Intra-Family Transfers and Business Transfers Flashcards Preview

CFP 3/17 > Intra-Family Transfers and Business Transfers > Flashcards

Flashcards in Intra-Family Transfers and Business Transfers Deck (15)
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1
Q

Property Owner Needs Income

A
Installment Sale
Self-Canceling Installment Note
Private Annuity
Grantor Retained Annuity Trust (GRAT)
Grantor Retained Interest Trust (GRIT)
2
Q

Property Owner wants to Gift Assets or Income to Family

A

Gifting Shares

S-Corp (partnership or S Corp) -non service related
FLP
Gift Leaseback
Qualified Personal Residence Trust

3
Q

buy-sell agreements

A
  • contract between owners of a closely held business or between the business an the owner providing for the purchase of the interest of an owner who dies, becomes disabled, or retires
  • most are separately funded by life insurance policies
4
Q

benefits of a buy-sell agreement

A
  1. fix the value of the business for estate tax purposes
  2. provides liquidity/cash for the decedent business owner’s estate
  3. guarantees there will be a market/buyer for the business
  4. provides for business continuation and goodwill
5
Q

two types of buy-sell agreements

A
  1. cross-purchase agreement - if any owner dies, the surviving owners will buy the interest
  2. an entity purchase/redemption agreement - business entity itself purchases the interest of an owner who dies

increase in basis for surviving owners?

  • cross-purchase agreement: yes
  • entity purchase/stock redemption agreement: no (if C corp)

of policies required
Cross Purchase= number of partners or shareholders multiplied by the same number minus one
= [n x (n-1)]
thus, the entity purchase agreement is advantageous in that only one policy has to be purchased for each shareholder/owner (for the entity)

6
Q

Installment Sale

A
  • a sale of property where you receive at least one payment in the year after the tax year in which the sale occurred
  • estate tax advantage: seller removes an appreciated asset from his estate
  • estate tax disadvantage: if seller dies during the installment period, the remaining unpaid principal plus any interest that has accrued from the date of the last payment until the date of the transferor’s death is included in his estate (PV of remaining payments included in owners estate)
  • if debt is forgiven in will, estate must report all remaining gain
  • if debt is forgiven in life, amt forgiven is a gift, part is reported as taxable income
  • gain is capital gain (spreads out taxable gain)
  • DON’T use for recapture property
  • If property is sold before payments are complete the gain for income tax purposes is accelerated
7
Q

SCIN

A

-special type of installment sale that terminates when the seller dies

-any unpaid balance that remains due is canceled
avoids adding the unpaid balance and accrued and unpaid interest to the seller’s estate AT DEATH NO ESTATE TAX

***any unrecognized gain must be reported on the estate’s income tax return (not in gross estate)

  • almost always between family members
  • the buyer must pay a premium so that there is no unequal transfer of assets and a taxable gift
  • increased premium for increased seller’s age
  • no step up when the seller dies
  • very good planning tool when the seller is unhealthy
8
Q

Private Annuity

A

sale of an asset, usually family, in exchange for an unsecured promise to pay a lifetime annuity to the seller

each payment has three elements

  1. return of basis
  2. gain on sale
  3. ordinary income
  • terminates at the annuitant’s death - nothing in the gross estate
  • seller’s estate has no gain to report (unlike an SCIN)
  • seller may pay more than the FMV if the annuitant lives a long time

New regulation-hardly used anymore

9
Q

Family Limited Partnership

A
  • created to transfer assets to junior family members at a reduced gift tax valuation and cost
  • senior family member transfers assets (securities or closely held business assets) to the partnership in exchange for a 1% general partnership interest and a 99% limited partnership interest
  • then, the limited partnership interests are gifted over time to the junior family members - taking advantage of valuation discounts (i.e. lack of marketability and minority interest discounts) and the gift tax exclusions

ONLY GIFT VALUATION IS DISCOUNTED NOT BASIS
CARRYOVER BASIS

-senior family member maintains control and assets are protected from the creditors of the senior family member

  1. FLP must be established for reasons other than the avoidance of transfer taxes
  2. FLP’s income must be distributed to all partners in accordance with their percentage ownership in the partnership
  3. FLP’s capital must be a material income-producing factor for the partnership
10
Q

Gift Leaseback

A

similar to a sale-leaseback, except it is a gift

  • used by a senior family member doing a systematic gifting program but owns mostly business assets
  • creates a deductible lease payment (to replace depreciation)
11
Q

bargain sale

A
  • sale of an asset between family members for less than FMV
  • partly a sale and partly a gift
  • difference between the sale price of the asset and the seller’s basis in the asset will be treated as a taxable gain to the seller for income tax purposes
  • the difference between the FMV of the asset and the payment received by the seller is considered a gift
  • the portion of the property treated as a table gift is added back to the seller’s taxable estate as an adjusted taxable gift (ATG) in arriving at the taxable base
12
Q

GRAT

A

Transfer of appreciating or income producing property

right to receive a fixed annuity for # of years

When term ends, any remaining balance is transferred tax free to benes

If grantor dies early, all property brought back into the estate…all trust assets at date of death value

GIFT OF FUTURE INTEREST..no $14000

13
Q

GRUT

A

same as a GRAT except the income to the grantor is a fixed percentage of the net FMV of the trust assets as determined annually

allows for a possible inflation hedge

14
Q

GRIT

A
  • grantor transfers property into a trust for some period for the eventual benefit of someone else
  • maintains the right to income from the trust
  • if the grantor survives the trust period, the trust property passes to the remainderman and the FMV of the asset is removed from the grantor’s estate
  • the grantor reports all trust on his/her income tax return
  • if the grantor dies, all or some of the date-of-death value will go into the grantor’s gross estate
  • severly limited in that the grantor’s retained income interest is zero when the transfer is made - so it is all a gift, doesn’t qualify for the gift tax exclusion
  • so, the grantors retained interest must be in the form of an annuity or unitrust

Not much gain using this

15
Q

QPRT

A

type of GRIT

personal residence as the corpus of the trust
zero value rules don’t apply
retains the right to live in the residence in the trust

  1. trust may have an interest in only one residence
  2. residence can’t be occupied by someone other than the grantor and members of the grantor’s family
  3. may include a small amount of cash - this income can only go to the grantor
  4. no limit on the trust term - the grantor has to outlive the term of the trust to have it removed from his gross estate
  5. must be irrevocable
  6. may be rented by the grantor after the term of the trust