Transcript Chartered Retirement Planning CounselorSM Professional

CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Session 12
Closely Held Business
Transfer Techniques
©2015, College for Financial Planning, all rights reserved.
Session Details
Module
6
Chapter(s) 2
LOs
6-4
Identify the purpose (uses), characteristics,
and factors to be considered in using a given
inter vivos closely held business transfer
technique.
6-5
Analyze a situation to determine the tax
implications and/or the
advantages/disadvantages of a given inter
vivos closely held business transfer technique.
6-6
Evaluate a situation to select the most
appropriate transfer technique to accomplish a
client’s inter vivos closely held business
planning objectives.
12-2
Inter Vivos Sales: Installment Sale
Characteristics
• Purchase price not paid at time of sale is paid in a
fixed number of future installments; one of which
must be in a tax year other than the year of sale.
• Reporting of gain on an installment basis is allowed
automatically unless seller elects otherwise.
• Payments may be secured or unsecured.
12-3
Inter Vivos Sales: Installment Sale
Taxation
• Buyer’s basis is purchase price actually paid.
• Payments are composed of three elements:
•
1. return of basis (tax free);
2. gain (taxed as capital gain); and
3. interest (ordinary income).
Present value of remaining payments is included in
seller’s gross estate.
12-4
Inter Vivos Sales: SCINs
Characteristics
• Normal installment sale except all unmatured
payments will be canceled at seller’s death.
• The possibility that the seller may die prior to
due date of all installments must be taken into
consideration to avoid gift tax. This result is
avoided by increasing the purchase price and/or
interest rate—known as a SCIN premium.
12-5
Inter Vivos Sales: SCINs
Taxation
• Seller’s estate must recognize gain in payments
canceled at death in certain circumstances.
• Buyer’s basis is full purchase price even if not
paid.
• If SCIN premium was not paid, seller is subject
to gift tax.
• No inclusion in GE of seller if SCIN premium
was paid.
12-6
Inter Vivos Sales: Private Annuities
Characteristics
• Payments are determined by using the actuarial
lifetime of the seller and the applicable federal
discount rate for the month of sale.
• Payments continue for actual lifetime of seller,
whether that is more or less than his or her
actuarial lifetime.
• Installment reporting of gain is
not available whether payments
are secured or unsecured.
12-7
Inter Vivos Sales: Private Annuities
Taxation
• Payments are reported by seller under periodic annuity
rules (return of basis and ordinary income until basis
has been fully recovered, at which time all additional
payments are ordinary income). No installment
reporting of gain.
•
•
•
•
Buyer’s is the amount actually paid
No gift tax unless asset is sold for less
than FMV.
Asset is excluded from seller’s gross
estate even if seller dies before end
of actuarial lifetime.
12-8
Application Questions
You want to sell your solely owned business.
Your available options are:
I. An installment sale
II. A self cancelling installment note (SCIN)
III. A private annuity
Which one or combination of these choices
would meet each of the following goals?
12-9
Application Questions
You don’t want to incur any gift tax
I. An installment sale
II. A self cancelling installment note (SCIN)
III. A private annuity
a. I only
b. II only
c. III only
d. I, II, and III
12-10
Application Questions
The seller wants to use installment reporting of
gain.
I. An installment sale
II. A self cancelling installment note (SCIN)
III. A private annuity
a. I only
b. I and II only
c. II and III only
d. I, II, and III
12-11
Application Questions
The seller wants to be assured of receiving a
set number of installment payments.
I. An installment sale
II. A self cancelling installment note (SCIN)
III. A private annuity
a. I only
b. II only
c. III only
d. I, II, and III
12-12
Application Questions
Seller wants to take a security interest in the business
in case the buyer defaults.
I. An installment sale
II. A self cancelling installment note (SCIN)
III.A private annuity
a. I only
b. II only
c. III only
d. I, II, and III
12-13
Application Questions
Seller wants the payments to last for his or her
lifetime.
I. An installment sale
II. A self cancelling installment note (SCIN)
III.A private annuity
a. I only
b. II only
c. III only
d. I, II, and III
12-14
Business Transfer: Buy-Sell Agreements
Purpose
• To assure a closely held business owner of a
market for his or her interest in the event of:
o total disability
o retirement
o death
• To prevent closely held business interests from
being transferred to third parties
who may be unsatisfactory
12-15
Business Transfer: Buy-Sell Agreements
Procedure
• Each owner obligates himself to sell his interest to each of the
other owners (cross-purchase) or to the business entity (entity or
stock purchase).
• In a cross-purchase, every owner obligates himself to purchase his
pro rata share of any offered interest.
• In an entity purchase, the entity obligates itself to purchase any
offered interest.
• The agreement establishes a formula for computing the purchase
price; if triggering event is death, estate tax value is often used.
• Parties are obligated to purchase insurance
in order to meet agreement obligations.
12-16
Business Transfer: Buy-Sell Agreements
Taxation
• Premiums paid on insurance are not deductible by payor or
income to the insured; in a cross-purchase transaction, buyer
will have basis in interest purchased equal to purchase price.
• No gift tax if interest is purchased at FMV.
• If interest is not purchased at FMV, Code Section 2703
(Chapter 14 rules) may require selling party to pay gift or
estate tax on difference if more than 50% of business is
family owned.
• At death of owner, his or her gross estate
will include FMV of business interest
and replacement cost of policies on
other owners, if cross purchase.
12-17
Application Question
A, B, and C are the sole owners of a closely
held business. They have entered into a crosspurchase buy-sell agreement. How many life
insurance policies will need to be purchased to
fund this agreement?
a. 1
b. 2
c. 3
d. 6
12-18
Application Question
A and B are the sole owners of a closely held
business. They have entered into a crosspurchase buy-sell agreement. Who should be
the owner and beneficiary on the life insurance
policy on A?
a. A
b. A’s estate
c. B
d. B’s estate
12-19
Application Question
A and B are the sole owners of a closely held
business. They have entered into an entity
buy-sell agreement with the business (C). Who
should be the owner and beneficiary of each
policy purchased?
a. A
b. B
c. C
d. A and C on the policy on B
e. B and C on the policy on A
12-20
Application Question
The buy-sell agreements formula for purchase
price is more likely to be accepted for gift and
estate tax purposes if the owners are family
members than if they are not.
True
False
12-21
Business Transfer: Recapitalization
Purpose
• To allow additional owners of the
business, and give them financial
incentive to eventually purchase
owner’s remaining interest
• To maintain control of business
until retirement
• To maintain preference in payment
of income and liquidation
• To freeze value of business for
estate tax purposes
• Valuation discounts
12-22
Business Transfer: Recapitalization
Procedure
• May require change in entity to
accommodate multiple owners.
• Causes creation of multiple classes of
ownership interests:
o voting vs. nonvoting (to maintain
control)
o preferred vs. nonpreferred (to
maintain preference for income)
o fixed value vs. non-fixed value
(to freeze value)
• Nonvoting, nonpreferred interests are
sold or given to family members.
• Voting and preferred interests are
retained by original owner.
12-23
Business Transfer: Recapitalization
Taxation
• Interests gifted are subject to gift
tax as modified by Code Section
2701 (Chapter 14 rules); annual
exclusion and valuation discounts
may apply.
• Any interest retained by old
owner will be included in gross
estate.
• Both old and new owners will be
entitled to share of income
distributed by business.
12-24
Application Question
Which one of the following statements
regarding a preferred stock recapitalization
freeze transaction is not correct?
a. If shares are gifted to other family
members, the donor may be able to claim
discounts for minority interest and lack of
marketability.
b. If shares are gifted to other family
members, they are valued as of the date of
completion of the recapitalization.
c. If shares are gifted to other family
members, the Chapter 14 rules may apply.
12-25
Application Question
David has recapitalized his closely held business
to allow his children to become owners. David
has retained an interest in the business that will
pay him a cumulative fixed dividend on an
annual basis. David has retained a qualified
business interest for Chapter 14 purposes.
True
False
12-26
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Estate Planning
Session 12
End of Slides
©2015, College for Financial Planning, all rights reserved.