Bryant - Course 6. Estate Planning. 11. Business Planning Flashcards

Question

Lynn is an owner of a closely held business that is appreciating rapidly. She decides to transfer $400,000 of stock to her children who work in the family business to reduce the value of her estate, and have her children benefit from the company's growth. Lynn wants to receive income from the business but she does not structure the income payments as qualified payments. Therefore, her retained business interest is valued at zero. * False * True

Answer 1

True * Under Chapter 14, a qualified payment is needed to have the stock transferred to her children valued at $400,000. With a retained business interest of zero, the gifted shares are valued at the full value of Lynn's business interest. If Lynn had recapitalized her stock into non-voting common and cumulative voting preferred shares, and gifted the common stock to her children, she would have "qualified payments" and the common stock would be valued at $400,000 when transferred.

Answer 2

Installment sales of business interests to family members Use of the private annuity Preferred stock recapitalization Buy-sell agreements * There are a variety of freeze growth techniques that Julia can use. Installment sales, private annuities and preferred stock recapitalizations give business owners cash flow and they transfer the growth in the value of the enterprise to the next generation. Buy-sell agreements also freeze the value of the business interest for estate tax purposes.

Answer 3

* Sec. 2701 - Applicable to valuation of corporate and partnership interests designed for estate freeze purposes * Sec. 2702 - Applicable to interests in trusts * Sec. 2703 - Applicable to any agreement or right to acquire or use the property at a price less than the fair market value * Sec. 2704 - Applicable to lapsed voting and liquidation rights in a corporation or partnership.

Answer 4

Lower valuation for the business interest may result from interest that does not fully participate in the future growth of the business, such as preferred stock and frozen partnership interests, and long-term installment sales. **A failure to properly undertake valuation planning for a family business can leave an estate at the mercy of the IRS and may make it impossible to retain the enterprise**. **To be really effective, any estate freeze plan must contain the following elements**: * **A present transfer of interests in the business from family members in the older generation to those in younger generations, either by sale, gift, or both**. * **A shift of all or part of the future growth of the enterprise to the younger generation**. * The owners of the family business should **consider making full use of their applicable credit and even their GST tax exemption for lifetime transfers of family business interests**. On the other hand, **retention of the value of business interests in the estates of the older generation may facilitate stock redemptions, particularly under IRC Sec. 303, deferred payment of tax under IRC Sec. 6166, and special-use valuation for real property under IRC Sec. 2032A, to meet the minimum percentage requirements in the gross and adjusted gross estates**.

Answer 5

The IRS has recognized that valuation of interests in closely-held businesses and family limited partnerships must take into account the difficulty of transferring property that has a limited market, or property that has limited rights. * **Discounts can be applied when these business interests are transferred to family members to reflect the proper valuation of these limited interests**. The two most common discounts available for family and closely-held businesses are the discounts for * Lack of marketability, and/or * A minority interest. A **lack of marketability discount** is **used when valuing transfers of business interests to junior family members during the business owner's life or at death**. A discount is allowed because investors are not interested in closely held stock or family limited partnership shares, and the cost of taking this stock public or selling it on an exchange to potential investors is very expensive. Therefore, a discount for the lack of marketability is allowed by the IRS. **In valuing interests** in corporations, which hold investment assets such as real property, marketable securities, and coins, **consider whether there are potential capital gains that will be taxed at the corporate level**. * The existence of potential capital gains is considered a factor that increases the lack of marketability discount. A **minority interest discount** is allowed when transferring business interests to minority shareholders because these shareholders have no influence or control over business operations or management policy. Specifically, minority shareholders cannot compel dividend payments or obtain the company's assets through liquidations, mergers, or sales. * A **discount is applied to a percentage of the appraised value of the stock which reduces its value for a gift or estate tax purposes**. A lack of marketability discount and a minority interest discount can be combined together when calculating a discount on shares of closely held stock. * **Typically the IRS will scrutinize discounts that exceed the 35-45% range, so business valuations should be conducted by professional appraisers**.

Answer 6

**A discount that reflects a circumstance in which a limited partner cannot withdraw from the partnership and is locked into his investment, is known as a lock-in discount**. **For partnerships, always consider whether the partnership interest can be liquidated through the enforcement of withdrawal rights**. * In some states, if the partnership agreement does not provide a time for when capital will be returned, **a limited partner is given the right to withdraw from the partnership six months after giving notice to the general partner**. In other states, applicable state law prohibits the return of capital to a limited partner except upon the occurrence of certain events specified in the partnership agreement, for example, upon expiration of the partnership term. **If the partnership agreement or state law does not confer upon the limited partner any right to withdraw capital, then the interest may remain in the partnership until the expiration of the partnership term, often 35-50 years in length**. * In such a case, **the limited partner is locked in to maintain his investment in the partnership and a lock-in discount is appropriate**.

Answer 7

**A key-person discount** is allowed **to reduce the value of an estate to less than fair market value upon the death of a key employee in a closely-held business**. The key person in many businesses is the founder of the business, who typically owns most of the stock and controls the management of the company. * Since the value of the company's stock would sharply decline at the owner's death, the IRS may allow a discount for the impact that this loss might have on the business. **A blockage discount is allowed by the IRS if the immediate sale of a substantial amount of publicly traded stock that the decedent owned would adversely affect the stock's market price**. * The blockage discount would reduce the value of the stock held in the decedent's estate, and reduce the estate tax liability.

Answer 8

* Minority Interest - A shareholder has less than majority interest and has no control over the business. * Lack of Marketability - Closely held business stocks with no readily available market. * Key Person Discount - Discount for the loss to the business due to the owner's death. * Blockage Discount - Sale of sizable amount of publicly traded stock at the owner's death which depresses its market price.

Answer 9

**A fractional interest discount or a "co-ownership discount" is available in the decedent's estate for real property that is owned with another party, who is unwilling to sell their partial interest to a third party or to the decedent's estate, or who will not buy out the decedent's partial interest in the property**. * The co-owner of the property cannot be the decedent's spouse, heirs, business partners, or joint tenants under JTWROS. The courts recognize that the value of a fractional interest in real property may be less than the pro-rata value of the same real property if it were held as full fee simple property. * **The discount is a percentage of the value of the real property included in the decedent's estate, which reduces the decedent's gross estate**. Among the factors cited by the courts in justifying the application of a discount to the pro-rata value of a fractional interest in real property are the following: * The owner of a fractional interest has greater difficulty in finding a ready market for the sale of the interest due to the fact that a buyer of the interest will have to share ownership with another. * The owner of a fractional interest cannot sell the fee interest in the property or lease the property without the consent of the holder of the remaining interests. * The owner of a fractional interest by himself generally cannot obtain a loan from normal sources of credit secured by only a partial interest in the real property. * The owner of a fractional interest may not have the right to exclusive use of the property so as to put it to its highest and best use. * An action by an owner of a fractional interest to partition real property does not guarantee that the partitioning co-owner will receive property whose utility is equal to that of the entire parcel from which the partition took place. * The cost of bringing an action to partition real property is often substantial and fee interest in a portion of the property received may be worth less than the proportionate share of the whole property or the sales proceeds. If the property is not fairly partitioned it may not equal the property's fair market value. * The existence of an undivided fractional interest is a legal matter affecting title to real property and often cannot be solved without obtaining legal counsel and commencing legal proceedings at significant cost. **For these reasons, many courts have allowed a discount to the proportionate value of real property in order to arrive at the value a willing purchaser would be willing to pay for an undivided fractional interest in real property**. If the taxpayer asserts that a discount from the proportionate value of the entire property is warranted, he or she must prove that a willing buyer would purchase the property and a willing seller would sell the property at a price that is less than its proportionate value. **The extent of ownership rights is determined under state law**. Though the IRS Valuation Manual states that the fractional interest discount is generally based on the cost of dividing the land, such as survey costs, court costs, and legal fees, the following other factors must be considered: * Size of the fractional interest * Number of owners * Size of tract and likelihood of partition * Use of land * Access to financing

Answer 10

In the valuation of closely-held businesses, there are some potential pitfalls. * For example, **in planning for discounted asset values, the calculation of adjusted taxable gifts may force the value of all lifetime gifts to be reconsidered**. The result of the reconsideration could increase the estate's tax bracket. * Another pitfall may come in **over-reliance on expert valuations**. The following cases illustrate how the **courts are closely examining the approach used by experts in valuing business interests and the qualifications of the appraisers**: * In Estate of Murphy, TC Memo 1990-472, 18 days before death the decedent transferred less than 1% to each of two children to bring her percentage below 50%, and her estate claimed a minority discount. **The Tax Court allowed a discount for lack of marketability, but rejected the minority discount, noting that the decedent gave up control on paper, but not in reality**. * In Estate of Campbell, TC Memo 1991-615, the **court emphasized the importance of evaluating both earnings and net asset values in arriving at the actual value and allowed a substantial discount**. * In Estate of Berg, TC Memo 1991-279, a 60% discount in the value of the closely-held stock was claimed to represent both minority and lack of marketability discounts. The appraisal was by petitioner's CPA, Mr. Whalen, an experienced practitioner who had served on the faculty of several universities and had testified as an expert witness in several cases on lack of marketability and minority discounts, but as **the court noted, with no formal education as an appraiser**.

Answer 11

**If the business interest being valued is a controlling interest, then you must add a premium to the valuation to reflect control**. The **IRS has applied this concept to situations where the transfers to individual family members were of minority interests, but they could collectively exercise control over the business entity**. Controlling Interest Example: An owner of a closely held business owned 100% of the stock in a family corporation. He transferred 30% to each of the three children and 5% to his spouse. **The gifts were valued at net asset value less a 25% discount for minority interest and lack of marketability**. * Since the blocks were transferred simultaneously, each of the children had a swing vote characteristic. * This meant that the owner of any 30% block could join with the owner of any other 30% block to exercise control. * **As the controlling interest increases, premiums should be added to each block accordingly**.

Answer 12

* **Lock-In Discount** is permitted when a **limited partner cannot withdraw from a partnership and is therefore "locked-in" to maintain his investment**. * **Other Discounts** can be taken to reduce the value of a decedent's estate after 2010. A **key-person discount** is taken upon the death of a key employee in a closely held business to compensate for the loss to the business. A **blockage discount** is permitted if a sizeable amount of a decedent's publicly traded stock would depress the stock's market price if sold. * **Fractional Interest Discount or "co-ownership" discount** is available at the owner's death when the fractional interest owned in the property cannot be readily sold. * **Avoiding Pitfalls such as over-reliance on expert valuations, and having gifted property brought back into the estate tax calculation as adjusted taxable gifts**. * **Controlling Interests**: a **premium is added to each unit of stock transferred to limited partners when the collective value of their shares control the business or partnership**.

Answer 13

Fractional interest discount can be taken for property the decedent held as tenants in common with a neighbor, who refuses to sell the property. * A fractional interest discount can be taken at the property owner's death when the neighbor refuses to sell his partial interest in the tenancy in common property. * A blockage discount only applies to sales of publicly traded stock that would depress market price if sold. * A minority interest in a home is not a closely held business interest. * A key man's discount is only available for the loss to the business upon a key employee's death.

Answer 14

A lack of marketability discount can be combined with a minority interest discount when valuing limited partnership interests. A lack of marketability discount is available for all interests, whether it is a minority or a majority interest. * A lack of marketability discount can be combined with a minority interest discount for valuing limited partnership shares. * A lack of marketability discount is available for all interests, whether it is a minority or a majority interest. * A minority discount is available since minority ownership cannot influence the business, compel dividends, or liquidate the company. * Both discounts apply to shares in closely held businesses, not to publicly traded shares on a stock exchange.

Answer 15

To ensure that you have an understanding of business continuation, the following topics will be covered in this lesson: * Defining Business Continuation * Stock-Redemption Agreement, Tax Implications * Section 303 Stock Redemption Upon completion of this lesson, you should be able to: * Define the business continuation agreement, * Describe the use and requirements of the business continuation plan, * Distinguish between cross-purchase and stock redemption agreements, * Explain sinking fund, * Describe the uses of stock redemption, * List IRC requirements for stock redemption, and * Explain the tax implications of stock redemption.

Answer 16

**A business continuation agreement is an arrangement for the disposition of a business interest in the event of the owner's death, disability, retirement, or upon withdrawal from the business**. Business continuation agreements take a number of forms: * An agreement between the business itself and the individual owners, either a corporate stock redemption agreement or partnership liquidation agreement, frequently called an **entity plan**, * An agreement between the individual owners, a cross-purchase or criss-cross agreement, * An agreement between the individual owners and a key person, family member, or outside individual such as a third-party business buyout agreement, or * A combination of the foregoing. **For corporations, the most common types of business continuation agreements are stock redemption plans, also called stock retirement plans, and shareholder cross-purchase plans**. * The **distinguishing feature of the redemption agreement** is that the **corporation itself agrees to purchase or redeem the stock of the withdrawing or deceased shareholder**. * In a **cross-purchase plan**, the individuals agree between or among themselves to purchase the interest of a withdrawing or deceased shareholder. In the case of a **partnership**, the **business continuation agreement is the partnership liquidation agreement, where the partnership in effect purchases the interest of the deceased or withdrawing shareholder by distributing assets in liquidation of the partner's interest**, or the partners agree to a cross-purchase similar to the corporate cross-purchase plan.

Answer 17

* Stock Redemption Agreement - Corporation purchases or redeems stock of the withdrawing or deceased shareholder. * Cross-Purchase Agreement - Individuals agree among themselves to purchase the interest of a withdrawing or deceased shareholder. * Business Buyout Agreement - Key person, family member, or outside individual to purchase interest. * Partnership Liquidation Agreement - Identifies the business continuation plan for a partner's interest in case of death or withdrawal.

Answer 18

You can use a business continuation agreement: * When a guaranteed market must be created for the sale of a business interest in the event of death, disability, or retirement. * When it is necessary or desirable to **peg the value of the business for federal and state death tax purposes**. * When a shareholder or partner is unable or unwilling to continue running the business with the family of a deceased co-owner. * When the business involves a high amount of financial risk for the family of a deceased owner and it is desirable to convert the business interest into cash at the owner's death. * When it is necessary or desirable to prevent all or part of the business from falling into the hands of outsiders. This could include a buyout of an owner's interest in the event of a divorce, disability, or insolvency if there is a danger a business interest would be transferred to a former spouse or creditors. * Where it is desirable to lend certainty to the disposition of a family closely-held business. Rather than relying on will provisions of a parent to transfer the business interest, a binding buy-sell agreement between parent and child could be used.

Answer 19

**A written agreement is drawn stating the purchase price, terms, and funding arrangements**. The agreement **obligates the retiring or disabled owner or owner's estate to sell the business either**: * To the business itself * To the surviving owners * To a third party nonowner * To a combination of parties Occasionally, the agreement combines the types of obligations. For example, the agreement may give other owners the option to purchase the stock or partnership interest. However, it provides that if the owners fail to exercise that option, the interest must be redeemed or liquidated by the corporation or partnership. Conversely, the agreement may provide that if the entity cannot purchase the interest, the remaining owners have either an obligation or option to do so. Such agreements need to be carefully drafted to avoid a situation where the entity discharges an obligation of the other owners to purchase the interest that could have adverse tax consequences to the other owners. For example, if the shareholders under the agreement are obligated to buy the stock of a deceased shareholder, and the corporation redeems the stock, the amount of the obligation of which the remaining shareholders are relieved could be considered a taxable dividend to them. **The buy-sell agreement specifies the event triggering the respective obligations**. Generally, that event is death, disability, or retirement of the owner. However, it could include divorce or insolvency, and events such as loss of a professional license by an owner or conviction of an owner of a crime. Valuation may be based on several factors, like book value, asset value, formula value, or some agreed amount. **Funding pertains to how the promises under the agreement will be financed**. * **Generally, in a redemption or liquidation agreement, the business purchases, owns, and is the beneficiary of life and disability income insurance on each person who owns an interest in the business**. * If a **cross-purchase agreement** is used, then each **business associate purchases, owns, and is a beneficiary of each other's life and disability insurance policies**. The buy-out price is also important in buy-sell arrangements and set prices, without formula adjustments, can bring in the application of Chapter 14 issues.

Answer 20

Death Retirement Disability Divorce Loss of professional license to continue performing business-related tasks * The buy-sell agreement specifies the triggering event. Generally, that event is death, disability, or retirement of the owner. It can include divorce or insolvency, and events such as loss of a professional license by an owner or conviction of an owner of a crime.

Answer 21

**Practitioner Advice:** * **The stock redemption arrangements are advantageous in the event of the principal owner's disability and permit the use of corporate funds for the purchase and are usually more cost-effective from a tax standpoint than the use of personal funds**. * However, **cross-purchase agreements give the other owners more control over a successor who can manage the business and can also provide big tax advantages for the new owners**. * It is extremely important that the value of the business interest for estate tax purposes is pegged by the agreement and usually the company's tax advisor is consulted about the matter. * **Once the value is pegged, the business can't be sold for more than the price set by the stock purchase agreement either before or after the death of the principal business owner**. * It is better to have an initial appraisal and then a formula appraisal mechanism in the agreement to determine the fair market value of the stock to avoid Chapter 14 issues.

Answer 22

**Practitioner Advice:** * Many authorities **suggest that a third party such as an irrevocable trust owns the life insurance**. * At the shareholder's death, the **proceeds are paid to the policy owner who can then make a fully secured loan to the corporation**. * The **corporation could then redeem the stock under Sec. 303**. The three advantages of this technique are: * The insurance proceeds don't increase the value of the corporation for estate tax purposes, * Cash values cannot trigger an accumulated earnings tax problem, and * Neither cash values nor death proceeds can trigger an alternative minimum tax problem.

Answer 23

Assuming the corporation is the owner and beneficiary of the policies, the value of the insurance is not includable as insurance proceeds in his gross estate for federal estate tax purposes. However, **the insurance proceeds will be considered in valuing the decedent's interest in the business unless there is a valid agreement fixing the price and the proceeds are excluded from the purchase price under the terms of the agreement**. **The buy-sell agreement generally establishes the value of the business for federal estate tax purposes if**: * The **estate is obligated to sell at the decedent shareholder's death, or the estate is obligated to offer the decedent's shares at his death at the agreement price**, * The **agreement prohibits the shareholder from disposing of his interest during his lifetime without first offering it to the corporation at no more than the contract price**, * The price was fair and adequate at the time the agreement was made and resulted from a bona fide arm's length transaction between the parties, and * The price was fixed by the terms of the agreement, or, preferably, the agreement contained a formula for determining the price.

Answer 24

**Life insurance and disability income premiums used to fund the purchase of an owner's interest are not deductible to the corporation**. * On the other hand, the death proceeds and disability income proceeds will be received by the insurance corporation on an **income tax-free basis**. * Also, premiums paid by the corporation on the insurance policies are not taxable to shareholders. If in any tax year the corporation's taxable income is retained either for paying insurance premiums or for any other purpose in excess of the amount of the $250,000 accumulated earnings credit ($150,000 in the case of certain personal service corporations), the corporation should show that such excess retentions are necessary to meet reasonable needs of the business. Such excess retentions that are beyond reasonable business needs may attract tax. Where an uncommitted key individual life insurance policy of appropriate amount and type is used to shift the risk of the loss of a key person's services, it generally does not cause or aggravate an accumulated earnings tax problem. Likewise, even though death proceeds do increase earnings and profits to the extent they exceed premiums paid, they should not, per se, cause or aggravate an accumulated earnings tax problem. **Term, whole life, or a similar low cash value policy should be used**. Furthermore, wherever possible the redemption should be effected in the same fiscal year that death occurs. **Besides insurance proceeds and 10-year notes (installment or self-canceling installment notes), a corporation can also establish a sinking fund and pay periodically to the fund with the purpose of someday using it to pay for stock redemption**. * A **sinking fund** can also be established to fund the repayment of the 10-year notes.

Answer 25

**The biggest potential problem in a corporate stock redemption agreement is the possibility that the redemption will be treated as a dividend distribution**. * The IRC states that no matter how the parties label a transaction, distribution of money or property in the redemption of stock by a corporation **will generally be treated as a dividend subject to ordinary income taxation**. * **If the distribution or redemption meets certain exceptions to the general rule, the seller can often avoid ordinary income treatment and can usually have the transaction treated as a capital gain**. The **most common exception is the redemption of all of a shareholder's stock**. * **This complete termination of interest will allow a corporate stock redemption not to be treated as a dividend**. * For example, Hank and Sam, unrelated parties, own all of the stock in a closely held corporation. Hank dies and his stock passes to his estate. * The corporation redeems all of Hank's stock from his estate. * The result is a total redemption and Hank's estate has completely terminated its interest in the business. * This distribution will not be subjected to dividend treatment for Sam because Hank's estate has given up all control, share of future profits, and share of future assets in the event of a sale or liquidation of the corporation. **If the beneficiary of the estate owns stock (constructive ownership) and the corporation does not simultaneously redeem those shares owned by the beneficiary at the time it redeems the estate's shares, then whatever the corporation redeemed from the estate is considered a dividend**. Also, under the "family/trust/corporation" attribution rule, an individual is considered to own the stock owned directly or indirectly by or for the individual's spouse, children, grandchildren, and parents. * Therefore, a close family member to an estate beneficiary who owns shares can make part or all of the redemption amount to be considered dividend distributions. * This rule can be waived if the stockholder holds no interest after the redemption and agrees to not acquire interest for the next 10 years except through inheritance or by bequest.

Answer 26

Avoid being taxed as dividends. * **IRC Sec. 303 allows a corporation to make a distribution in redemption of a portion of the stock of a decedent that will not be taxed as a dividend to use to pay death taxes and other expenses**.

Answer 27

The IRC requirements for a Sec. 303 stock redemption are: * The **redeemed stock must be included in the decedent's gross estate for federal estate tax purposes**. * The value for purposes of federal estate tax of all stock of the corporation that is included in determining the value of the decedent's gross estate **must be more than 35% of the excess of the value of the gross estate minus the sum allowable as a deduction under IRC Sec. 2053 that is estate expenses, indebtedness, and taxes, and Sec. 2054 that is losses**. Gifts of all property made within 3 years of death are included in the gross estate before the percentage test is applied. * Only an amount equal to the total of: 1. **All estate taxes, inheritance, legacy, and succession taxes including generation-skipping transfer taxes and interest thereon imposed by reason of decedent's death**, and 2. **Funeral and administration expenses** whether or not claimed as a deduction on the federal estate tax return can be redeemed and receive favorable income tax treatment, that is, avoid dividend treatment. * **Any excess will be taxed under the rules of IRC Sec. 302**. This means **any balance may be taxed as a dividend to the seller, the executor or heir from whom the stock is being redeemed**, or the **balance may qualify for favorable tax treatment, that is, no realization of taxable gain due to the stepped-up basis of the stock upon the decedent's death**. * A redemption under Sec. 303 will qualify for favorable tax treatment only to the extent that the interest of a shareholder whose stock is redeemed is reduced either directly or indirectly through a binding obligation to contribute toward the payment of the decedent's administration expenses and death taxes.

Answer 28

$700,000 * The value for purposes of federal estate tax of all stock of the corporation that is included in determining the value of the decedent's gross estate **must be more than 35% of the excess of the value of the gross estate minus the sum allowable as a deduction under IRC Sec. 2053 that is estate expenses, indebtedness, and taxes, and Sec. 2054 that is losses**. In Diego’s situation, the stock value is calculated as follows: 0.35 x ($2,250,000 - $250,000) = $700,000

Answer 29

In IRC Sec. 303 stock redemption, the **corporation redeems stock from the party who receives it at the death of the decedent-stockholder**. * The amount of the shares to be redeemed will receive Sec. 303 treatment and not be treated as dividends. * Usually, the recipient of the stock is the decedent shareholder's personal representative, that is, the decedent's executor or administrator. Sometimes the seller is a direct heir, surviving spouse, or trustee of an irrevocable trust created by the decedent. **The redemption is protected under Sec. 303 only if it is from a stockholder who is obligated to pay death taxes, funeral or administration expenses, or whose share of the decedent's estate is reduced by these expenses**. You cannot redeem stock from any stockholder who has acquired his stock by purchase or gift if the donor was not the decedent. Also, **Sec. 303 is not applicable where stock is redeemed from a stockholder who has acquired the stock from the executor in satisfaction of a specific monetary bequest**. The purchase of life insurance on the stockholder by the corporation guarantees the necessary cash on the insured's death. The life insurance used to fund the Sec. 303 redemption should be a typical key person policy. The corporation should be the applicant, owner, premium payer, and beneficiary.

Answer 30

The amount paid to the estate is not treated as a dividend distribution. It is treated as the exchange price for the stock and generally results in no gain being recognized at all by the estate. **This happens if the basis for the stock has been stepped-up for being included in the shareholder's estate**. * **However, to the extent the price paid to the estate exceeds the estate's basis, it will pay a tax on any such gain**. Under the step-up-in-basis rules, a Sec. 303 redemption may result in no adverse income tax consequences to the shareholder from whom the corporation made the redemption. The favorable tax treatment occurs because the basis of the stock in the executor's hands can be stepped up to the stock's fair market value for federal estate tax purposes. In some cases, the value per share paid by the corporation is greater than the value of the stock per share for federal estate tax purposes. When that happens, a capital gain results. Sec. 303 redemptions are specifically exempt from attribution, that is, constructive ownership problems, which helps to make redemptions from family corporations possible without the threat of dividend treatment.

Answer 31

In some cases, the value per share paid by the corporation is greater than the value of the stock per share for federal estate tax purposes. When that happens, a capital gain results. Sec. 303 redemptions are specifically exempt from attribution, that is, constructive ownership problems, which helps to make redemptions from family corporations possible without the threat of dividend treatment.

Answer 32

In order to qualify or aggregate ownership interest in two or more corporations for purposes of meeting the more than 35% of adjusted gross estate test, **there must be at least 20% in value of each corporation included in the decedent's estate**. * In determining the 20% stock ownership by the decedent, **half of the surviving spouse's stock constituting community property may be included by treating it as if it had been included in determining the value of the gross estate of the decedent**.

Answer 33

* **Stock-redemption agreements** generally **establish the value of the decedent's interest in the business for federal estate tax purposes**. A properly drawn-up corporate stock redemption agreement will **ensure that the redemption will not be treated as a dividend distribution**. Disability income and life insurance premiums used to fund the agreement are not deductible by the corporation. Premiums paid by the corporation are not taxable income to its shareholders. * **Section 303 stock redemption** is **used when you want to keep control of a family corporation. It can also be used when the corporation's stock is a major estate asset and a forced sale or liquidation of the business poses a threat**. The amount paid to the estate is not treated as a dividend distribution but treated as the exchange price for the stock.

Answer 34

Cross-purchase agreement Entity plan Third party business buyout agreement * The cross-purchase agreement is an agreement between the individual owners. * The entity plan is an agreement between the business itself and the individual owners. * The third party business buyout agreement is an agreement between the individual owners and a key person, family member, or outside individual. * These are some forms that the business continuation agreement takes. Corporations commonly use stock redemption plans or shareholder cross-purchase plans.

Answer 35

When the corporation's stock is a major estate asset and a forced sale or liquidation of the business in order to pay death taxes and other costs is a threat. Where a tax-favored withdrawal of funds from the corporation at the death of the stockholder would be useful. When redemption of IRC Sec. 303 stock is desirable. * Ronald can use the Sec. 303 redemption to take care of death taxes and other costs which could possibly cause liquidation. * The other situations where this can be used are when it would be useful to withdraw funds from the corporation on the death of the stockholder and when redemption is desirable.

Answer 36

True * Insurance proceeds and disability income used for paying for a stock redemption are considered tax free for corporate income.

Answer 37

Upon completion of this lesson you should be able to: * Define characteristics of installment notes, * Explain when to use SCINs, * Define characteristics of private annuities, * Describe the uses of gift- or sale-leasebacks, * Explain uses of FLPs and LLCs, * Explain tax consequences of intra-family loans, and * Define bargain sales.

Answer 38

**Installment notes are used primarily when business owners want to sell their business to family members to remove the business and any future appreciation from their estate and receive secured income payments from the sale**. * Since installment payments will be received over a period of time rather than as a lump sum, **owners can defer their capital gains and recognize smaller gains each year when payments are received**. Family members who do not have sufficient funds to buy the business outright or make a down payment will find that an installment sale **provides them with greater payment flexibility.** * The purchase price must be paid at some future time but a set sales price is not required, and payments can vary, be spread out over many years, and even be paid from future sales. * The **IRS requires that at least one payment must be made to the seller after the taxable year in which the sale occurs, but regular payments can begin and end whenever both parties choose**. **Each payment received by the seller is comprised of a tax-free return of capital based on the seller's adjusted basis, capital gains, and interest taxed at ordinary income rates**. * **If parents charge too little interest** on the sale, they run afoul of the IRS unstated interest rules, and must **report income on imputed interest** that should have been charged, but was not received. * **The seller must also report depreciation and investment tax credit recapture in the year of the sale**, even if no payments are received. * The **buyer's basis consists of the principal payments made and an interest deduction may be taken for the interest paid**. * If the family members who buy the business **resell it within two years after the first payment is made, the seller must pay tax on the entire outstanding capital gain**. **Installment sales freeze the value of the business in the owner's estate if the owner dies during the installment sale term since the appreciation in the business has been transferred to the new owners**. * The present value of the outstanding installment payments is included in the seller's gross estate, and the **heirs are responsible for paying the entire income tax liability**. **If the business owner outlives the installment sale term, then nothing is included in the gross estate other than any unconsumed principal and interest payments.**

Answer 39

**A self-canceling installment note (SCIN) is indicated when a business owner wishes to sell his business to family members and receive income from the sale for a period of time, or until his death**. * A SCIN is **structured as an installment sale with a provision that the note will partially or fully cancel automatically before the note matures or at the business owner's death**. * The **advantage** of a SCIN is that **any outstanding installment payments are not included in the business owner's estate, unlike a typical installment sale.** * However, **any unrealized capital gain must be recognized when the note is canceled or at the owner's death**. * In the latter situation, it would be **reported on the estate's income tax return (Form 1041)**. **The buyer pays a premium for the business when using a SCIN since the actual payments received by the seller may be less than the current value of the business**, since payments may end prematurely due to a lifetime cancellation or cancellation at the owner's death. * The premium may be a higher principal amount and/or a higher interest rate, and for cancellations at death, they are **based on mortality tables**. * For example, a 65-year-old seller with a 20-year installment note has a mortality factor for the likelihood of dying before age 85. This mortality factor is multiplied by the amount of the note to arrive at the premium paid for his business. * **This extra premium means the seller will have a greater income tax liability from the sale of the business than he would have had using a regular installment sale**. **A SCIN is better than an installment sale for a seller who is not expected to live long**. * It is **also advantageous when the estate tax benefits from excluding the future installment payments are greater than the additional income tax** the seller pays on the premium received since estate tax rates are higher than personal income tax rates. * **The business and future appreciation are removed from the seller's estate and transferred to family members at a substantially reduced cost when using this transfer technique**. **A lifetime cancellation of an installment note before the note matures results in an accelerated capital gains tax that must be recognized by the seller**. * In addition, **the seller has made a gift to the buyer for the present value of the outstanding payments due**. * The **gift tax liability can be reduced by the annual exclusion, but the seller might be subject to both income tax and gift tax in the year of cancellation**. * **To avoid this, the seller may wish to make annual cancellations of the note to spread out the income tax and gift tax liability over time**. * **The seller could also opt to cancel the payment in an amount that equals the annual exclusion each year, thus avoiding any gift tax liability on the annual cancellations**.

Answer 40

A private annuity is another intra-family sale technique **used when a business or property owner wants to transfer his assets to family members and receive fixed income payments for life**. * In a single-life private annuity, a sale of the business or property is **structured to permanently remove the assets from the owner's estate, and not have the remaining payments included in the gross estate**. Private annuity payments are **calculated as lifetime annuity payments, using US Treasury actuarial tables for the seller's life expectancy and current IRC discount rates under Section 7520**. * Payments are unsecured promises to pay a monthly fixed payment to the seller for life, and are **received by the seller as a tax-free return of adjusted basis, capital gains, and interest taxed as ordinary income.** * Once the seller's basis in the property has been returned, **all remaining payments are taxed as ordinary income**. * However, if the **seller dies sooner** than his actuarial life expectancy, **the unrealized gain will be included on his estate's income tax return, even though the remaining payments will not be included in his estate**. **The buyer's basis in the business is the amount of payments made to the seller**. * If a buyer were to die before the seller, **the buyer's estate must continue to make payments to the seller for the remainder of his life**. * If the seller outlives his actuarial life expectancy, the buyer must also continue to make payments until the seller's death. * The **buyer cannot deduct the payments made to the seller on his personal income tax return**. **A private annuity can also be structured as a joint and survivor annuity, where payments are made to one individual until their death, and then to the other annuitant until their death**. * Actuarial tables calculate a factor using two life expectancies based on the individuals' current age and the prevailing IRC Section 7520 discount rate. * If the annuitants are spouses, at the first spouse's death, the present value of the future payments to the survivor is included in the decedent spouse's estate but will receive a marital deduction equal to that amount. * No payments are included in the second spouse's estate at death.

Answer 41

Gift- or sale-leasebacks are techniques that can **provide income to family members when the business owner does not have sufficient liquid assets available for this purpose**. A business owner may have most of his wealth tied into tangible, illiquid business assets that cannot be sold to third parties to provide income since the assets are needed to run the business. **A sale or gift leaseback technique can structure a sale or gift of the business property to family members to provide them with**: * **an income stream from lease payments** and * **remove the business property from the owner's estate**. In a **gift-leaseback, the business owner may gift the land, building, and/or equipment used in the business directly to a family member, or irrevocably transfer the property into a trust with an independent trustee and name family members as beneficiaries**. * The business owner removes the value of this property and any future appreciation from his gross estate but **the transfer is subject to a potential gift tax liability**. * Since the business owner still needs the transferred property to operate the business, **he will lease back the business property from the recipient or the trust**. * The lease payments will provide the donee or trust beneficiaries with **income payments that are taxed in their tax brackets if over age 18, which may be considerably lower than the business owner's bracket, thus providing a tax advantage to the family**. * The **business owner deducts the lease payments as an ordinary and necessary business expense** and continues to use the property in the business.

Answer 42

A sale-leaseback works essentially the same way, except that **the business property is sold to family members rather than gifted**. * The sale of the property must be based on the property's appraised fair market value as an "arm's length" transaction. * The sale to family members **can be structured as an installment sale, with the lease payments providing taxable income to satisfy installment payments to the owner**. * The owner and spouse can gift back an amount of installment payments equal to the annual exclusion amounts, to provide an income stream to the new property owners. * The owner may consider selecting a property that has been fully depreciated, although depreciation is recaptured in the year of sale. * The new owners **can take depreciation deductions for the property acquired, and a deduction for expenses relating to the maintenance of the property**. * The value of the property is **removed from the owner's estate, the appreciation is passed on to family members, and the property is now outside the reach of the business owner's creditors**. It is important that these intra-family techniques be set up properly to avoid problems with the IRS. * **The sale or gift of property must be irrevocable and based on fair market value, and a legally enforceable lease agreement should be in place that provides for reasonable lease payments**. * A sale-leaseback arrangement must also be **established for a necessary business purpose, rather than simply used as a method of shifting income to other family members**.

Answer 43

**A family limited partnership (FLP) is a legal, tax-paying entity established under state law, which is a partnership consisting entirely of family members**. * The FLP **allows senior family members to transfer property to junior family members at significantly reduced transfer costs, to reduce the value of their estates**. * Senior family members are **general partners (GPs) who can control the management of the partnership, control the flow of income to other family members, and receive a salary for services rendered**. * **Children** are **limited partners who have ownership interest but no management control over the family enterprise**. **A FLP must have a legitimate business purpose to exist**. * Parents may transfer their business or other investment property into the FLP in exchange for all equity interests. * They may **choose to receive 1% of general partnership units and 99% of limited partnership units**. * The initial transfer does not trigger an income tax, and **any future income distributions are taxed to the partners who receive them**. The types of property that can be transferred into the FLP include: * Stock of a closely held business but not voting shares. If voting shares are transferred and voted, the shares are included in the GP's estate. * Securities, if less than 80% of the value of the FLP property. * Bonds. * Real estate. Gain is recognized if the property has debt in excess of its income tax basis. Property located out of state avoids ancillary probate in the FLP. * Life insurance policy on the GP's life. Cash values are at the GP's disposal. If the FLP owns the policy, partnership income is used to pay the premiums. Properties that cannot be transferred into the FLP include: * S-Corporation stock, * a family residence, or * qualified retirement assets.

Answer 44

**General partners reduce the value of their estates by gifting limited partnership units to their children**. * Parents can gift all of their limited partnership units and keep a 1% general partnership interest to maintain control over the entire entity. * **If all limited partnership units are gifted, then at the general partner's death only the general partnership interest is included in the gross estate, at its original appraised value**. * In addition, the deceased general partner may receive a lack of marketability and loss of control discounts for the value of the units included in the estate. **It's clear that a FLP is better than an irrevocable trust for intra-family transfers**. * In a trust, if the grantor had control over the trust assets, the value of those assets would be included in the grantor's estate at death after 2010. * **However in a FLP, the general partner can have complete control over all partnership interests, and possibly have less than 1% of the value of the general partner interest included in their gross estate after 2010**. * If the FLP owns a life insurance policy on the general partner's life, then only 1% of the value is included in the general partner's estate. **The value of the property held in a FLP is less than its value if held outside a FLP, because discounts can be taken for a lack of marketability and minority interests on transfers to limited partners**. * A valuation expert is needed to appraise the underlying value of the partnership interests, and determine the acceptable value of the combined discounts. * **The use of discounts leverages the parent's annual exclusion gifts, since they can gift a greater amount of limited partnership units to their children, without incurring any gift tax**. * Spouses can also use gift splitting and their applicable credit amounts to avoid any gift tax liability on the transfers. * More partnership interests can be transferred to limited partners over time using discounts and these gifting techniques. * The limited partners will receive partnership interests, potential appreciation on their interests, and income distributions if stated in the FLP agreement. * If income distributions are not required per the FLP agreement, then the limited partner has no present economic interest and annual exclusions cannot be used to offset gift taxes on transfers to limited partners. **FLPs have the additional advantage of providing some measure of creditor protection for limited partners**. * Creditors can only receive a "charging order" which is a court order requiring that all partnership distributions to a debtor be paid to the creditor until the debt is repaid. * Since general partners control distributions, they can decide not to make any distributions to the debtor. * **The creditor then has no way of forcing a distribution or reaching the property held by the FLP**. * **The creditor even has to pay a proportionate share of income taxes on the distribution that was not received**. * This deters creditors from filing charging orders since they would need to wait for general partners to either liquidate the partnership or make distributions to the debtor partner. **FLPs may also protect the property of limited partners who are going through a divorce, since most states do not award FLP property to a divorced spouse**. The partnership agreement may prevent non-family ownership by giving limited partners the right to buy out another partner's interest first. **Some of the disadvantages of a FLP are**: * **Costs of having an attorney prepare the partnership agreement, appraisal costs, and annual tax preparation costs**. General partners are personally responsible for all debts.

Answer 45

An alternative to a FLP is a Limited Liability Company (LLC). **An LLC offers the tax advantages of a partnership (the pass-through of income and losses to individuals) and limited liability for family members**. * **Management of the LLC can be controlled by certain family members who are actively involved in the business, but ownership can be given to other family members, which entitles them to receive distributions from profits**. * **Gifts of non-voting membership interests to family members qualify for annual exclusions if they are deemed present interests**. * These transfers remove the annual exclusion amounts and future appreciation from the managing members' estates. * Management interests are not transferable without the consent of all members, and **creditors can only obtain a lien against a member's interest in the LLC, not against the business entity**. **Practitioner Advice:** * **The IRS is scrutinizing FLPs and LLCs, and has ruled against some taxpayers for not following proper formalities and for having too much control over distributions and liquidations**. * The IRS has penalized taxpayers for not giving family members ownership interests with any real, present, economic value, and **has disallowed their annual exclusion transfers**. * It is very important that **experienced attorneys draw up these agreements and perhaps consult with other financial advisors in the process, to discuss the tax and other financial planning ramifications to the family**.

Answer 46

**Personal loans made to family members are common** and serve as **viable intra-family techniques for transferring wealth to younger generations**. * **Money or other assets used to fund these family loans will reduce the value of the lender's gross estate and will remove any taxable appreciation from the assets transferred**. **Family loans can be structured in many different ways**. * For example, a parent can loan cash to a grantor trust for the beneficiary's use, in exchange for a promissory note. If the beneficiary invests the borrowed funds and earns a rate of return that exceeds the interest on the note, then the parent has transferred wealth to a family member without paying transfer taxes. * However, any outstanding balance on the promissory note will be included in the grantor's estate if the grantor dies before the note is paid. **Most family loans, however, are typically structured as lump-sum payments made directly to family members to help pay for first homes, cars, education expenses or new business start-up costs**. * There are clear advantages for making loans available to family members since **interest rate charges and loan repayment terms are often more flexible and favorable than what banks can offer**. * Unfortunately, there are also financial and emotional risks involved, unfavorable tax consequences, and endless record-keeping responsibilities. * To minimize these risks, **loan agreements should be written documents with terms that specify the repayment amount, maturity date, interest charges, repayment schedules, and any late fee charges**. **Parents will often make loans to their children with no intention of ever having them repaid. These loans are "forgiven" and the IRS views these loans as disguised gifts from the parent to the child**. * **The loan amount is subject to gift taxes and the child would not report any income from the gift**. * A **parent can avoid paying gift taxes by forgiving the loan payments and interest, or any skipped payments, up to the annual exclusion amounts each year**. * Of course, gift-splitting and the applicable credit could offset any taxable gifts on forgiven amounts that exceed the $17,000 (2023) annual exclusion. **Loans to third parties typically include repayment amounts with a prevailing market interest rate**. * The interest rate is determined by the applicable federal interest rate (AFR) issued monthly by the IRS. * A loan payment from the borrower to the lender is a **tax-free return of capital, while the interest is taxed at the lender's ordinary income rate**. **Family loans, however, are often gift loans which are interest-free loans or loans with below-market interest rates**. * Gift loans are usually recharacterized as arm's length transactions so that the parent is deemed to have made a loan at the market rate, even though no actual interest has been charged. * This forgone interest, the difference between the interest rate that should have been charged on the loan and the amount that is actually charged, **generates a "phantom" interest payment instead**. **This phantom payment is considered a gift from the parent to the child and is subject to gift taxes and the annual exclusion**. * If the loan has a specified maturity date, **the value of the gift is the difference between the amount loaned and the discounted present value of the note, as of the date of the loan**. * If the loan is a demand loan that can be repaid at any time, **a gift is made on the last day of each year the loan remains outstanding and is based on the interest that should have been paid less any interest that the borrower actually paid**. **Gift loans may generate income taxes as well**. * **Parents must report taxable income for imputed interest that should have been paid by the child at the market interest rate**, above any interest the child actually paid on the note. * The **child may take an income tax deduction for this "payment" for investment interest, such as for home mortgage interest, if they itemize, but the deduction does not apply to personal interest**. **The IRS allows for exceptions to these rules**. * **Intra-family gift loans are exempt from gift and income taxes if they are structured as interest-free or below-market rate loans that do not exceed $10,000 per person**. * This rule does not apply if the loan is used to purchase income producing assets. * If the loan exceeds $10,000 but is less than $100,000, **the imputed interest deemed paid by the child and received by the parent is not taxed if the child's other net investment income is $1,000 or less**. * When the child's net investment income exceeds $1,000 **the tax is based solely on the imputed interest amount equal to the child's net investment income**. * Note that parents will pay income taxes on all phantom interest on loans that exceed $100,000 and are used for any purpose.

Answer 47

A bargain sale is just what the name implies. **It is a sale of property to family members, third parties, or charities for less than fair market value**. * The transaction is **considered to be part sale and part gift**. * This **removes the property from the seller's estate except for any unconsumed proceeds that remain in the estate at death**. **The difference between the fair market value price and the price paid for the property is the gifted portion of the sale**. * This is **subject to gift taxes with annual exclusion offsets since the sale is a present interest transaction**. * Gifted amounts that exceed the annual exclusion will be brought back into the seller's estate as an adjusted taxable gift. **A taxpayer may also have to recognize a taxable gain on a bargain sale for property sold to charity**.

Answer 48

* **Gift or Sale Leaseback** is used by business owners who do not have sufficient liquidity from their business to transfer funds to family members. **Allows owner to gift or sale business property to children then lease it back, providing children with lease payments and the business owner with lease deductions**. * **Family Limited Partnership** is a business entity that **allows general partners the ability to reduce their estates, use discounts to leverage annual exclusion gifts, and maintain control of the business by gifting limited partnership shares to other family members**. * **Limited Liability Company** is a business entity that allows voting members to reduce their estates, use discounts to leverage annual exclusion gifts, and maintain control of the business by gifting non-voting units to other family members. * **Intra-family Loan** is used to transfer funds to family members which **reduces the lender's estate and avoids transfer taxes** if structured properly. * **Bargain Sale** is a sale for less than fair market value that is **part sale and part gift**.

Answer 49

Private Annuity * A private annuity is the best transfer technique since the entire $1.5 million interest in the ski resort plus the appreciation will be removed from Ted's estate. Payments are unsecured, but Bob is wealthy and can presumably make payments throughout Ted's life. * A preferred stock recapitalization is a gift of partial business interests that would be subject to gift tax. * A bargain sale results in a gift tax for the difference between the sale price and the fair market value. * An installment sale would cause the PV of any outstanding installment payments to be included in Ted's estate at death.

Answer 50

Installment Sale * An installment sale is the best transfer technique to use since Carol can sell the business to her niece with no down payment, and receive secured income payments to meet her retirement needs. The PV of any outstanding installment payments will be included in her estate at death, but this will not trigger an estate tax liability. * A private annuity is based on unsecured payments, and Carol needs to receive the income or take back the business if needed. * A sale leaseback is a device used to provide cash to buyers. * IDGT is a sale of the business to a trust to permanently remove the property from a grantor's estate, which is not an important tax consideration for Carol.

Answer 51

Gift Leaseback * A gift leaseback is the best transfer technique to use since a gift of the bakery building and land would remove these assets and appreciation from the Pastinos' estate. Lease payments to Maria would give her $20,000 a year in additional support, and are deducted by the bakery. * A business continuation agreement guarantees the sale of a decedent's business interest to partners or a corporation. * A GRAT is a split interest trust that provides income to a grantor for a period of time. * A private annuity would provide income to the Pastinos for life, instead of to their daughter.

Answer 52

* **Business continuation**: A business continuation agreement facilitates the disposition of a business interest in the event of the owner's death or his inability to manage the business anymore. The agreements take a number of forms, such as **partnership liquidation agreement, cross-purchase agreement, buyout agreement or a combination of all these**. In a cross-purchase agreement, the other business associates purchase the decedent's interest in the company. In stock redemption plans, the corporation will buy back the interest. Both the corporation and the other owners can fund their purchase with life insurance proceeds, disability insurance income, or debt. **Sec. 303 stock redemption can be used to offset a decedent's estate tax and funeral expenses**. Whether or not the redemption amount is treated as a dividend distribution depends on the future control of the corporation and other tax code requirements. * **Intra-family business transfer** techniques are various devices and strategies available to business owners to transfer their business interests and property to family members, according to their objectives. **Typically, business owners want to remove their business interests and future appreciation from their estate by selling or gifting business property to family members, while minimizing transfer taxes in the process**. Transfer techniques such as **installment sales, self-canceling installment notes, private annuities, sale or gift leasebacks, family limited partnerships and LLCs, loans to family members, and bargain sales** can accomplish specific family objectives in addition to lowering transfer taxes for senior family members.

Answer 53

unsecured * Private annuity payments are unsecured promises to pay a monthly fixed payment to the seller for life and are **received by the seller as a tax-free return of adjusted basis, capital gains, and interest taxed as ordinary income**.

Answer 54

Capital gains Tax-free return of capital Interest taxed at ordinary income rates Each payment received by the seller is comprised of: * a tax-free return of capital based on the seller's adjusted basis, * capital gains, and, * interest taxed at ordinary income rates.

Answer 55

Use of land Access to financing Size of the fractional interest Number of owners Size of tract and likelihood of partition * Though the IRS Valuation Manual states that the fractional interest discount is generally based on the cost of dividing the land, such as survey costs, court costs, and legal fees, the following other factors must be considered: * Size of the fractional interest * Number of owners * Size of tract and likelihood of partition * Use of land * Access to financing

Answer 56

FLP * A family limited partnership (FLP) is a legal, tax-paying entity established under state law, which is a partnership consisting entirely of family members. The FLP allows senior family members to transfer property to junior family members at significantly reduced transfer costs, to reduce the value of their estates.

Answer 57

Minority interest discount Lack of marketability discount * The two most common discounts available for family and closely-held businesses are: * Lack of marketability, and * A minority interest discount. * A lack of marketability discount is permitted for family businesses because investors are not interested in closely held stock or family limited partnership shares, and the cost of taking this stock public or selling it on an exchange to potential investors is very expensive. * A minority interest discount is allowed when transferring business interests to minority shareholders because these shareholders have no influence or control over business operations or management policy.

Answer 58

not deductible * Life insurance and disability income premiums used to fund the purchase of an owner's interest are not deductible to the corporation. * On the other hand, **the death proceeds and disability income proceeds will be received by the insurance corporation on an income tax-free basis**.

Answer 59

$1,452,500 * The value for purposes of federal estate tax of all stock of the corporation that is included in determining the value of the decedent's gross estate must be more than 35% of the excess of the value of the gross estate minus the sum allowable as a deduction under IRC Sec. 2053 that is estate expenses, indebtedness, and taxes, and Sec. 2054 that is losses. In Diana’s situation, the stock value is calculated as follows: 0.35 x ($4,500,000 - $350,000) = $1,452,500

Answer 60

ordinary income * Once the private annuity seller's basis in the property has been returned, all remaining payments are taxed as ordinary income.

Answer 61

Estate tax Income tax * Since the recipient of the item of IRD must include the assets as taxable income, it is possible to have an item of IRD subject to two tax liabilities: * estate tax * income tax

Answer 62

$10,000 * Intra-family gift loans are exempt from gift and income taxes if they are structured as interest-free or below-market-rate loans that do not exceed $10,000 per person.

Answer 63

SCIN * A self-canceling installment note (SCIN) is indicated when a business owner wishes to sell his business to family members and receive income from the sale for a period of time, or until his death. * A SCIN is structured as an installment sale with a provision that the note will partially or fully cancel automatically before the note matures or at the business owner's death.

Bryant - Course 6. Estate Planning. 11. Business Planning Flashcards

(93 cards)