This is the second of three milestone assignments that will lead to completion o
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This is the second of three milestone assignments that will lead to completion of your course project. In this assignment, you will complete Sections IIl and IV of the final project. For this part of the assessment you will prepare a Word document that addresses the critical elements below. Make sure you answer each question in a substantive way and defend your content with at least one scholarly source other than your textbook. You will want to pay close attention to the grading rubric in order to make sure you meet the exemplary level in each requirement. Specifically, the following critical elements must be addressed II Estate Planning A. B. C. D. In terms of minimizing tax liability, how would estate planning differ from a partnership to a corporation? For estate planning purposes, what are the advantages of setting your business up as a corporation versus a partnership? Defend your response. Describe your company's succession plan and whether or not it aligns with your company's vision. Based on your responses, what estate planning strategy would be most effective in minimizing tax liability? Why? IV. Trusts A. B. C. Draw a conclusion about the purpose for the company's trust based on the research of your company. Why would a small business owner want to set up a trust and how could it be used for estate planning purposes? Evaluate the similarities and differences between trusts and corporations. In an attempt to protect income, which would be most suitable for a company? Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Use at least one outside source other than the textbook. Sources should be cited according to APA style.Explanation / Answer
III. Estate Planning
A. The gap between what your business is worth while you plan your estate and what it is worth when you pass away, as well as other liquidity problems, may be managed by creating an ILIT. If the ILIT is structured correctly, the benefits paid from the underlying insurance policy do not pass through probate and are available immediately, providing cash for estate taxes and other needs.
You may be able to transfer your business assets to your children and retain a source of income for yourself by establishing a grantor retained annuity trust (GRAT) or grantor retained unitrust (GRUT). If the assets grow over the terms of the trust, the appreciation will not be subject to estate taxes, so these trusts can be effective tools for passing on a rapidly growing business.
To achieve the estate tax benefits of this type of trust, the trust must be structured precisely and you must outlive the terms of the trust. You may mitigate this risk by structuring an ILIT for wealth replacement to help offset the potential tax liability that would occur if you die before the trust expires.
Another approach is the family limited partnership or a family limited liability company. For example, you can form a limited partnership to hold the business assets. Some of the limited partnership units can be transferred to your successors, potentially eliminating the units from your taxable estate. Because limited partnership interests do not carry control of the partnership, the value of the transferred assets may be discounted for gift tax purposes. As with GRATs and GRUTs, family limited partnerships are subject to complex rules and it is advisable to consult with experienced tax and estate planning professionals.
B. Setting up a business as Corporation versus Partnership:-
A partnership is a business in which two or more individuals share ownership. In general partnerships, all management duties, expenses, liability and profits are shared between two or more owners. In limited partnerships, general partners share ownership responsibilities and limited partners serve only as investors.
C. When Business Week magazine features an article questioning why Herb Kelleher, CEO of the very successful Southwest Airlines, has not designated and groomed a successor, it exposes a weakness in many companies’ strategic thinking. The concept of succession planning has become an important part of many companies’ strategic planning but not in all companies.
Too many think of succession planning as having application only in family owned companies or in large conglomerates. In fact, succession planning should be a part of every company’s Strategic Plan - your vision of where the company will be going in the future. The reasons for this approach are fairly obvious: If there is no succession planning process, how will the company develop and nurture its human capital? How will you assure a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire or move on? How will you be able to plan for the future of the company without some assurance that the key posts will be filled with people able to carry on and excel? Succession planning is much more important than the time many companies devote to it would indicate.
First, realize that one size doesn’t fit all. There are different approaches which may be used, depending on the situation in each company. In some cases, a company may have to move some people along quickly, in order to expose them to a broad range of experiences, and possibly to fill vacancies. In others, a deeper involvement in selected departments or disciplines may be indicated. Some of this will depend on the culture and processes of the company. In yet other cases, decisions about the process will depend on the individual’s capabilities and competencies, and the structure and operations of the company. In virtually all situations, your ability to educate and promote will depend on the capabilities and strengths of the people who currently occupy the key positions, and where they will be going in the future - what are they being groomed for?
It may not be vital to have a succession plan for every position in the company, but certainly there are some key areas of responsibility which must be considered. These will vary by company and industry, but as a part of your Simplified Strategic Planning process, one important strategic issue should be the need for succession planning for certain, defined key positions. This issue should be revisited at least once a year, and more often if circumstances dictate.
D. It is recommended to take full advantage of one’s claim on Capital Cost Allowance. If you need to buy supplies, machinery, and technology, time it for maximum savings. If doing the math shows you will minimize your tax exposure deducting the expenses this year, do not delay. Using Capital Cost Allowance on your new property, you will still increase the CCA for the current year and will have increased CCA claims for the next year. Consider postponing disposal of depreciable resources. Do not dispose of business equipment until the following year depending on which will better reduce the tax liability for your business. Planning income deferments can also help minimize your business tax liability. Postponing or putting off income is recommended if business profit will be higher or if the tax rates in the following tax year are expected to be reduced.
IV. Trusts
A. A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of trusts and in managing estates. Trust companies are not required to exercise all of the powers that they are granted. Further, the fact that a trust company in one jurisdiction does not perform all of the trust company duties in another jurisdiction is irrelevant and does not have any bearing on whether either company is truly a "trust company". Therefore, it is safe to say that the term "trust company" must not be narrowly construed. The "trust" name refers to the ability of the institution's trust department to act as a trustee – someone who administers financial assets on behalf of another. The assets are typically held in the form of a trust, a legal instrument that spells out who the beneficiaries are and what the money can be spent for. A trustee will manage investments, keep records, manage assets, prepare court accounting, pay bills (depending on the nature of the trust) medical expenses, charitable gifts, inheritances or other distributions of income and principal.
B. An owner may have established a trust long ago for a specific purpose only to have life circumstances and/or legislative changes derail a well-thought-out estate plan. The use of a disclaimer by a trust beneficiary may be helpful to adjust the results of a previously established irrevocable trust.
C. Differences:- A CORPORATION (or company) is an incorporated business structure that is managed by directors and owned by shareholders. A corporation exists as an entity in its own right, is considered separate from its ownership and control and has the powers of a natural person. Shareholders are generally not liable for a corporations debts, because their liability is limited to the amount of their investment (the amount that they paid for their shares). AND
A TRUST is a legal arrangement whereas one person (a trustee) legally holds (owns) assets (trust property) on behalf of another (a beneficiary). A trustee is the legal owner of the trust assets, while the beneficiaries are the beneficial owners of the trust assets. A trust is not a separate legal entity, rather the assets are held under the name of the trustee. The trustee is usually liable for the debts of a trust fund, although the trustee is sometimes entitled to indemnity out of the assets of the trust fund. Their are various types of trust structures, including fixed trusts, unit trusts, discretionary trusts (family trusts), testamentary trusts (arising from the will of the deceased) and hybrid trusts (a combination of features from two or more structures).
Similarities:- Trusts are like corporations in the sense that the intangible concept has tangible reality. Corporations and trusts transact business, borrow and lend money and operate as a legal “person”. There are many differences in the mechanics, but the basic concept of an intangible principle having tangible reality applies equally to corporations and trust.
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