Source: Russ Alan Prince from Forbes
Within the business world, disharmony among family members or unrelated business partners can also mean a higher tax bill if the owners are forced to divide assets among its members. There are a number of wealth management strategies that can be used to mitigate and defer the tax bill when businesses in the form of limited liability companies or partnerships are divided up. Through the use of sophisticated partnership structures, business owners can structure a division of their companies, eliminating, taxes at that time.
According to Edward Renn, a leading tax expert and partner at Withers Bergman LLP, “As a general rule, any asset, including an interest in a limited liability company or a partnership, can be contributed to a partnership, and can be distributed from a partnership to a partner tax free, with carryover tax basis applying to both the property contributed and the property distributed. There is no need for disgruntled partners to continue to work together and they pay taxes only on the businesses they control. Economic and managerial rights have been divided inside the partnership, business by business.”
Example: A Contentious Business Situation Between Partners: Two partners are each 50% owners in a manufacturing business and a trucking company. Infighting and friction have led to unresolvable discord between the two, thereby impairing their ability to run the companies.
They decided that the only solution was to each take over one of the business, so that they no longer need to work together. Both the businesses have been very successful, roughly equivalent in value, and their respective values are in excess of their tax basis. If Partner A were to sell his 50% interest in the manufacturing company to the Partner B in exchange for her 50% interest in trucking company, there would be a taxable gain for both of them.
As an alternative to triggering a taxable event because of the gain through a sale, Partner A could form a specialized partnership, contribute his 50% interest in the manufacturing company to the partnership, and Partner B could contribute his 50% interest in trucking company to the partnership. The result would be that Partner B would effectively control 100% of manufacturing company and Partner A would effectively control 100% of trucking company, thus achieving the desired separation between the two of them. The partnership could be liquidated at a future time, without triggering a gain or a need to pay any taxes.
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