Tax Court Rules for Taxpayer in Transfer of Closely-Held Business Interests

The Tax Court has just passed a new technique that closely-held businesses owners —and wealthy families — can use to pass assets to heirs with a minimal amount of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.  The below commentary was written by a WealthCounsel associate, Lizette Sundvick, who practices throughout southern Nevada.

Just between us, isn’t it nice when the IRS loses a case to a taxpayer? For example, the little-guy victory in the landmark case of Wandry v. Commissioner affirms and simplifies a very powerful tool for passing on wealth, especially for the business owner.

While the case and the estate planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth transfer when there is a business involved is to give it in pieces, and that’s precisely the plan that benefits from Wandry v. Commissioner. Giving away the entire business outright is a good way to take a tax hit, since it will invoke a gift tax when you cross certain thresholds during the year and in your lifetime.

There’s currently a lifetime exemption of $5.12 million and an annual exclusion of $13,000. Nevertheless, it’s easy for a business to be worth more than $5.12 M, and using that exclusion in full will drain what you have available against the estate tax later at death. However, by their very nature and structure, business interests are especially amenable to piecemeal ownership transfer. This is because ownership of the business, and therefore the underlying assets owned by the business, is an abstraction, and you can simply gift your interests in the business without a tax hit. For example, you can chip away by giving a usefully small amount, say, $13,000 per year per individual (or whatever number Congress and the IRS set for that year), without gift taxes.

Of course, gifting business ownership is not entirely ideal. Fortunately, that’s what the Wandry v. Commissioner case tries to fix. Gifting exactly $13,000 is pretty easy by simply writing out the figures and name on a check. On the other hand, with an abstraction like business ownership, the gift depends on the value of the business and, more to the point, on the value that you and the IRS agree or disagree about.

If you give $13,000 of ownership on the basis of your valuation, but the IRS adds up $15,000 based on its own valuation, then the IRS might also think you owe a tax (or, alternatively, that your gift/estate tax exemption should erode by that much). As you might have guessed, that’s exactly what happened in the Wandry case. Unfortunately for the IRS, the court held that the Wandrys had clearly intended to give their annual exemption amount and, if there is a new appraisal and higher valuation of the gift, then the excess wasn’t intended to be gifted in the first place.

As is always the case with the law, there is much more to this case and more guidance to be gleaned for the business owner. I would recommend reading the original article if you are or will be transferring interests in your business. As always, make sure you engage qualified legal counsel before taking action.  I am available to talk on the phone or meet in person.

Reference: The Wall Street Journal (April 30, 2012) “Shielding the Family Business”

Separation of Church...and Estate

For many people, estate planning isn't just about financial assets and other practical concerns. It's also about honoring their religious beliefs and passing those values on to family members. That can be very tricky ground.  My legal colleague, Lizette Sundvick, has offered the below commentary in reference to a good Wall Street Journal article on this topic.

Planning your estate may seem like a simple matter of deciding who gets your stuff when you’re gone. What if you are a person of great faith and religious conviction? How does a person of faith plan for his or her estate when life (and especially life beyond) is so much more than mere “stuff”?

The problem of mixing religion and estate planning – that is, the problem of doing it well – is taken up by the Wall Street Journal in an article titled Joining Church and Estate.

If your decisions during life are guided by your faith, then likely your estate decisions will be too. For example, end-of-life, disposition of remains and even charitable giving decisions are oftentimes determined by one’s religious beliefs. These are personal decisions that directly impact you and collaterally impact others.

However, it is an entirely different matter to make religiously-motivated decisions for others. Given the numerous alternative planning strategies and tools available to plan your estate, it is possible to make (or attempt to make) religious decisions for your heirs. This is where problems can arise.

In the extreme, you can move beyond encouraging to requiring the observance of certain religious principles, rituals, or lifelong membership in the given religion to secure any inheritance. As the Wall Street Journal article illustrates, this is where problems can arise. In short, requiring heirs to uphold religious principles they do not share can work to undermine them.

The article discusses some particularly poignant examples and real life court battles. It’s worth a read and serious consideration when trying to strike that delicate balance of encouraging without alienating those whose beliefs may differ from your own.

I stand ready to assist you in striking the delicate balance between church and estate.  Please call me or email, and we’ll find a time to meet.

Reference: The Wall Street Journal (April 30, 2012) “Joining Church and Estate”

 

Estate Planning For Women (And the Men Who Love Them)

Question #7

A fellow attorney (and award-winning journalist) Deborah Jacobs authored the book, “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide”.  In her Forbes article titled “Estate Planning for Women (And the Men who Love Them)” she indicated the below question is a question every financially savvy woman should be able to answer. 

Should you give away assets now to save taxes?

Now that the estate tax exclusion has gone to $5 million per person ($10 million per couple), this issue concerns fewer people. Keep in mind, too, that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. A threshold question for anyone contemplating this strategy: Can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, you should assume you will live to an advanced age.

You can give anyone $13,000 a year (a couple can give $26,000) without eating into your $5 million exclusion. If you want to give away more than that, you can either count your gift against the $5 million exclusion amount or, if you have used up the tax-free amount, pay gift tax of 35%. Remember that each dollar of the exclusion used during life shaves a dollar off what is available for your estate to use after your death.

So before you dip into the lifetime exemption, consider some simple, tax-free ways to prune your estate. They include paying tuition and medical expenses for another person (such as a grandchild) directly, funding 529 college savings accounts and converting a traditional IRA to a Roth.

This concludes the "Estate Planning for Women (and the Men Who Love Them) series. I hope you have found these posts thought provoking and valuable. Questions like these can often trigger even more questions in your mind.  Please accept my invitation to schedule a meeting where we can discuss these topics and others that might be relevant to your estate planning.  Give my office a call to set a meeting.

 

6 Things To Do Before Your Spouse Dies

While important to both sexes, estate planning often affects women more profoundly. Women live longer on average and tend to marry older spouses, making them three times as likely as men to be widowed at 65.  It’s a staggering reality, and here is some pertinent information for coping with this reality.

Barbara Stanny recently contributed this article to Forbes.  The article gets right to the point in a practical and personal way. 

It's time to have "The Talk"

I heard from a woman whose husband had just been diagnosed with terminal cancer. She wanted to know what she should do before he dies.

Reading her words, I felt a mixture of heartbreak and admiration. Death is not easy to talk about, let alone prepare for. Sadly, most women will face a similar dilemma at some point. Instead of going into denial, like many do, this woman went into action.

Her question sent me back to when my father became seriously ill. I’ll never forget the day I went to my mother and asked: “Do you know what Dad has planned for you when he dies?”

“Oh yes,” she replied quickly, but when I pressed her for details, she couldn’t deliver any.

She also made it abundantly clear: this was not a conversation she wanted to have. I made it even clearer: avoidance was not an option. Here’s what we did:

1. We had “The Talk.” I made my Mom sit down with my Dad and we looked at all the financial documents: bank statements, investments, estate planning, etc. This was not, by any means, an easy conversation. Dealing with death is emotionally excruciating, at least it was for us. Nerves were frayed. My Mom glazed over. My Dad lost patience. I kept scratching my wrist (a nervous habit) until it bled. But by the end, my Mom knew where every penny was and what arrangements he had ( and hadn’t) made made.

2. We assembled “ The Team.” My Dad was very much a do-it-yourselfer. Mom needed her own team of professionals to support and guide her (during and after). First on our list was to hire an estate lawyer. Mom, my sisters and I met with him first, brought in my father, and together my parents created a very good, tax efficient estate plan… which my Mom not only understood, but had a big role in creating. The whole family helped her find an investment advisor (we interviewed 3). She also hired a CPA . It soon became clear he wasn’t a good fit, so she recently hired someone else. She meets with her “team” on a regular basis to this day.

3. We updated documents. We made sure the Will, Power of Attorney, EVERYTHING reflected their latest info and current wishes.

4. We envisioned a future without Dad. My mom started thinking about living single: how much money she’d need to live on (a lot… she wasn’t going to work nor did she have to, but she did like to spend); how she wanted her money invested (very conservatively);and who would assist her with this (her team).

5. We had regular family meetings. These meetings, though often emotional, were absolutely wonderful in getting everyone on the same page while Dad was still alive. Meetings included my sisters, spouses, and all the grandchildren (we eventually had great grandkids crawling around too). My Dad let everyone know what his wishes were, especially for philanthropy, and enrolled the whole family to the board of his foundation. These meetings drew us closer in many ways.

6. Mom talked to friends. She’d had several friends who lost their husbands, so she talked to them at length. They gave her great advice which really helped her see life goes on, happily so.

Having done these things, by the time my father died, all my mother had to do was grieve. Every detail was in order. There were no surprises. All papers signed. All major decisions made. Her team was in place. Practically speaking, his passing was seamless. Emotionally, it wasn’t easy. But being prepared, financially, made it a little easier.

If you would like to insure the stability in your financial life, please give me a call.  I work every day helping my clients “Be Prepared”.  I welcome your questions.  Let’s start early when the stress level is the lowest to work our way through this check list of 6 things to do before your spouse dies.   You are always invited to contact me by phone or leave a comment on this blog

Estate Planning For Women (And the Men Who Love Them)

Question #6

A fellow attorney (and award-winning journalist) Deborah Jacobs authored the book, “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide”.  In her recent Forbes article titled “Estate Planning for Women (And the Men who Love Them)” she indicated the below question is a question every financially savvy woman should be able to answer. 

 

What's a tax dowry?

Starting in 2011, the tax-free amounts you can give to no-spousal heirs during life and at death are combined into a single $5 million exclusion. So, for example, if you have used $1 million of the exclusion to make lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.

Married couples get a new, special break: They can share each partner's $5 million exclusion during life (this process is called gift-splitting) and give more to the kids now, tax-free. But of course this also reduces how much of the tax-free amount will be available when they die, either for their own use or to be carried over by the survivor.

This can pose some tricky issues when at least one member of a couple is wealthier than the other and has been married before. Soon after the new tax law passed, I heard about a situation in which the poorer spouse (a woman) with an unneeded $5 million exclusion agreed to combine the two exclusion amounts for lifetime gifts so that her husband could give more to his kids from a previous marriage, tax-free. Warning: Don't give up your tax dowry without legal advice, and make sure it comes from your own lawyer--not one your spouse hired.

Questions like this one can often trigger even more questions in your mind.  Please accept my invitation to schedule a meeting where we can discuss this topic and others that might be relevant to your estate planning.  Give my office a call to set a meeting.

 

The Odds are worse for finding a Nursing Home for Dad

Liz Sundvick is a member of WealthCounsel who practices law in the state of Nevada.  I found her commentary about gender differences in nursing home availability to be valuable.  Her comments are based on the article article “Fewer Beds For Men Entering Nursing Homes” The New York Times The New Old Age Blog (January 30, 2011)

Finding a nursing home for an ailing loved one, and a good nursing home that is affordable, is already a fairly difficult task. Unfortunately, it’s only likely to grow in difficulty as the number of elderly in need of care begins to peak. Unfortunately, too, there are some factors that you just might not think of. Like this: it is disproportionately difficult to find a nursing home for a male patient.

This fact was recently pointed out over at the New Old Age Blog and I thought it was worth sharing. What is working against our male elderly loved ones is not much more than simple math, with a bit of Medicare policy work at play. As you are likely aware, women have a longer life span on average and therefore there are more women in nursing homes to begin with; that’s already a bottleneck based on population statistics. Then you throw in the fact that, under Medicare rules, most rooms in nursing homes are no more than “semi-private”, a delicate euphemism, and co-ed rooms aren’t allowed either. Thus, with more women already in such rooms the more that only women can be admitted into a facility. The math is fairly easy to figure out, but it’s a strange and unintended consequence nonetheless.

Topics like this one can often trigger even more questions in your mind.  Please give me a call to schedule a meeting, then we can discuss this topic and others that might be relevant to your estate planning.

 

Estate Planning For Women (And the Men Who Love Them)

Question #5

A fellow attorney (and award-winning journalist) Deborah Jacobs authored the book, “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide”.  In her Forbes article titled “Estate Planning for Women (And the Men who Love Them)” she indicated the below question is a question every financially savvy woman should be able to answer. 

What's the difference between a will and a living trust?

There is widespread confusion about the differences between these two documents, and when you need one rather than the other. A common misconception is that living (revocable) trusts avoid estate taxes, which is not true. Both a will and a living trust can be used to transfer assets, but each has unique uses. For example, a living trust can hold assets for your benefit while you are alive--say, in case you are suffering from dementia. Only a will can be used to appoint a guardian for a child.

In some states, living trusts are also used to avoid or limit the cost of probate--the process through which a court determines that a will is legally valid and approves the distribution of assets covered by that will. Whether probate is costly or burdensome will depend on the state. Still, there are times when you might want to use a revocable trust to limit how much of your estate goes through probate or to avoid it altogether. For example, if you are concerned about publicity over your net worth or the identity of your beneficiaries, you might transfer assets through a trust--which, unlike a will, is not a public document. Someone leaving assets to a domestic partner might use a revocable trust, because it is harder for family members to challenge a trust than a will.

A living trust is also useful if you own real estate in a state that is not your primary residence. Real estate is governed by the probate rules of the state in which it is situated. Unless the property is in a living trust, an Illinois resident who has a home in Florida, for instance, would need to probate the property separately there.

Questions like this one can often trigger even more questions in your mind.  Please accept my invitation to schedule a meeting where we can discuss this topic and others that might be relevant to your estate planning.  Give my office a call to set a meeting.