Every once in a while, the IRS attempts to achieve large results without the benefit of legislation. Such a time is now, and the IRS has in its sights family business transfers.
By far the greatest source of wealth in this country is business ownership. Bill Gates, Steve Wozniak, Warren Buffet, Ross Perot, Elon Musk, Michael Bloomberg, and Mark Zuckerberg became fabulously wealthy because they founded businesses that became enormously successful. (Leveraged real estate transactions can also produce wealth, but are a distant second in the wealth creation game. Donald Trump found this out the hard way after multiple bankruptcies—his major source of wealth is licensing his huuuge brand.) What is true for the fabulously wealthy is also true for the merely moderately wealthy families who constitute the top one-half of 1 percent.
Let’s assume that Mom and Dad own a business worth $12 million and they have 3 children all of whom work in the business. Since their total estate is on the order of $18 million (including the business real estate, stocks & bonds, etc.) and the 40% estate and gift tax rate kicks in at assets above about $11 million, the family is sitting on a potential “transfer tax” (estate and gift tax combined) liability of about $2.8 million.
Judge Learned Hand famously said in a much quoted judicial opinion: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” The wealthy have taken Judge Hand’s advice to heart and their advisors have developed methods to keep their taxes as low as possible.
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