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As a further service to our clients, our website offers links to valuable financial tools including up to date tax, business and financial news articles, financial calculators, a tax calendar with important filing dates, federal and state tax links, financial terms, and a page that offers links to track your federal and state tax refunds. While these tools are not a substitute for financial and tax advice from a qualified professional, they can be used as a starting point in your decision making process. Click a link below to start using these valuable resources today!

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Financial Calculators

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Important Filing Dates

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Federal and State Tax Links

This helpful resources offers links to federal and all 50 state tax websites.

Articles

Our articles cover a variety of tax topics that are currently trending. While these cannot be relied upon to provide financial or tax advice, they can be used to understand these topics If you have any questions or would like additional information about any of the topics covered in these articles, please do not hesitate to contact us.

S-Corporation – Advantages and Disadvantages
Cost Segregation
IRS announces end date to Offshore Voluntary Disclosure Programs
Cryptocurrency – Evolution and Taxation explained
Beneficial Credits for a company
Captive Insurance Companies
Monetized installment sales
Multiple Business Structuring
Self-Rental
Succession Planning for small business

S-Corporation – Advantages and Disadvantages

An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS) to be considered an S corporation.

Here is a checklist highlighting advantages and disadvantages of the S corporation form. This form is very popular among small businesses and is the most common form of doing business except for the unincorporated sole proprietorship.

Some of the advantages of operating a business as an S corporation are:

Self-employment tax is not owed on the regular business earnings of the corporation, only on salaries paid to employees. This is a potential advantage over sole proprietorships, partnerships, and limited liability companies.
Your personal assets will not be at risk because of the activities or liabilities of the S corporation (unless, you pledge assets or personally guarantee the corporation’s debt).
Your S corporation generally will not have to pay corporate level income tax. Instead, the corporation’s gains, losses, deductions, and credits are passed through to you and any other shareholders, and are claimed on your individual returns.

Some of the disadvantages are:

S corporations cannot have more than 100 shareholders (but with husband and wife being considered as only one shareholder). Further, no shareholder may be a nonresident alien. Corporations, nonresident aliens, and most estates and trusts cannot be S corporation shareholders. Electing small business trusts, however, can be shareholders, a distinct estate planning advantage.
S corporation shareholder-employees with more than a 2-percent ownership interest are not entitled to most tax-favored fringe benefits that are available to employees or regular corporations.
S corporations generally must operate on a calendar year.

Please note that the above Information provided in this chart is general in nature. It cannot be used to accurately assess a specific business or situation. For more detailed analysis of your situation consult your tax advisor.

Ami Shah CPA can provide expert guidance on choice of entity that suits your business model. We have years of expertise in new-entity formation consultation, incorporation, accounting and tax return preparation services. This means that you have more time to focus on your business rather than worry about the compliance or accounting aspects of your company.

Cost Segregation

Cost Segregation is the practice of identifying assets and their costs and classifying those assets for federal tax purposes. In a cost segregation study (CSS), certain assets previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation using accelerated methods. An “engineering-based” study allows a building owner to depreciate a new or existing structure in the shortest amount of time permissible under current tax laws.

The benefits of a cost segregation study include:

Reduced current year tax liabilities
The ability to reclaim depreciation deductions from prior years (without having to amend tax return)
An immediate increase in cash flow due to above

Why to do a CSS now more than ever:

Due to recent legislative changes, real property owners now have even more reason to engage in a CSS. The new law includes cost recovery provisions that open new tax planning and savings opportunities for taxpayers owning or operating real estate. There is now a 100% bonus depreciation for qualifying property acquired and placed in service after September 27, 2017, and an expansion of the definition of qualifying property to include used property. Under the old provisions, there was an original use requirement to qualify for bonus depreciation. Taxpayers can use cost segregation when constructing a building, buying an existing one, or, in certain circumstances, years after disposing of one so long as the year of disposition still is open under the statute of limitations

In our vast experience of recommending CSS to our clients, we recommend the following type of properties who would benefit the most:

Properties whose purchase price are over $700K
Commercial properties
Medical offices and building and Franchise operated buildings
Restaurant buildings
Properties that do not operate on a loss

How can Ami Shah CPA help here?

The Act benefits property owners not only by allowing 100% bonus depreciation for qualifying reclassified property, but also by extending bonus depreciation to qualifying used property. Taxpayers planning on building or acquiring commercial or residential real property should consult with us to ensure they are maximizing their tax benefits under the new legislation. We work with various professional consultants who have great engineering expertise and are pioneers in providing CSS. Our team will be in constant touch with the consultants to make sure to represent your interests in the study and get maximum benefit. We will also handle the tax compliance part after the CSS such as filing a form 3115 – Automatic Change in Accounting in lieu of an amended return. This saves a lot of time and money instead of filing an amended return to fix depreciation for prior years.

Taxpayers who have typically performed CSS are sometimes subject to IRS scrutiny. By engaging the expertise of Ami Shah CPA, property owners can be assured that their study will stand up to the strictest scrutiny of IRS auditors.

IRS announces end date to Offshore Voluntary Disclosure Programs

The IRS recently announced an end date to the Offshore Voluntary Disclosure Program (OVDP). The program officially ends on September 28, 2018.

To recap, OVDP was an amnesty program introduced by the IRS to encourage taxpayers to voluntarily come forward and report foreign assets and financial accounts.

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. Though the IRS is closing this program, they note that seeking out and prosecuting tax noncompliance will continue to be one of their main concerns.

A separate program, the Streamlined Filing Compliance Procedures (“SDOP”) , for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. The Streamlined Filing Procedures are available to taxpayers who did not know they had a filing obligation, and the related penalties are significantly less than the amounts imposed by the OVDP. To utilize the Streamlined Filing Procedures, expats must file three years of delinquent tax returns and six years of delinquent Foreign Bank Account Reports (FBARs).

At Ami Shah CPA, we have brought in hundreds of clients under compliance by filing under the above programs. If you have foreign financial accounts and foreign assets that haven’t been disclosed in your US Tax returns, then reach out to our team right now. We have multiple years of experience in dealing with these cases including working with the assigned IRS agent to get a smooth closure for the case. We review your situation and suggest the best possible program suited for your case. Reach out to us today and schedule a consultation.

Cryptocurrency – Evolution and Taxation explained

Virtual currencies/ cryptocurrencies are becoming a fad investment since the past year due to their extraordinary surge in their values. Almost everyone seems to be talking about and many investors have made a fortune selling them for cash. However, there is also a lot of uncertainty about the taxation of cryptocurrency. Hence to help navigate this uncertainty we have compiled a list of most frequently asked questions from investors on Bitcoin or other cryptocurrencies.

1. What is Virtual Currency/ Cryptocurrency?

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are currently more than 1,500 known virtual currencies. Bitcoin is the most famous among them but there are many others like Ripple, Ethereum and LiteCoin that are gaining popularity. These are usually generated through a process known as mining.

2. How are these taxed?

Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency. This notice states that virtual currency is to be treated as a property rather than currency for tax purposes. This means that is not treated as currency that could generate foreign currency gain or loss.

3. What happens if I mine Bitcoin or other cryptocurrencies?

When a person successfully mines virtual currency, the fair market value of the virtual currency generated as of the date of receipt is includable in gross income. If mining is your trade or business, then the net earnings (gross income less allowable deductions) resulting from this constitute self-employment income and are subject to the self-employment tax

4. Should transactions involving Cryptos be disclosed on my US tax returns?

The most common taxable event is short-term capital gains. Cryptocurrency capital gains occur when you hold a cryptocurrency for less than a year and sell the cryptocurrency at more than basis. This means that they must be disclosed on your returns just like you would disclose any other stock trades you do.

What happens when I convert/ exchange one Crypto for another?

Another common transaction that investors indulge are converting one Crypto into another. The IRS treats this as a taxable event. For example, you purchase a Bitcoin for $1,000. Shortly afterward the price appreciates to $1,500, and you trade it for $1,500 worth of LiteCoin. The trade triggered a taxable event, and you’re now liable for $500 of taxable income even if you didn’t get any cash as a result of this transaction.

What happens if I do not disclose the Crypto gains/ losses I made on my tax returns?

Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS. But the IRS has time and again reminded taxpayers to report these transactions on your tax returns. The IRS has also indicated that taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000. At Ami Shah CPA, we have helped various current clients to disclose their transactions the right way on their tax returns. If you have dealt in Cryptos and not disclosed them on your tax returns, contact us to get compliant. We can put up a income tax compliance plan including preparing and filing US Tax Returns or Amending Tax Returns and an appropriate disclosure program

Beneficial Credits for a company

There are various credits that a company can obtain, and it can be very valuable in either reducing the taxable income or tax in general. Here are few of them:

Research & Development (R&D) Credit

R&D stands for research and development. It is work directed to the innovation, introduction, and improvement of products and processes. The Economic Recovery Tax Act (ERTA) was passed in 1981 and acted as an economic stimulus. The tax credit ultimately acted as an incentive to encourage investment within the United States.

Research and Development (R&D) is a unique tax credit. It is a dollar for dollar offset for state and federal income taxes that has been around for 30 years and is highly underutilized. Often times, it is confused for a deduction. However, it is an actual credit against taxes owed or taxes paid. Every small business that spends money for R&D for new products should be aware of the IRS tax credit that could substantially reduce their tax liability.

In recent years, there have been aggressive legislative changes constructed around the small to mid-cap businesses.

There are various benefits of R&D Tax Credit:

Helps reduce current and future years of state and federal tax liabilities.
Dollar for dollar offset for state and federal income taxes.
Instant source of cash for the small to mid-cap businesses.
Businesses can apply the credit for all open tax years and the current year.
Many industries qualify for this credit including Engineering, Environmental & Life Sciences, Manufacturing & Design and Software

New businesses or start-up companies may be eligible to apply the R&D tax credit against their payroll tax for up to five years. The R&D credit was permanently extended as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. It includes some enhancements starting in 2016, including offsets to alternative minimum tax and payroll tax for eligible businesses. The credit is still based on credit-eligible R&D expenses, but offsets apply to only those costs incurred beginning in 2016. The new payroll tax offset allows companies to receive a benefit for their research activities regardless of whether they are profitable.

The new payroll tax offset is available only to companies that have:

Gross receipts for five years or less. A company isn’t eligible if it generated gross receipts prior to 2012.
Less than $5 million in gross receipts in 2016 and for each subsequent year the credit is elected.
Qualifying research activities and expenditures.
The maximum benefit an eligible company is allowed to claim against payroll taxes each year under the new law is $250,000.

Domestic Production Activities Deduction (DPAD)

The American Jobs Creation Act of 2004 (“AJCA”) enacted Section 199, which created a tax deduction related to domestic production activities.

The special tax deduction is available only to manufacturing and production activities within the United States and can potentially reduce a company’s effective federal tax rate from 35% to 31.85%. The deduction is applied at the partner/ shareholder level. Each owner will take into account his/her distributive or proportional share of items that are allocated to the pass-through entity’s qualified production activities in determining the actual deduction allowed.

The following activities qualify for a DPAD deduction:

Any lease, rental, license, sale, exchange or other disposition of tangible personal property that was manufactured, produced, grown or extracted by the taxpayer within the United States, any qualified film produced by the taxpayer in the United States, or electricity, natural gas or potable water produced by the taxpayer in United States.
The construction of real property (either residential or commercial) performed in the United States by a taxpayer engaged in the active conduct of a construction trade or business.
Engineering or architectural services performed in the United States by a taxpayer engaged in the active conduct of an engineering or architectural services trade or business with respect to construction of real property in the United States.

The companies which are eligible are manufacturing and production activities pertain to entities operating in various industries and professions including software, construction, engineering, architecture, film production, electric, gas and water as well as certain handlers of agricultural products. The deduction applies to corporations (C corporations and S corporations), partnerships and limited liability companies.

Captive Insurance Companies

Captive Insurance Companies (referred to as Captives) also known as Closely Held Insurance Companies (CHIC), have become a commonplace form of alternative risk transfer and can provide companies with significant insurance program flexibility and cost savings. Captives provide an additional layer of asset protection for the business that the commercial insurance market often cannot provide. In addition, when structured properly, insurance coverages that a business may purchase from a Captive can allow an operating business to take a current year income tax deduction for the amounts paid to the Captive that are used to pay future insurance claims.

The business owner pays premium for the insurance coverage on an annual basis based upon an actuarial review of the unique risks of the business.

How can it be structured?

The Captive is established as a cell captive which is a separate legal entity established by the business owner to meet the insurance, risk management, and asset protection needs of the business. The Captive will be taxed as a C Corporation and files a United States tax return under the captive insurance taxation regulations.

What Kind of Business Works for a Captive?

The typical profile of a business that owns a Captive is an operating business with annual sales of $2,000,000 or more a year, and employees other than the owners of the business. Passive businesses such as real estate holding companies, limited partner oil well partnerships and income from royalties do not typically have sufficient risk for a Captive.

The following business owners are also ideal for captives:

Businesses with requisite risk currently uninsured
Business owner(s) interested in personal wealth accumulation
Businesses where owner(s) are looking for asset protection
Business owner(s) interested in tax savings strategies

Steps to Forming a Captive

Feasibility Study: Includes data gathering and preparation of an analysis to determine if a captive is a good fit with the client’s situation and Objectives
Actuarial Study: Engage an underwriter to review the potential risks, determine appropriate premiums and capitalization needs
Develop Business Plan: A good business plan will include elements such as governance, management, investment policy statement, pro-forma financial statements, risk-management strategies, and coverages to be offered
Application, Formation and Licensing: Submit a formal application (including business plan) to the Insurance Commissioner, execute the captive legal documents and ancillary planning entities
Operation: Engage a 3rd-party firm to provide administrative services; Execute the business plan and make suitable investments

Monetized installment sales

Monetized installment sales are allowed under Section 453 of the Internal Revenue Code, and can be used for the disposition of various capital assets, including but not limited to: real estate, the stock and assets of a business, a business itself such as a partnership or LLC, contract rights or franchise agreements, a professional practice such as a doctor’s office selling to a clinic, and art collections. This is a unique tax deferral strategy that allows the seller of “property” to defer capital gains taxes for 30+ years while receiving sale proceeds today.

Structuring a Monetized Installment Sale

The seller sells the asset to an intermediary on an “installment contract,” a 30-year contract in which the intermediary puts no money down and uses a non-amortizing, interest-only loan. Simultaneously, the intermediary resells the asset to a new buyer—typically for cash.

SELLER → INTERMEDIARY → FINAL BUYER

The deed, or other instrument of transfer, goes around the intermediary and to the final buyer. The intermediary never goes into title. The intermediary contracts to acquire and to resell, so the deed can be transferred directly from the buyer to seller. The representations and warranties also go around the intermediary, directly from the buyer to seller.

The intermediary will usually have a lender that’s familiar with monetized installment sales. The lender will lend the original seller an amount of money that is equal to 95% of what the cash buyer paid the intermediary for the asset. This is another no-money-down, non-amortizing, interest-only loan. In other words, the terms of the loan the intermediary uses to purchase the asset from the seller will match the terms of the loan the seller gets from the lender. So, the amount the intermediary pays the seller over the 30-year installment contract matches the amount the seller pays the lender over the same 30-year period.

The seller then walks away with 95% of the sales prices in his pocket (in the form of a loan) without any capital gain tax paid to the IRS. The 5% discount goes to the intermediary for facilitating the transaction.

Per the terms of a standard installment sale loan agreement, the seller must initially use the loan proceeds for any investment or business purpose. The seller could buy another piece of real estate, pay business debt, or just put the money in an interest-bearing bank account. After the loan proceeds been initially invested for a business purpose, this fulfills the business purpose requirement and any future proceeds of that investment are considered unrestricted funds and can be used at the seller’s discretion.

Advantages of Using a Monetized Installment Sale

There are a few reasons why a monetized installment sale is advantageous. Here are some of them:

Avoiding paying lump-sum capital gains payment to the IRS. Someone who sells an investment property for $1 million can walk away with $950,000 at closing instead of $650,000 (After paying Capital gains tax in an ordinary sale transaction), an amount that can make a big difference when trying to find new investment opportunities.
Because a monetized installment sale is typically structured with a business loan, the seller can write off those interest payments each year. This offsets the taxable income the seller is receiving from the intermediary each month.
The seller will eventually have to pay capital gains taxes at the end of the 30-year contract, but the installment sale allows the seller to defer paying capital gains tax during that time.

Advantages of Using a Monetized Installment Sale over a 1031-exchange

There is no 45-day time limit for identification or anything else; and no 180-day time limit applies for purchase of replacement property
There is no requirement that as a condition of tax deferral, the present level of debt must be maintained (the seller can pay off debt and still enjoy complete tax deferral
There is no limit to the range of things in which one can invest cash after the sale
No risk exists that the transaction will fail because of market conditions or inability to obtain financing in time
There is no current tax on “boot”, if there is any, to be incurred

Multiple Business Structuring

It is not unusual for such serial entrepreneurs to create a multiple business entity structure to hold multiple and varied business endeavors. Doing so is commonplace and provides certain limitation of legal liability for the serial entrepreneur. Such business entities may include a Limited Liability Company (LLC), C or S Corporation, and/or Partnership. Each in its own way protects the entrepreneur’s personal assets from potential risks such as lawsuits and other claims against the business. In recent years, the practice of forming layered, multiple business entities has gained increased interest among entrepreneurs desiring to start a new businesses.

The layered, multiple entity structure strategy would look something like this:

One entity is established to serve as the ‘operating’ business and holds very few assets on its balance sheet.
Another related business is established to hold valuable assets such as patents, trade secrets, software, websites, and other intellectual property and serves as a ‘holding’ company.
Likewise, real estate needed for operations may be held in a separate entity.

In simple terms, the enterprise assets are separated from the potential liabilities in the same business enterprise by placing them in two (or more) separate business entities. Such multiple business entity layering necessitates careful drafting of legal agreements between the various entities involving items such as leases, licensing agreements, management agreements, etc.

While creating multiple business entities may afford the entrepreneur an opportunity to separate liability exposure in his business from his personal assets and the assets of his other business endeavors, certain tax consequences can and will follow. LLC’s, Partnerships and S Corporations offer pass-through taxation treatment. The C Corporation is taxed at the entity level as well as the personal level when dividends are paid to the individual shareholders. All tax consequences should be considered carefully when choosing the form of business entity, regardless of the number of entities formed by the entrepreneur.

Layering multiple entity structures may include one of the following entity combinations:

An LLC owning multiple LLC’s
Limited Partnership owned by a General Partner (another entity) and Limited Partner(s) Individual
S Corporation owned by a Single Member LLC
S Corporation owned by a Limited Partnership (with all individual partners)
S Corporation owned by an S Corporation with one individual shareholder
C Corporation owned by another C Corporation, Trust or LLC

Considerations to be made while opting for multiple entity:

Each business entity has its own tax consequences at the federal and state level. When considering the entity structure, whether forming multiple entities operating in tandem or layered multiple entities, it is wise to consult with both legal counsel and a tax advisor familiar with the appropriate state’s corporate and tax laws.
Care should be given to the decisions related to how assets should be titled and recorded on the multiple business’s accounting records
Asset titling or ownership issues will be important when one or more of the businesses is ultimately sold

Self-Rental

Under Self-Rental, portion of a taxpayer’s gross income from an item of property used in a rental activity is recharacterized from passive to non-passive income if:

The property is rented for use in a trade or business activity in which the taxpayer materially participates; and
The property does not qualify as property rented incident to development activity.

Essentially, this rule converts passive income into non-passive income. A passive activity is any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. All rental activities are generally passive.

As an example, Let’s assume that a taxpayer has ownership of an operating company and also owns a separate entity that owns the real estate that is leased to the operating company. The taxpayer materially participates in the operating company. In this situation, the rental income received from the operating company which would normally be treated as passive income becomes recharacterized as non-passive.

The rule was implemented to prevent a taxpayer with passive activity losses from various other entities from artificially creating passive activity income to absorb such losses.

While planning a self-rental transaction, a taxpayer must pay attention to several risks:

The self-rental rule only recharacterizes the rental income as non-passive. The rental loss on the rental property is considered as passive. Therefore, if there is no passive income in the current year, the loss will not be deductible but suspended and carried forward to future tax years.
Income from a self-rental is treated as non-passive, while loss is treated as passive. Therefore, a taxpayer must pay special attention to the rental rate charged between their active business and their rental properties. If the rent charged is too low and produces a rental loss, the resulting loss becomes passive and may be suspended if the taxpayer otherwise has no other passive income with which to offset
The self-rental rule recharacterizes the rental income from an item of property, rather than from an activity. For instance, if taxpayers owned Property A, which they rented at a profit to ABC Corporation, and Property B, which they rented at a loss to XYZ Corporation, and where taxpayers materially participated in the activities of both corporations, the rental income from Property A had to be recharacterized as non-passive under the rule applied to the income from the rental of Property A—an item of property—and not to the net income from Property A/Property B rental activity. As a result, the income from the rental of Property A (recharacterized as non-passive) couldn’t be used to absorb the loss from Property B (which had to be treated as passive under the rule generally treating rental activities as passive activities).
The self-rental rule applies where property is rented to a C corporation that’s subject to the passive activity loss rules in which the taxpayer materially participates.
Activities of the taxpayer’s spouse are also attributed to the taxpayer. Thus, for example, rental income received by an individual taxpayer pursuant to a lease of office space to her spouse’s corporation is recharacterized as non-passive income.

Succession Planning for small business

Steps for Developing a Succession Plan

There are several different strategies and options for succession planning. The following five general steps for developing a plan provide a good road map for the process:

Choose Your Successor – Start by looking within the organization, examining employees who may have the right leadership skills. Family businesses may benefit from impartial third-party consultants, given the emotional aspects of choosing among family members. This should begin at least 15 years prior to a planned retirement.
Develop a Formal Training Program – First, identify critical functions of the company and then have your successor work in each of these areas. It’s not enough for your successor to understand the executive duties alone, since he or she needs to understand the breadth and depth of the organization. You may also have to allow your successor to make some mistakes along the way.
Set a Timetable – Determine how and when control of the company will be shifted to your successor. Ease your successor into the position and avoid the impulse to routinely overrule his or her decisions during this transition phase.
Plan Your Own Retirement – It is important for departing officers to prepare for their departure and plan the next chapter of their lives. This also will make it easier for you to let go and for your successor to fully take the reins.
Execute the Succession Plan – If you have made the proper preparations, this should be as simple as handing over the company and stepping aside. Businesses whose owners install their successor during their lifetime typically have a much smoother transition to the new principal.

Succession Planning Strategies

We usually think of a business owner simply handing over the reins to a new owner or principal when we think of succession planning. But there are several different financial options for business owners who would like their organization to survive beyond their own tenure. Below are six such strategies for succession planning:

Selling Your Business Interest – You may choose to sell your business interest outright in return for cash or other assets. Most partners or company officers have the option of selling before they retire, at retirement, at death or at any time in between. You may have to pay capital gains tax if you sell before your death.
Transferring Business Interest with Buy-Sell Agreement – This is a legal contract that arranges the sale of your business interest in advance, to be enacted at a predetermined event such as retirement, divorce, disability or death. The buyer is obligated to purchase your interest at fair market value at the time of the triggering event.
Granter Retained Annuity Trusts or Unitrusts – GRATs and GRUTs are irrevocable trusts to which you transfer assets while still obtaining an income for a given period of time. At the end of this period or upon your death, the assets in the trust go to the other trust beneficiaries. This is considered to be a quite sophisticated succession tool.
Private Annuities – This is the sale of property in exchange for regular payments to you for the rest of your life. Ownership of the business is transferred to family members or another buyer, who promises to make periodic payments until your death (and sometimes for the life of a surviving spouse). This allows you to avoid gift or estate taxes.
Self-Canceling Installment Notes – SCINs allow owners to transfer a business to a buyer in exchange for a promissory note, requiring the buyer to make a series of payments. The remaining payments are canceled upon the seller’s death.
Family Limited Partnerships – This can help when transferring business interests to family members. You first establish a partnership with general and limited partnership interests, then transfer the business to the partnership. Over time, you may gift your business interest to family members.