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330 - Estate Planning E Transfer in trust (1) If a grantor seeks to freeze estate values, a transfer in trust will often ll the need (2) Transfers in trust work by splitting property into two parts: remainder interest and income interest 3 Federal income, gift, and estate implications A Buy-sell agreements (1) Gift taxation: Generally, there is no gift taxation unless the buyout agreement gives the purchaser an unquali ed present purchase right at a contract price below fair market value (2) Income taxation (a) The selling owner, usually the estate of the deceased, sells a capital asset subject to capital gain treatment However, there is usually no capital gain treatment because the buyer receives a stepped-up basis at fair market value (b) The selling party is taxed on the proceeds of the business as dividends, to the extent of the corporation s earnings, unless the corporation quali es for IRC Sections 302 and 303 (3) Estate taxation (a) To set the estate tax value of a business equal to its buyout agreement price, agreements must meet Section 2703(b) requirements: i The agreement must be a bona de arrangement ii The agreement must not be a device to transfer the property to members of the decedent s family for less than full and adequate consideration iii The terms of the agreement must be comparable to similar arrangements entered into by persons in an arm s-length transaction (b) The requirements ensure a value reasonably close to the value of the business interest at time of transfer (c) Example: If a surviving owner, a son, is allowed to buy the decedent parent s $1 million business interest at $250,000, this would be in violation of the rst two requirements B Installment notes (1) Gift taxation: No gift tax consequences if it is a bona de sale for full and adequate consideration (2) Income taxation (a) Can defer capital gains over several years (b) Interest paid to seller is treated as ordinary income (tax-deductible for buyer if quali ed); principal is return of capital and capital gain (c) Losses are never reported (d) Two events trigger immediate recognition of remaining gain to the seller: i The seller sells the installment note ii The seller cancels the installment note (e) Consequences of (1) and (2): The seller has received taxable income The income is equal to the difference between the cost basis and the value of the payments forgiven (3) Estate taxation.



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/** * BenefitEnrollerHome is the home interface for our * simple benefits processing and registration system */ public interface BenefitEnrollerHome extends EJBHome { /** * Creates a registration session for a student */ BenefitEnroller create(String a_memberId) throws RemoteException, CreateException; }

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Calling the create() method eventually results in creation of a corresponding BenefitEnrollerBean instance Recall that this is a stateful session bean, so there's one per client session If we hadn't needed to maintain state, we could have chosen to implement BenefitEnrollerBean as stateless The process of bean instantiation follows the lifecycle contract defined earlier for stateful session beans The create(), setSessionContext(), and ejbCreate() methods will be called in that order by the container These methods can be implemented by the developer when she codes the bean instance class, which is the topic of the next subsection Coding the Bean Class Listing 8-3 shows one way that a stateful session bean called BenefitEnrollerBean can be written

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profit from the transaction You can both go away feeling good about the deal and about the relationship However, there is a built-in temptation for you to exaggerate If you can make your ally think that your cost is higher than it actually is, the ally will think it is an even better deal and feel more future obligation Thus, the temptation always exists to paint an extreme picture of your own costs (and minimize the ally s) in the interests of getting what you want at the lowest cost Furthermore, what if you have more to give than your ally realizes Why reveal everything you are willing to do, especially those things that are costly to you if you can gain what you want for less That will leave more to spend on other inf luence attempts.

1 import javautil*; 2 import javaxejb*; 3 import javaxnaming*; 4 import javaxrmiPortableRemoteObject; 5 6 /** 7 * The BenefitEnrollerBean includes the core business logic and 8 * required SessionBean methods for our school registration system 9 */ 10 public class BenefitEnrollerBean implements SessionBean 11 { 12 String m_memberId; 13 ArrayList m_elections; 14 15 public BenefitEnrollerBean() { } 16 17 /** 18 * Creates a benefits enrollment session for specified member 19 */ 20 public void ejbCreate(String a_memberId) 21 { 22 m_memberId = a_memberId; 23 m_elections = new ArrayList(); 24 } 25 26 public void ejbRemove() { } 27 public void ejbActivate() { } 28 public void ejbPassivate() { } 29 30 public void setSessionContext(SessionContext sc) { } 31 32 /** 33 * Adds a course to current class list 34 */ 35 public void selectBenefit(String a_benefitId) 36 { 37 m_electionsadd(a_benefitId); 38 } 39 40 /** 41 * Removes a course from current class list 42 */ 43 public void deselectBenefit(String a_benefitId) 44 { 45 int idx = -1; 46 String cur; 47 48 for (int i=0; i<m_electionssize(); i++) { 49 cur = (String)m_electionsget(i);

Topic 97: IntraFamily and Other Business Transfer Techniques - 331 (a) Keeps postsale appreciation out of the seller s gross estate (b) When the holder of an installment note dies, only the present value of the installment note is included in his or her gross estate (c) If the transfer was a partial gift (less than full and adequate consideration paid), the date-of-death value of the property sold less actual consideration paid is included in the estate C Self-canceling installment notes (1) Gift taxation To avoid gift taxes, the buyer will have to make additional principal payments or pay higher interest rates In determining the higher principal payments, the IRS tables can be used to determine the likelihood of the note holder s death (2) Income taxation (a) The decedent note holder must report the difference between the fair market value and the basis on the estate s income tax return upon cancellation The gain is income in respect of decedent (b) No income tax deduction is allowed, inasmuch as the note is not in the gross estate (3) Estate taxation: The value of the SCIN at the note holder s death will not have to be included in the holder s gross estate D Private annuities (1) Gift taxation (a) No taxable gift (b) Value of property transferred equals present value of annuity (2) Income taxation (a) Each payment is split into three parts: i Investment in the contract Tax free ii Gain in asset Taxed as capital gain iii Balance after investment in the contract and the gain in asset are removed Taxed as ordinary income (b) Once the annuitant reaches original life expectancy, all investments in contract and gains have been paid, and future payments are solely ordinary income (c) The unrecovered basis is deductible as a loss if the annuitant does not reach life expectancy (d) The person or entity making the annuity payments cannot deduct any portion of the payments (3) Estate taxation (a) No estate tax (b) Lifetime annuity terminates at the death of the annuitant (c) If the annuity is worth less than the property transferred, then the original transaction is ruled a gift and the gross estate includes the entire date-of-death value of the property, reduced by payments already received This is deemed a Section 2036(a) transfer with a retained interest E Transfers in trust (general tax objectives) (1) Gift taxation (a) Keeps retained interest value at zero (b) No gift tax for transfers to quali ed charities.

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