Estate and Wealth Transfers 15 Estate planning strategies surrounding large illiquid assets

Question 1

Recognize estate planning issues related to large illiquid assets.

Question 2

The family limited partnership (FLP) has become a popular estate planning tool for
shifting the wealth of the older generation to the younger generation at a reduced
estate tax cost. The FLP allows taxpayers to take advantage of substantial valuation
discounts for lack of marketability and for lack of control over the business assets
transferred into the FLP if a valid nontax purpose exists for establishing the FLP. These
valuation discounts will result in reduced estate taxes.

Question 3

What special relief provision, not the ideal option, more of a last resort, is available to address liquidity issues allows the purchase of a portion of a decedent shareholder’s stock by his corporation to be treated as a sale or exchange rather than as a dividend

Answer 3

CODE SECTION 303
STOCK REDEMPTION

Question 4

What are the tax implications of Code Section 303?

Question 5

What planning considerations are paramount when resorting to Code Section 303 Stock Redemption?

Answer 5

Unintended dilution of the business interest

Question 6

How can the discord among inheritors of a business be addressed?

Answer 6

Recapitalization

Question 7

What is recapitalization?

Question 8

What conditions must exist to resort to COde Section 303- post mortem planning strategy?

Answer 8

1. The stock that is to be redeemed must be includible in the decedent’s gross estate for federal estate tax purposes;
2. The value for estate tax purposes of all the stock of the redeeming corporation that is includible in the decedent’s gross estate must comprise more than 35 percent of the value of the decedent’s adjusted gross estate;
3. The amount that can be paid out by the corporation under Code Section 303 is limited to an amount that does not exceed the sum of (a) all estate and inheritance taxes and (b) funeral and administrative expenses. Any excess over this amount is treated as a dividend to the estate to the extent of the corporation’s earnings and profits. If the corporation has no earnings and profits, excess distributions are considered a return of Code Section 303 permits corporate assets to be withdrawn from a business free of tax to pay funeral and administrative expenses, federal estate taxes, generation skipping taxes, and state gift taxes. Code Section 303 provides that, if certain conditions are met, a corporation can redeem part of a deceased shareholder’s shares without the redemption being treated as a dividend; instead, the redemption is treated as a tax-free exchange. Because the shareholder’s basis in the stock is stepped-up to the fair market value of the stock as of the date of death, the estate recognizes no taxable gain on redemption. The family attribution rules do apply to a redemption under Code Section 303. There is a desire to keep control of a closely held or family corporation within the decedent-shareholder’s family after death; the corporate stock is a major estate asset and a forced sale or liquidation of the business to pay death taxes and other costs is a threat; or a tax-favored withdrawal of funds from the corporation at the death of the stockholder would be useful.

the cost of the stock, and any amount recovered over cost is a capital gain*.

Question 9

What does Code section 6166 provide?

Answer 9

If you are a US citizen when you die, the law allows estate taxes to be paid over 14 years

Question 10

What conditions must exist to use code Section 6166?

Answer 10

The requirements for qualifying for Code section 6166 installment payments of the estate tax due are as follows:
1. The decedent must be a U.S. citizen or resident at the time of his or her death.
2. The gross estate must include a closely held business interest, which can be in a sole proprietorship, a partnership, a corporation, or a farm that was actively managed at the time of the owner’s death.

Question 11

True or False

Unlike Section 303, an unincorporated business qualifies for this special tax treatment.

Answer 11

True

Question 12

Does interest paid under a Section 6166 arrangement does qualify as an administrative expense and is it deductible on either the estate tax return or on the fiduciary income tax returns.

Answer 12

No

Question 13

How do you elect Code Section 6166 for Installment payment of estate taxes?

Answer 13

bond may be required to b posted to secure payment of deferred tax.

Question 14

What is a SLAT?

Answer 14

A Spousal Lifetime Access Trust (SLAT) is one of many types of irrevocable trusts utilized for transferring wealth outside of an estate.

Question 15

What are the benefits of a slat trust?SLAT

Answer 15

A SLAT allows the donor spouse to transfer up to the donor spouse’s available exemption amount without a gift tax. When the donor spouse dies, the value of the assets in the SLAT is excluded from the donor spouse’s gross estate and are not subjected to the federal estate tax.

Question 16

Is a SLAT for both spouses?

Answer 16

Yes. If you and your spouse set up SLATs for each other, the two SLATs must not mirror each other. If the two SLATs are too similar, the IRS will ignore both SLATs for gift tax purposes. To avoid this, certain facets of the SLAT agreements, such as distribution terms, should be sufficiently different.