It is a natural extension of ATICG's corporate practice to expand our services to encompass the needs of the owners and founders of the business entities we serve. Our extensive background in income and estate tax planning and compliance provides ATICG with a unique ability to assist your corporate attorney, estate tax planning attorney, and CPA to see to it that a comprehensive plan is executed in a timely manner based on your facts and circumstance! No plan is too complex or too basic for us. We work with your professionals as a “team.” We are often hired by estate and corporate tax attorney’s to assist them in the formation, research and implementation of complex corporate and personal income tax planning.
Combination Strategies
Much of the complex planning used in today’s business environment involves “combination planning.” Combination planning is nothing more that using two or more accepted estate and\or income tax planning tools to give you a desired result. Our clients understand that in a world of limited capital, the money invested in the business instead of being paid in excessive taxes means more wealth and job creation. In order to properly and effectively navigate through the complexities of the Internal Revenue Code, we find ourselves having to implement these multiple or combination strategies. Here are just a few such combination strategies.
Charitable Remainder Trust & ESOP
One such example of complex planning would be combining a Chartable Remainder Trust (“CRT”) with an ESOP. Under this strategy a charitably minded business owner would contribute stock into a new or existing CRT thereby taking an actuarially determined Income Tax Deduction for the contribution. The stock now in the CRT would be, at some point in the future, sold to the ESOP for cash “leveraged transaction” or note “seller financed” transaction. Upon completion of the strategy, the CRT is fully funded with cash or the note and the ESOP is fully funded with stock of the sponsor Company. The contributor would receive income for life from the CRT and pay no tax on the sale of the stock to the ESOP. At the death of the contributor, the portfolio of marketable securities would go to the charity, not the stock in the privately held company. Lastly, wealth replacement insurance would make the family whole.
Dynasty Trust, Family Limited Partnership and\or “S” Corporation Stock
Another such combination strategy for example is combining a Dynasty Trust with a Family Limited Partnership with the trust owning “S” Corporation stock. Here’s how it works. Companies that are taxed as an “S” corporation generally have very few estate planning options. One such option is called a QSST or a Qualified Subchapter S Trust. This trust is an allowable owner of the “S” Corporate stock. A Dynasty Trust is a form of a QSST that can be created in some states and it has substantial “combination” benefits. The trust is funded with a reasonable amount of cash and a Generation Skipping Tax Election is made at the time of creation. The Trust then purchases some, most or all of the “S” stock from the shareholder in exchange for a note. The taxpayer makes the “installment sale election” and thereby reports capital gain and interest income on the sale as payments are received. The note is then contributed to a Family Limited Partnership in exchange for partnership units. Distributions are made from the “S” Corporation to the trust and from the trust to the holder of the note, the FLP. The “S” Corporation also distributes enough money to the trust and from the trust to the beneficiaries to pay their pro-rata share of the income tax due via the QSST “flow through.” Once the note is paid in full the money in excess of the income tax liability, if any via “S” Corporation distributions, remain in the trust. This “excess” money can be invested in stocks or bonds. Another option for the Company after the note is paid is to revert back to a “C” Corporation and discontinue making distributions. Revoking the “S” election allows capital to remain in the Company to help fund corporate growth. At this point in time we have done several important things.
- We have removed all the value of the stock plus future appreciation in the private company from the estate.
- Non-dividend distributions have no tax consequence to the seller of the stock but are used to pay the note at capital gain tax rates to the seller. Interest on the note is taxable as such.
- We have removed the FICA tax liability from the seller and the Company; he/she has retired or is semi-retired.
- We have “Generation Skipped” the entire value of the stock because the stock is purchased by the trust for full and adequate consideration.
- We have not used any annual or lifetime gifting exemptions. In fact at this point a gift tax return is not filed.
- The note inside the partnership is “asset protected” from the claims of creditors.
- The “Fair Market Value” of the note enjoys valuation discounts.
- The Limited Partnership Units can be gifted to family members.
- The Limited Partnership Units enjoy valuation discounts in there own right for gift and estate tax purposes.
This has the affect of removing the stock from the estate for “full and adequate” consideration at today’s value. The FLP and trust provide asset protection from the claims of creditors and it gives the business owner the ability to convert ordinary income to capital gain income while giving the family the ability to spread the “S” corporate income tax liability over all the beneficiaries’ tax bracket (with limitations for minor children). It allows the “legacy” to continue to work and earn a salary in the Company even though they no longer own the stock. Last but not least, future stock appreciation is now out of the estate of the seller and allowing the estate to legally skip a “generation” for amounts far in excess of the allowable GST exemption.
Family Limited Partnership & ESOP
This combination strategy provides capital gain tax deferral, estate tax reduction, with asset protection. With this strategy, timing and planning are critical and here is how it works:
- One or more family limited partnerships are created
– Privately held stock is contributed in exchange for limited partnership units
- An Employee Stock Ownership Plan and Trust is established by the privately held corporation
- Shares of stock in the privately held company are sold by the Family Limited Partnership to the ESOT.
- The “taxpayer” makes the required IRC §1042 election and in doing so is allowed to defer the capital gain tax on the sale of the stock to the ESOT.
- Once the ESOT owns 100% of the stock in the Company, the shareholders can make an “S” election turning the Company into a for profit entity that is no longer subject to federal or state income tax, corporate or personal
- Family limited partnership, at the direction of the “general partner” invests the proceeds in a diversified portfolio of stock, bonds, real estate or other acceptable investment assets.
- Asset management fees are paid by the partnership to the general partner.
- Limited partners can then begin making gifts of limited partnership units, further removing those assets from their estate.
This represents just some of the many options and\or strategies available to you and your family when it comes time to build, preserve, or pass on your wealth to the next generation of management or ownership in the most tax affective way possible. We at ATICG will meet with you and your advisors to provide a comprehensive tax advantaged corporate transition strategy that also meets your “life style” needs.
It is important to note that ATICG is not a law firm and therefore, is not giving legal advice, nor is ATICG an accounting firm even though we have extremely knowledgeable seasoned CPAs on staff in the firm. What is important to know is that ATICG works with your advisors to provide technical support and valuation services that meet the highest level of professional and ethical standards in the industry and because of our background in income and estate tax planning can create an “integrated team” of professionals to get the job done.
