Intra-Family and Other Business Transfer Techniques

Question 1

Buy/sell agreement advantages

Answer 1

• Facilities the transfer of ownership from one business owner to another in an efficient manner
• Designed to provide liquidty to pass a business interest to another party
• Provides a predetermined tax value for a business
• Ensures business continuation
• Makes it easer to obtain credit

Question 2

Cross purchase agreement

Answer 2

• Surviving owners receive proceeds from life insurance policy and and these proceeds are transffered to the deceased’s owners estate and then the estate passes the deceased owner’s shares of the firm to the owners

Question 3

IRS requirements for buy/sell

Answer 3

• Must be fair based on arm-length valuation
• Parties involved must agree to sell their interest in the firm at a predetermiend price

Question 4

Entity purchase

Answer 4

• The entity itself owns the insuracnce policies and pays premiums
• NOT DEDUCTIBLE PREMIUMS

Question 5

Stock redemption agreement

Answer 5

• Basically same as entity purchase except this is for CORPORATIONS (has stock)

Question 6

GRIT

Answer 6

• Grantor-retained income trust
• Irrevocable trust where the grantor makes transfers to the trust while retaining a right to receive income from the trust and/or right to use property held in it
  
  • These rights expire at the end of a pre-set term
• At end of term, the remainder interest in the trust is then distributed to the trust bene’s
• If grantor outlives trust term, asssets are excluded
  
  • If not, then FMV is included in grantor’s gross estate
• Good use for high appreciating assets because transferred assets from grantor are valued at a DISCOUNT for gift tax purposes

Question 7

GRAT

Answer 7

• Grantor retained annuity
• Good for transferring HIGH appreciating property to the trust
• Grantor receives FIXED payemnts for life (or term) based on INITAL value of the trust
• Grantor is taxed on all income

Question 8

GRUT

Answer 8

• Grantor retained unittrust
• Value of payments flucuate
• Good for EASILY VALUED PROPERTY
• Has to be REVALUED YEARLY (THE PROPERTY)
• Grantor can ADD assets to this trust to receive higher income

Question 9

FLP

Answer 9

• Family limited partnership
• Good for older business owners who have highly valued PRIVATELY HELD businesses or expect it to increase in value a lot over time
• Business owner wants to maintain control over the firm but also wants to reduce his/her estate tax liability in the future
• Keeps a general parntership interest in the firm and transfers limited partnership to younger generation
• Could also use a discount valuation for gift tax purposes since it is hard to value prviately-held firms

Question 10

Defective Grantor Trusts

Answer 10

• Busines owner transfers enough cash to the trust in order to make a down payment for the purchase of the firm
• The grantor then sells the business to the trust and recieves the down payment and installment payments
• Considerd defective because grantor pays income taxes on the earnings within the trust (not the bene’s)
• Value of business is effectively removed from gross estate

Question 11

Private annuity

Answer 11

• Canont be issued by an insurance company or firm that is in the business of offering annuities
• This is a technique where a family member agrees to pay the owner of an asset a predetermined amount over a period of time in return for the evnetual ownerhsip of the asset
• Value of annuity is based on owner’s age, health and market interest rates
• Must be a UNSECURED promise
• Annuity must defer capital gains over the life of the asset owner
• Most appropriate when asset owner’s life expectancy is MUCH LESS than IRS life expetancy table used for annuity value
• Asset and appreciaiton is exluded from grantor’s estate