthy families—can use to pass assets to heirs with a minimum of taxes and complications. The ruling in the case, Wandry v. Commissioner, [T.C. Memo. 2012-88 (Mar. 26, 2012)], is stirring up excitement among experts.
In a previous life, I worked for a firm where we did a lot of estate planning for high net worth families.
You often hear the folks that think the estate tax is a good idea whine about the rich staying rich. Maybe. But the fact was, damn near all of our clients that wanted to pass along wealth were “self made” and virtually all of them were small business owners.
Here’s what would happen without successful estate planning- John and Jane Doe build Spacely Sprockets from the ground up into a successful small business, worth, say… $20mm dollars. When they die, they leave the company to Elroy and Judy, who were raised in the business and want to continue to run it.
But Uncle Sam’s estate tax kicks in. With a $5mm lifetime exemption, and 55% estate tax rate, the estate of John and Jane suddenly owes Uncle Sam somewhere in the neighborhood of $7mm for the transfer. But while the Doe’s are “rich” in the eyes of greedy leftists, virtually all their wealth is in their company.
And while the company is successful, it doesn’t have $7mm in cash laying around. And even if it DID, the estate doesn’t have the right to raid company assets to pay estate taxes.
In the end, the options are to either sell the company(and who knows what cash that will generate? In a down economy, you’ll have to sell at a deep discount) or use sophisticated estate planning tools for tax mitigation.
While I was happy to make a LOT of money helping to provide sophisticated estate planning tools, I also realized that it imposed an expense and burden on families that hindered and retarded family owned businesses. So anytime I see that burden reduced, I’m happy.