Court Ruling Is Good News for Small Business Owners and Wealthy Families
The U.S.tax court recently issued a ruling in Wandry v. Commissioner (http://tinyurl.com/87mcnmw), that experts are calling a landmark decision, because it allows tax-free ownership transfers of closely held businesses from one generation to the next with much more ease and certainty.
The Wall Street Journal recently highlighted the relevant issues in the case (http://tinyurl.com/76r9rf3) and explained why financial advisors should seize the opportunity to advise clients about the way this new ruling can help them cut the estate tax burden for their beneficiaries.
Current Tax Law Set to Change in 2013
Until the end of the year, individuals can give up to $5.12 million as a lifetime tax-free exemption, and can give up to $13,000 of assets per year to as many recipients as they choose. This lifetime exemption will drop on Jan. 1, 2013, to $1 million.
Business owners who want to transfer ownership to children or to any other beneficiaries can use these exemptions now to make the shift in ownership tax-free, and can also utilize the $13,000 annual exclusion to give away pieces of the business a little bit at a time rather than in one large financial exchange.
The Wandry Ruling
Coloradonatives Dean and Joanne Wandry each gave their heirs shares in their family-owned limited-liability company worth $1,099,000 in 2004.
To avoid paying tax, they specified that the gifts should equal the dollar amount of their annual exemptions. At the time of the gift, the lifetime exemption was $1 million and the annual exclusion was $11,000.
In order to gift away ownership of the company, the Wandrys were required to get a professional appraisal of the business. The IRS can contest the appraisal after the gift was made, and the value was reappraised at 20% higher than the original valuation.
Despite the IRS’s reassessment of the value of the gift, the judge in the Wandry case did not believe that the couple intended to make a gift that exceeded their exemptions, and ruled that no further tax was due.
Not Just for Business Transfers
The Wandry ruling can also be applied to entities holding publicly traded stocks and wealthy families with “family limited partnerships.”
In order to take advantage of this asset transfer opportunity, clients will need to act fast before lawmakers or an appeal by the IRS change the rules once more.
More than ever, it’s important to talk to your clients about transfer of assets while the current tax laws are still in effect.
To get more information regarding this or any related topic, please visit our website www.TEPLG.com or call us at 630-871-8778.