Final Submission: Memorandum With Appendix In Module Nine, you will complete all necessary tax forms according to Section III of the critical elements. You will then submit a comprehensive memorandum

Milestone Three Final Project: Strategic Planning, Gift Taxes, and Disposing of a Business

Name – Yvonne Saunders-Batchue

Institution - Southern New Hampshire University

June 29, 2019

Memorandum

______________________________________________________________________________

Title: Strategic Planning, Gift Taxes, and Disposing of a Business

Requested By: Mr. Bob Jones

Submitted By: Yvonne Saunders-Batchue

Date Submitted: June 29, 2019

______________________________________________________________________________

FACTS: Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob’s personal wealth, including investments in land, stocks, and bonds, is about $14,000,000.

Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000.

The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s tax basis in the land and building is $2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business’s total value. The office furniture and equipment are fully depreciated.

Questions and Answers:

F. Create a detailed tax planning proposal explaining how the client’s family can experience tax savings should the client pass away. Cite relevant governing rules and regulations.

When business owners die, they want their estates to pass on to their children or family members. However, they do not want them to pay any inheritance tax (IHT) as this would reduce the total amount of estate that the family ends up within their pockets. There are various strategies which can be employed to help Bob’s family to reduce the amount of tax going to the taxmen before the family gets its share. These strategies guide on how inheritance tax can be saved.

First, the Bob should put the assets owned into trust before death. Setting up a trust will make the assets in the sizeable estate look like it no longer belongs to the family (Kess & Westlin, 2001). Assets within a trust in clients’ estate do not form part of the clients’ estate when they die. This way, inheritance tax is avoided by the family, saving a good amount that would have been passed to the taxmen. Trust can be established in different ways. Irrevocable or permanent trust offers a lot of tax benefits. Assets put to this type of trust belong to the trust, and money is not subject to any estate taxes (Kess & Westlin, 2001). Trusts pay tax from sources like interests and dividends. This tax is very high for individuals; thus, trust reduces such taxes. Third, charity contributions have an impact on taxation. Contributions made by the client to charity from an estate will always be free of the inheritance tax liability (CTFA, 2019). A client could make use of charitable lead trusts (CLT). Through a CLT, a client transfers an estate's asset to the trust, thus reducing the estate's size and saving the estate's tax. The trust does not, in turn, pay the income to the client but a charity for a certain number of years until the client dies (CTFA, 2019). After death, the asset is transferred to the family untaxed. In addition to CLT, the family can, after the client dies, experience tax savings by contributing to charity from the IHT. For example, if the family contributes 10% of its total inherited assets to charity, the remaining IHT rate on other remaining assets reduces from 40% to 36% (CTFA, 2019). All these strategies will help reduce the amount of taxes Bob’s family would pays if he passes away, ending up with better amounts in their pockets.

G. Illustrate a strategic plan that addresses the need for a will in handling the estate. Detail what happens to the business, land, and investments consistent with tax codes and regulations. Consider extending the plan to address the client’s estate tax, trust, and charitable contributions while minimizing estate tax.

Estate planning is a preparation for all tasks which will serve in the management of an individual’s asset base or estate in the event of the individual’s incapacitation. Most planning involves the bequest of a client's assets to the desired heirs and tax settlement. Estate planning calls for strategies. Some of the strategic plans in handling an estate make a will a critical document that a client must have (CTFA, 2019). A will refers to a legal document that is created to give instructions on how a client’s property should be handled (CTFA, 2019). In the event of the death of Bob, there needs to be a plan on how the business will be owned, how land and investments will be shared, and how all tax codes should be consistent with the property left behind. One of the strategic plans that address the need for a will in handling the estate is planning who gets what share of a client's estate, land, and investments. In the wealth distribution plan, a will is a necessary document in which the individuals to get what portion of land, investment, and estate are listed (Julius, 2019). Besides, through a will, a client can plan who executes all affairs regarding investments, land, estate, and any other related matters. Lastly, a will helps avoid conflicts resulting from children and family over the estate, land, and other investments when the client passes away.

Another strategy is planning on what happens in case a client becomes incapacitated. That is, planning for the powers of Attorney. While creating a sound plan for the powers of Attorney in estate planning, a will can be essential in the event that a client dies (Julius, 2019). When a client intent that a will be a fundamental part of an estate plan, he/she is required to create the powers of Attorney in that will. The powers of Attorney stated in the will give a clear plan on which friend or relative can manage the client's land and investment financial affairs in case the client is incapacitated (Julius, 2019). This makes the will an essential part document in estate strategic planning.

Another strategy in strategic planning for estate management is creating trusts. Creating trusts involves getting out some of the estate assets to reduce tax expenses. In creating trusts, as one of the planning strategies, certain assets are set outside a client's last will. This is to help prevent these assets from going through high taxation, reducing the client's taxed income (Read & Bailey, 2015). Besides, the assets stated outside of the will do not go through the probate process, which is slow and expensive.

As a client plans strategically for his estate, it is essential to include plans for revocable trusts, charitable contributions, and issues to do with tax. Through revocable tasks, the client states who would provide the benefits that the beneficiary would enjoy (Read & Bailey, 2015). The client may provide an income string for the other beneficiary after he/she dies. Trustees for holding assets in trusts may be required. An individual compliant for paying the estate tax should be named in the planning process (Read & Bailey, 2015). The amount for contribution to charity may be stated in the strategy, including which charity to contribute to, although with the aim of reducing tax on estate income. All these calls for a will in which the information is explained.

H. Recommend estate planning strategies consistent with tax codes and regulations for the purpose of reducing the taxable estate. Be sure to include gifting property to heirs in your response.

There exist various estate planning strategies that are consistent with tax codes and regulations that Bob can consider for reducing the taxable estate. The recommended strategies include:

• Gifting property to heirs: this strategy offers a custodian for whoever inherits the estate to benefit.

• Charitable transfers: lifetime transfers of some estate incomes to charities upon the client's death helps reduce the estate' size, thus reducing the estate taxes

• Transfer to trusts: transfer some estate assets to irrevocable trusts to reduce the size of assets taxed in the estate while at the same time, creating very large proceeds like insurance proceeds away or outside from the firm. These proceeds are untaxable.

1. Illustrate the best course of action if the client decides to leave the business in three years. Provide some advice to him should he decide to gift the business to his daughter or transfer the assets or common stock to her, depending on the business entity you have selected.

The best course of action to advice Bob is to gift the business to his daughter in the event limited partnership from the family. The main reason is that gifting is a valuable estate planning strategy to help in transferring ownership of assets that are closely owned by the family to the coming generation (CTFA, 2019). It also takes care of the assets not to fall into the creditors' hands. Another advantage is that its taxation will be done at lower rates for children. Thus, gifting is an excellent course of action.

J. Illustrate the best course of action if the client wishes to sell the business. Consider the tax consequences concerning capital gains and losses, ordinary income issues, and selling an existing operating business.

Selling is one right course of action if Bob wishes to sell the business. This is because Bob would be in a position to control all timings through the terms created in the deal. However, consequences will follow. First, the profit made from selling will be taxed (Wilde & Wilson, 2018). In conjunction to this, the amount that the client will pay will depend on whether the money earned by the client is taxed as either capital gains or just ordinary income (Wilde & Wilson, 2018). Lastly, the profits that the client will earn after selling the business assets may be taxed at the rate of capital gains.

References:

Beebe, J. (2018). The estate tax after the 2017 Tax Act. Issue Brief, 4.

CTFA, A. (2019). Estate planning strategies after tax reform. Journal of financial planning, 32(4), 20-22.

Julius Giarmarco, J. D. (2017). The three levels of family business succession planning.

Kess, S., & Westlin, B. (2001). CCH financial and estate planning guide. Commerce Clearing House.

Read, D. W., & Bailey, W. A. (2015). A primer on teaching the law of wills, probate, and basic estate planning documents to business law students. Southern Journal of business and ethics, 7, 11-35.

Wilde, J. H., & Wilson, R. J. (2018). Perspectives on corporate tax planning: observations from the past decade. The journal of the American taxation association, 40(2), 63-81.