G.61 Intra-family and other business transfer techniques Flashcards
(12 cards)
Dr. Rodriguez is contemplating a transfer of his successful medical practice to his son using an installment sale. Which of the following benefits would he likely expect from this approach?
A) Immediate payment of the total sale price
B) Retention of control over the medical practice
C) Deferred tax liabilities on the sale’s gain
D) Immediate termination of all responsibilities related to the practice
Deferred tax liabilities on the sale’s gain
Explanation: An installment sale allows the seller to spread out the recognition of gain over multiple years as payments are received, thus deferring some tax liabilities.
G.61 Intra-family and other business transfer techniques
Mrs. Chen owns a thriving retail business. To transfer ownership to her daughter without losing control, she is considering gifting minority shares over several years. What strategy is Mrs. Chen likely using?
A) ESOP (Employee Stock Ownership Plan)
B) GRIT (Grantor Retained Income Trust)
C) Discounted gifting
D) Self-canceling installment note
Discounted gifting
Explanation: By gifting minority interests in a business, one can often utilize valuation discounts for lack of control and marketability, thereby maximizing the amount transferred free of gift tax.
G.61 Intra-family and other business transfer techniques
Mr. Kumar wants to transfer his real estate holdings to his children but still receive income from the properties during his lifetime. Which transfer technique might he employ?
A) Private Annuity
B) Qualified Personal Residence Trust (QPRT)
C) Gift Leaseback
D) Family Limited Partnership (FLP)
Gift Leaseback
Explanation: In a gift leaseback, the owner gifts the property and then leases it back. This allows the owner to remove the asset from their estate while still receiving income or use from the property.
G.61 Intra-family and other business transfer techniques
Ms. Rivera is considering creating an entity to consolidate family assets, retain control over those assets, and facilitate the transfer of wealth to the next generation. Which vehicle might she use?
A) IDGT (Intentionally Defective Grantor Trust)
B) CRUT (Charitable Remainder Unitrust)
C) FLP (Family Limited Partnership)
D) GRAT (Grantor Retained Annuity Trust)
FLP (Family Limited Partnership)
Explanation: A Family Limited Partnership consolidates assets, allows for discounted gifting of partnership interests, and can retain control through general partnership interests.
G.61 Intra-family and other business transfer techniques
Mr. Smith wants to transfer wealth to his grandchildren and skip his children, all while taking advantage of generation-skipping tax exemptions. What might he consider?
A) Dynasty Trust
B) Qualified Terminable Interest Property (QTIP) Trust
C) Simple Trust
D) Crummey Trust
Dynasty Trust
Explanation: A Dynasty Trust is specifically designed to last for multiple generations, benefiting descendants without being subject to estate taxes at each generation.
G.61 Intra-family and other business transfer techniques
Mrs. Ali wants to transfer a valuable asset to her son and in return receive a stream of fixed annuity payments. Which technique might she utilize?
A) QPRT (Qualified Personal Residence Trust)
B) Private Annuity
C) Self-canceling installment note
D) GRAT (Grantor Retained Annuity Trust)
Private Annuity
Explanation: Under a private annuity, an individual transfers property in exchange for unsecured promises to make annual payments for the rest of their life.
G.61 Intra-family and other business transfer techniques
Mr. Perez has a significant estate and wants to benefit from the appreciation of his assets, but he’s concerned about the high estate taxes his heirs will face. Which transfer technique might he consider?
A) IDGT (Intentionally Defective Grantor Trust)
B) Simple Trust
C) UGMA (Uniform Gifts to Minors Act)
D) ESOP (Employee Stock Ownership Plan)
IDGT (Intentionally Defective Grantor Trust)
Explanation: An IDGT is an irrevocable trust that is effective for transferring wealth outside of a grantor’s estate but is “defective” for income tax purposes, meaning the grantor pays the tax on trust income, effectively making additional tax-free gifts to the trust beneficiaries.
G.61 Intra-family and other business transfer techniques
Mrs. Thompson wants to transfer her primary residence to her daughter but still live there for a number of years. Which technique would be most appropriate?
A) Family Limited Partnership (FLP)
B) Crummey Trust
C) QPRT (Qualified Personal Residence Trust)
D) Private Annuity
QPRT (Qualified Personal Residence Trust)
Explanation: A QPRT allows an individual to remove a residence from their estate at a reduced gift tax value while retaining the right to live in it for a specified number of years.
G.61 Intra-family and other business transfer techniques
Dr. Wilson is selling his practice to his niece and, in return, will receive payments for the rest of his life. If Dr. Wilson dies prematurely, the remaining payments will be canceled. Which technique has he used?
A) SCIN (Self-Canceling Installment Note)
B) GRAT (Grantor Retained Annuity Trust)
C) Private Annuity
D) ESOP (Employee Stock Ownership Plan)
SCIN (Self-Canceling Installment Note)
Explanation: A SCIN provides for installment payments, but the obligation to make future payments is canceled upon the seller’s death.
G.61 Intra-family and other business transfer techniques
Mr. Lopez owns a large corporation and wants his employees to gradually become owners of the company. Which technique would best serve this purpose?
A) Dynasty Trust
B) IDGT (Intentionally Defective Grantor Trust)
C) ESOP (Employee Stock Ownership Plan)
D) Crummey Trust
ESOP (Employee Stock Ownership Plan)
Explanation: An ESOP is a qualified retirement plan that invests primarily in the stock of the sponsoring employer. It allows employees to become beneficial owners of the stock, providing an avenue for business owners to sell their shares and an additional benefit for employees.
G.61 Intra-family and other business transfer techniques
Tim and Laura, both 58 years of age, have a joint estate valued at $35,000,000, which includes their family residence and a $1,200,000 whole life insurance policy on Tim. They have three children. Tim wishes for Laura to receive the income from the policy should he pass away, but he does not want the proceeds of the policy to be counted in either his or Laura’s taxable estate. He desires the final proceeds to be inherited by their children. Recently, Tim and Laura have signed Wills instituting bypass trusts, capitalizing on their applicable exclusion amounts. Who should be the rightful owner of Tim’s life insurance policy?
A) An irrevocable life insurance trust (ILIT)
B) The couple’s three children
C) A qualified terminable interest property (QTIP) trust
D) Tim’s bypass trust
An irrevocable life insurance trust (ILIT)
Explanation: An ILIT is specifically designed to hold life insurance policies and ensures that the death benefit proceeds are not counted in the taxable estate of the insured or the policy’s beneficiaries. By having the ILIT as the owner and beneficiary, Tim can ensure that Laura receives the income (perhaps through the ILIT’s investment of the proceeds) and that the ultimate beneficiaries are their children, without increasing either spouse’s taxable estate.
G.61 Intra-family and other business transfer techniques
David Thompson uses his personal funds to open a joint checking account with his granddaughter, Sarah. Which of the following constitutes a completed gift?
A) Sarah passes away.
B) David writes a check from the account to establish a joint savings account.
C) Sarah writes a check from the account to pay her own student loan.
D) Sarah writes a check from the account to pay David’s car loan.
Sarah writes a check from the account to pay her own student loan.
Explanation: A completed gift occurs when the donor has relinquished control over the gift and the recipient has full rights to the property. In this scenario, when Sarah uses funds from the joint account to pay for her own expenses (like her student loan), it demonstrates her control and use of the funds, constituting a completed gift from David.
G.61 Intra-family and other business transfer techniques
