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Tax and Financial Planning for the Closely Held Family Business

Gary A. Zwick and James J. Jurinski

Tax and Financial Planning for the Closely Held Family Business serves as a manual to help business advisers devise strategies for clients dealing with family issues. Guiding family businesses through the complex maze of organizational, tax, financial, governance, estate planning, and personal family issues is a complex, time-consuming, difficult, and sometimes emotional process. This book focuses not only on identifying the problems family businesses face, but on devising solutions and planning opportunities for both family businesses and their owners. Each chapter of this book contains creative planning opportunities that advisers can suggest and help implement in order to solve real problems in the family business.
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INDEX

Gary A. Zwick and James J. Jurinski

accounting methods 14.09514.096

accrual method 14.09814.100

cash method 14.097

clear reflection of income 14.00114.004

hybrid method 14.099

accounting period 14.104

see also change to fiscal years

business purpose for other year 14.114, 14.118

C corporation 14.10614.107

limited liability companies and partnerships 14.11614.119

personal service corporations 14.108

planning 14.135

required year 14.109

S corporation 14.11214.115

section 208H requirements 14.110

tiered structures 14.120

accumulated earnings tax 5.117, 14.015

additional .09% Medicare surtax (3.8% tax) 5.033, 5.077

affiliated service groups

defined 6.0346.037

management–type group 6.031

alternative dispute resolution 3.1643.166

compensation issues 4.015

mediation 3.167

alternative minimum tax 5.077, 10.071, 12.110, 13.025

amortization deduction see sale of business assets

annuities ex-spouse purchasing 3.097

arbitration and mediation see alternative dispute resolution

articles of incorporation

minority shareholder rights 4.0754.077

program requirements 4.107

stock transfer restrictions 4.0824.083, 4.0974.098

super majorities 4.1054.106

asset protection 8.007, 14.034

bargain sales

as disguised dividends 5.024

Board of Directors

abolition of 4.065

cumulative voting 4.1084.110

deadlocks see deadlocks

eliminating participation 4.048

limitations on discretion of 4.065

outside boards 3.146

pooling agreements to elect minority shareholders to board 4.113

quorum requirements 4.107

right of first refusal 4.086

super majorities 4.1054.106

voting agreements 4.112

bonuses

C corporations 5.135

compensation arrangements 5.138

constructive receipt 5.1245.125

FICA taxes 5.141

stock bonus for family members 5.136

business entity options see choice of entity

buy-outs

of minority shareholders 4.1234.124

retirement plan funding 6.0776.078

buy/sell agreements

enforceability of 4.101

family members between11.07611.077

forcing a buyout 4.0444.045

life insurance to fund a buy/sell agreement 12.064

mediation and arbitration provisions 3.160

related-party rules 5.026

stock compensation 5.0555.067

stock options 5.076

stock transfer restrictions 4.0844.091

valuation 4.0844.091

bylaws

quorum requirements 4.107

stock transfer restrictions 4.0844.091

super majorities 4.1054.106

cafeteria plans

C corporations 5.038

deductibility of plan 5.031, 5.039

capital gains

benefit of tax rate 3.113, 5.0255.026

compensation 5.026

ordinary income distinguished from 5.071

retirement distributions 6.1006.103

sale treatment 4.142, 9.012

stock options 5.0765.077

valuation effect on 11.065

case study: topics

anticipating future increases 16.034

asset allocation/portability 16.033

bringing children into the business 16.07316.075

building a business and building wealth 16.02316.024

business tax issues 16.076 –16.082

charitable lead trusts 16.062

combining a private annuity and a GRAT 16.063

consideration nearing retirement 16.083

considerations in start-up 16.00516.006

defining the problem 16.038

early estate planning 16.028

family split-dollar 16.061

funding for college 16.02616.027

good fortune and larger problems 16.03516.039

governance issues 16.07016.072

liquidity and payment of the estate tax 16.086

make additional gifts 16.059-16.060

next phase estate planning 16.03116.032

options for selection of entity 16.007

planning for the large estate 16.057

potential strategies 16.039

practical business planning 16.06716.069

private foundations and supporting organizations 16.06516.066

retirement plans for wealth building 16.025

selection of accounting method 16.020

selection of fiscal year 16.016

short term GRATs 16.064

start-up phase 16.002

succession 16.030

survey of additional planning ideas 16.058

Tom works elsewhere, Tina joins the family business 16.029

charitable organizations

beneficiary of retirement plan or IRA assets 6.085

tax benefits of 14.041

charitable planning 8.1088.109

charitable deduction 8.038

charitable lead trusts 8.125

charitable remainder annuity trusts 8.1128.115

charitable remainder unitrusts 8.1168.121

gift annuities 8.111

philanthropic funds and donor-advised funds 8.110

private foundations 8.1228.124

valuation see valuation

check the box regulations 14.03714.038

childcare expenses flex plan reimbursements 5.039

choice of entity14.001

basic entity choices 14.00614.008

C corporations 14.00914.021

limited liability companies 14.03314.034

partnerships 14.02714.032

corporate general partners 14.03514.036

S corporations 14.02214.026

changes in form of entity 14.06214.067

C corporation to 14.068 14.075

limited liability company or partnership to 14.08914.091

S corporation to 14.07614.088

other considerations

accounting periods and methods 14.09414.095

“check-the-box” regulations 14.03714.038

family considerations 14.05114.061

fiscal years 14.12114.124

interrelationship of business and individual planning 14.00214.004

other business trust and tax-exempt entities 14.03914.042

planning opportunities 14.12514.141

qualified business income deduction (QBID) 14.04314.047

section 1202 stock 14.04814.050

community property

divorce rules 3.076

retirement plans and 6.092

step-up in basis 9.038

transfer in business ownership caused by divorce 9.1109.114

communication problems 3.0303.037

compensation 3.059

bonuses see bonuses

cafeteria plans 5.027

capital gains 5.0255.026

cash dividends 5.0235.024

C corporations 5.0025.003

comparable salaries elsewhere 5.0045.008

conflict resolution 2.0662.079

constructive receipt 5.1245.125

deductions for compensation 5.019

dollar limits on deductible salary 5.1175.123

family and nonfamily members 5.0055.006

favoritism 5.013

fringe benefits 5.055

gifts made outside of workplace 5.011

insurance products as compensation 5.041

loans at favorable rates 5.055

management companies 5.161

market-based compensation system 5.0095.012

owner-employee issues 5.1265.127

personal service corporations 5.121

power struggles over compensation 5.1175.123

receipt test for income tax purposes 5.028

restricted property 5.1625.166

S corporations 5.0025.003

separate company set up 5.1575.159

tax considerations 5.0195.023

unreasonable compensation 5.1175.123

competition between family members 4.0174.019

conflict resolution 3.0423.067

active role of advisor in 2.0662.075, 3.0013.007

alternative dispute resolution 3.1643.166

compensation issues 3.0373.038

decision making process 2.0322.034, 3.0383.041

disability coverage 3.0633.065

estate planning needs 3.062, 3.140

family conflicts 1.020, 1.026

meetings and retreats 3.140

mission statement 3.150

outside boards 3.146–149

participation in business 2.035, 2.0402.045

personality conflicts 1.030

power struggles 3.053

risk tolerance 3.054

strategic planning disagreements 3.0553.058, 4.0384.040

succession issues 4.0084.011, 7.0017.004

value systems of family and business 2.019

varying expectations of family members 3.0483.051

conflicts of interest

prenuptial agreements 3.093

succession planning 7.012

constitutions see family constitution

control founder refuses to cede 4.0204.021

controlled groups

estates and attribution 6.0286.030

percentage ownership rules 6.0286.030

retirement plans 6.0246.027

stock options and attribution rules 6.0286.030

corporate bylaws see bylaws

corporate culture 1.002, 1.007, 3.0073.029

corporate resolutions super-majorities 4.1054.106

corporate opportunity 5.160

Corporation

accounting method used by 5.135

bonuses 5.133

cash dividends 5.027

change to S corporation 14.06814.075

compensation 5.1325.134

compensation practices 5.1175.123

double tax 5.024, 6.017, 11.068

ESOP and 9.099, 13.095

estate planning considerations 14.05614.057

income tax rates 13.05213.053

loans characterized as dividends 5.028

management company 5.161

qualified small business stock (section 1202) 13.02213.030

redemptions from 9.0799.085

section 105(c) 5.150

section 1244 stock 13.03113.037

split dollar insurance and 5.149

tax advantages 14.01614.021

tax disadvantages 14.01014.015

unreasonable compensation 5.117

used as tax shelter 14.13114.133

credit for the elderly and permanently and totally disabled 5.170

cross purchase agreements see bargain and sale agreements

Crummey powers

generation-skipping transfer 8.097–8.09

gift interest using 8.098

life insurance trusts 8.097, 12.16112.165

notice required 12.16312.165

deadlocks 4.057, 4.120

breaking of by shareholders 4.094.066, 4.121–122

buyouts as solution to 4.1234.124

dissolution as solution to 4.126

going public as solution 4.125

preventative planning 4.066

reasons for 4.120

remedies 4.1204.126, 4.066

split up as solution to 4.121–122

deceased spouse’s unused exemption amount 8.0168.023

decision–making style 3.038

deferred compensation 5.0195.023, 5.0445.064

C corporation sale of assets used in 6.016

C corporations 5.1325.134

Department of Labor form 5500 see form 5500

employee pension plans see employee pension plans

employee welfare benefit plans 5.0495.045, 5.1515.155

family attribution 5.140

for children of parents-owned companies 5.1375.138

funded plans 5.047

phantom stock arrangements 5.0655.072

qualified plans 5.0445.045, 5.140

substantial risk of forfeiture 5.033

unfunded plans 5.047

developmental stages of the family 2.0462.065

directors agreements see voting agreements

disability benefits

deductibility of plan 5.127

disability expectations 3.0633.065

employee benefit plans 5.044

long term plans 5.161

medical expense reimbursements 5.170

section 105(c) plans 5.150

short term plans 5.168

disclaimers and estate planning

jointly owned property 8.049

post-mortem use 9.086

discounts see valuation

dissolution

deadlock remedied by 4.062

involuntary 4.126

shareholder rights 13.108

dividends

cash dividends 5.024

compensation tied to performance of company 5.158

disguised dividends 5.024

minority shareholders dividends withheld 4.049

recharacterized as 5.024

and redeeming majority shareholder stock 4.0514.052

valuation for gift tax purposes see valuation

divorce and remarriage 3.0683.119

buy/sell agreements 3.109

community property states 6.092

estate planning 3.773

personal consequences of 3.0723.075

post nuptial agreements 3.0823.084

power struggle in business following 4.0134.014, 4.024

prenuptial agreements see prenuptial agreements

property distribution rules 3.0763.080

retirement plan effect on 6.117

restrictions in agreements 3.0943.095

tax consequences of 3.0963.103

transfer of business ownership 9.1109.111

DSUEA see deceased spouse’s unused exemption amount

dynasty trusts

described 8.0878.090

and generation skipping transfer 12.159

employee pension plan ERISA requirement 5.0445.045

employee stock ownership plan (ESOP)

contributions 9.093

cost effectiveness 9.0969.097

described 9.0919.095

funding for buy-out 13.09513.098

funding for expansion 13.09913.103

leveraged ESOPs 13.10413.109

planning with S corporation ESOP 9.0989.101

related party rules 15.08315.086

rollover treatment 9.095

sale of stock to company 9.094

tax advantages of 9.098

tax benefits 9.098

valuation 9.094, 11.008

employee welfare benefit plans

ERISA requirements 5.0445.045

multiple employer plans 5.046

employment practices 1.0131.014

excluding realtors from employment 4.050

incompetent family members 3.123

mediation and arbitration provisions 3.0573.165

older family members 3.0553.066, 3.128, 4.038

preferred compensation at termination of employment 5.032

shareholder-employees 4.0344.035

substance abuse 3.1313.133

younger family members 3.0553.066

entrepreneurs 2.065

ERISA

coverage requirements 6.0116.012

disclosure requirements 6.0116.012

employee welfare benefit plans 5.0445.045

fiduciary guidelines 6.054

reporting requirements 6.018

severance pay plans 6.0206.022

top hat plans 6.0186.019, 11.069

vesting requirements 6.0186.023

estate planning

see also estate tax

and divorce 3.773

generation skipping transfers see generation skipping transfers and tax

gifts see gifts and gift tax

gift splitting 8.0658.066

leverage gifting 8.0678.070

life insurance see life insurance

life settlement 8.0568.058

lifetime gifting 8.0598.064

marital deduction, employing 8.0288.034

married clients 8.0418.042

portability 3.073, 8.0148.023

prenuptial agreements 16.033

QTIP trusts 8.0328.033, 8.0438.045

reverse QTIP election 8.093

second marriages 8.0438.045

single clients 8.0468.047

estate plans

married clients 8.0418.042

second marriages 8.0438.045

single clients 8.0468.047

estate tax

see also estate planning, and generation skipping transfers and tax

administration and losses 8.0388.039

apportionment of tax liability 10.00510.006

calculation 8.024

charitable deduction 8.0358.037

charitable planning to reduce tax 8.1088.127

checklist of executor elections chapter 10 appendix 1327

deceased spouse’s unused exemption amount 8.0168.023

deductions 8.0278.039

dynasty trusts 8.0878.090, 12.159

exemption lifetime 3.010, 6.124, 8.0018.002

expenses of administration 8.0388.039

freezing value of senior interests 9.0149.015

and income tax planning 3.062, 4.1454.146

installment payment of see extension of time to pay tax

jointly-owned property 8.149

life insurance 8.0508.056

life settlement 8.0568.058

lifetime gifts to reduce 8.0598.074, 8.1008.103

marital deduction 8.0288.034

rates 3.010, 6.060

and retirement plans 6.071, 6.0806.083, 6.089, 6.0936.095, 6.1246.125, 8.0118.013

section 6166 see extension of time to pay tax

self-canceling installment notes 9.0279.032

state and federal tax 8.002

ten year extension to pay see extension of time to pay tax

unified credit 6.124, 8.059

valuation of see valuation

extensions of time to pay estate tax

section 616112 month extension 10.01410.018

section 616610 year extension 10.019

amount of deferral 10.02110.023

analysis 10.07310.074

calculation of deferral 10.037

checklists executor elections Ch 10 Appendix I 327

election 10.044

election calculations Ch 10 Appendix III 329–330

interest 10.038

Graegin loans 10.039

liquidity 10.07310.074

liquidity worksheet Ch 10 Appendix II 328

meeting the 35 percent test 10.03310.036

need for advance planning 10.05910.052

overview 10.020

requirements 10.02410.032

family business models

three circle model 2.0142.018

two circle model 2.0112.013

family business surveys 1.004

family decision–making style 3.038

family developmental stages 2.0462.065

family limited partnerships

IRS challenge 9.0749.075

mechanics 9.0669.068

non-tax advantages 9.0699.070

overview 9.0649.065

tax advantages 9.0719.073

FICA

acceleration rule 5.131

bonuses 5.1325.134

cafeteria plans 5.0375.039

deferred compensation payments 5.0275.040

family attribution 5.1405.145

flex plans 5.031

loans as disguised compensation 5.024

multiple family members and business 5.140

phantom stock 5.0655.072

restricted property 5.1625.166

substantial risk of forfeiture test 5.0305.031

fiduciary duty breach of 4.077, 4.081

fiduciary duty

see also succession plan

breaches of 4.081

entrepreneurial stage 2.0592.060, 3.148

ownership changes 2.050

financial security as business goal 1.016

financing

asset-based financing 13.07113.072

crowd funding 13.04513.047

debt/equity ratio 13.00413.020

investment company rules 13.021

leasing versus buying 13.05613.070

life insurance purchase 12.08412.104

loans from shareholders and family 13.04013.044

small business corporation tax rules 13.022

venture capital 13.08613.088

fiscal year see accounting period

flex plans

FICA reduced using 5.039

medical expense reimbursements 5.039

Form 5500

penalty for missed filing 5.072

phantom stock arrangements 5.0655.072

top hat plans 6.0186.019, 16.069

welfare benefit plans 12.102

Form 8832 check the box regulations 13.038

see also check the box regulations

founder refuses to cede control 4.0204.021

generation skipping transfers and generation skipping tax

generation-skipping transfers

described 8.085, 8.0758.086

dynasty trusts 8.0878.090

generation-skipping transfer tax

Crummey powers 8.0978.099

generation-skipping tax exemption 8.0918.092

life insurance in GST planning 12.15912.160

other transfers not subject to marital deduction 8.096

reverse QTIP election 8.0938.095

gifts

see also gift tax

annual per donee exclusion 9.035

of annuities 8.100

of appreciated and appreciating property 9.0369.038

charitable gifts see charitable planning

at death 9.038

gift splitting 8.0658.066

grantor retained annuity trust see grantor retained annuity trust

leveraged gifting 8.0678.074, 12.06112.063

of life insurance policies 8.0598.064, 9.0339.035, 12.175–12.177

net gifts 8.104 –8.106

present interest exclusion 8.011

stock bonus for family members 5.136

valuation 8.0698.061

gift tax

chapter 14 valuation rules 15.06115.062

charitable gift 8.0358.036

Crummey powers 8.0978.099

description 8.010

exemption 8.023, 8.059

gift splitting 8.065–8.066

life insurance gift tax aspects 12.12512.127

penalties tax 11.02211.023

rates 8.011, 8.060

taxable and nontaxable gifts 8,100

valuation rules 11.00411.005

goals of business owners 1.0151.023

golden handcuffs 5.1625.166

goodwill

amortization 9.012

personal 11.01311.014

related party rule 15.05815.060

valuation of 11.034

grantor annuity trust see estate tax, grantor annuity trust

Graegin loans 10.039

hanging on too long see founder refuses to cede control

harmony of family as business goal 1.0201.022

incentive stock options see stock options

income in respect of a decedent 9.019, 16.052

income tax

changing fiscal years 14.12114.124

receipt test for compensation 1.031

selection of accounting periods and methods 14.094–120

shifting income among family members 6.055

business and individual planning interrelationships 14.00214.005

choice of entity tax effect 14.00614.008

basic form of entity changes tax effects 14.06214.067

“check-the-box” regulations 14.03714.038

C corporations 14.00914.021

corporate general partners 14.03514.036

limited liability companies 14.03314.034

other business and tax-exempt entities14.03914.042

partnerships 14.02714.032

qualified business income deduction (QBID) 14.04314.047

S corporations14.02214.026

section 1202 stock 14.04814.050

family considerations 14.05114.062

income tax issues in change of entity

C corporation to – 14.06814.075

limited liability company or partnership to – 14.08914.093

S corporation to – 14.07614.088

income tax planning opportunities

employing minor children 14.141

income shifting among family members 14.12614.030

interest charged domestic international sales corporation14.140

management and related companies 14.13614.037

medical reimbursement plans 14.139

multiple entities 14.134

planning with the selections of the accounting methods 14.135

section 105(c) plans 14.138

using the C corporation for tax shelter 14.13114.033

income tax treatment

income in respect of the decedent see income in respect of a decedent

medical reimbursement plan 14.139

nonqualified plan assets 6.08–6.081

profit interest 5.085, 5.093, 5.014, 5.035, 5.115, 14.027–14.130, 15.024

section 105(c)plans 14.138

section 401(k) plans 6.022, 6.048, 6.068, 6.072, 6.097, 6.107, 6.126

incompetent relatives

employment practices 3.1203.134

individual retirement accounts see IRAs

installment sales

GRAT advantages over 9.048

installment sales generally 15.01715.023

loss transactions between related parties 15.03015.034

minority discount 15.06115.072

outright sales, installment sales, self-canceling installment notes compared 9.016

related party installment sales of depreciable properties 15.02415.026

spouses transactions between 15.01015.016

intestacy rules 3.074

intra-family transfers

employee stock ownership plans see ESOPs

intra-family buy/sell agreements see buy/sell agreements

post-mortem techniques 9.086

risks in intra-family transfers 9.007

S corporation ESOPs see ESOPs

transfer techniques 9.0099.013

charitable remainder trusts 9.0559.063

corporate redemptions to shift control 9.079

family limited partnerships 9.0649.075

see also family limited partnerships

freezing the value of senior interests 9.014–15

gifts 9.033

grantor retained annuity 9.039

outright sales and installment sales and self-canceling installment notes compared 9.016

private annuities 9.021

sale to defective grantor trust 9.049

self-canceling installment notes 9.027

wealth transfer through new company formation 9.115

investment company incorporation of 13.021

IRAs

see also Roth IRA, Roth 401(k)

averaging 6.1016.102

beneficiary designations 6.0826.087

charity as beneficiary of IRA

assets 6.0796.086

excise taxation 6.112

income tax 6.111

nondeductible contributions to 6.071

recalculating life expectancies 6.085

rollovers to 6.1126.114

spousal rollovers 6.1156.116

survivors’ rights in 6.0886.090

key employees 6.023, 6.054

phantom stock arrangements 5.0655.072

sale of business to 7.0227.023

separate company set up with 5.1575.159

split dollar insurance arrangements 12.08812.097

leasing

advantages of leasing equipment 13.05613.065

diverting funds out of family business 4.0554.056

nontax factors 13.069

sweetheart leases 4.056

tax advantages 13.06113.070

life insurance

financing the purchase of life insurance 12.084

borrowing to purchase 12.08512.087

split-dollar arrangements 12.08812.097

use of qualified plan money 12.09812.101

welfare benefit plan 12.10212.104

overview of tax aspects of life insurance 12.10512.127

estate tax aspects 12.117

gift tax aspects 12.12512.127

non-deductibility of premiums 12.11312.118

tax-exempt proceeds 12.10612.111

tax-free withdrawals 12.112

purposes of life insurance 12.06012.083

compensation 12.07212.074

estate builder 12.063

funding a buy-sell agreement 12.064

investment 12.071

key man insurance 12.06512.070

leveraged charitable and family gifting 12.08112.083

provide for family on premature death 12.07512.080

to pay estate tax 12.061

reviewing life insurance proposals 12.03312.059

cost indices 12.04112.042

due diligence 12.04812.051

endowing at age 10012.046

loaded versus no-load policies 12.05812.059

rating services 12.05212.057

“skinny universal life” 12.047

vanishing premium and single premium 12.04312.045

variables 12.03612.040

special features 12.02612.033

disability and waiver of premium riders 12.02812.029

other features 12.030

paid-up additions 12.02712.027

types of insurance 12.00412.025

term insurance 12.00512.011

term/whole life mix 12.02412.025

universal life 12.01612.020

variable life 12.02112.023

whole life 12.01212.015

life insurance planning 10.00710.010

limited liability companies (LLCs)

see also partnerships

changes in form of entity to 14.094

flow through taxation 5.002

income tax planning for 14.08914.093

options for selection of business entity 16.00716.015

self-employment tax 5.038

tiered structures 14.120

liquidity

see also 12-month extension to pay estate tax, ten-year extension to pay estate tax, redemption at death

causes and consequences of illiquidity 10.00110.004

the estate plan 10.00510.006

liquidity analysis 10.07310.074

liquidity worksheet Ch 10 Appendix II 328

loans diverting finds out of the business 4.0544.057

longevity of family businesses 1.066, 1.012, 2.05

management companies

advantages of 14.13614.137

described 5.561

management practices

lack of professional management 4.002, 4.032

shareholder-employees 4.0724.074

marital deduction see estate planning and estate tax

marriage

causing power struggle 4.037

prenuptial agreement 3.0823.093

related party rules 15.01015.016

spouse, role of 2.046

medical expenses

disability insurance reimbursement 5.1675.170

employee benefit plans 5.046

flex plan providing reimbursements 5.039

minor children employed in family business 14,141–14.143

minority shareholders 1.031

articles of incorporation 4.0494.083

buyouts 4.1234.124

corporate bylaws 4.049, 4.083

cumulative voting 4.1084.110

dividends withheld from 4.046

family members as 4.070–4.074

nonfamily minority shareholders 4.0754.077

preemptive right 4.111

super majorities 4.064

transferability of stock 4.078

veto power maintained by 4.080, 4.092, 4.103–4111

voting agreements see voting agreements

mission statements 3.150

model of family businesses

three circle models 2.0142.018

two circle model 2.0112.013

money purchase plan 6.048, 6.120

net gifts 8.1048.106

net investment income tax (3.8% tax) 5.024, 9.012, 13.05214.021

nimcrut 8.1048.106

non-participant shareholder 4.0724.074

nuisance suits by minority shareholders forcing buyout 4.045

participation in business

children as nonparticipants 2.0422.043

conflict resolution 2.0602.079

differing cash needs of participants and nonparticipants 2.059

expectations of the participants and nonparticipants 2.0422.043

power struggles between participants and nonparticipants 2.0422.043

partnerships

see also family partnerships, limited liability companies

accounting year-end 14.11614.119

basis of partnership interest 14.025

changes in form of entity to 14.094

FICA tax planning 5.0345.038

flow through taxation 5.002

income tax planning for 14.08914.093

options for selection of business entity 16.00716.015

partnership to hold insurance 12.13112.132

profits interest 5.0855.092

self-employment tax 5.0345.035, 5.038

tiered structures 14.120

passive income

passive activity loss rules 15.07715.082

sales of passive activities to related parties 15.07715.082

perpetuation of the business as a goal

personality conflicts

conflict resolution 2.0662.079

power struggles caused by 4.0254.028

personal service corporations

accounting required year 14.10714.108

deferred taxes 5.1325.133

defined 16.00916.010

section 280H requirement 14.11014.111

tax rates 13.006, 13.05213.053, 14.021

tax savings 12.111

phantom stock

described 5.0655.072

nonqualified deferred compensation rules 5.1445.147

stock appreciation rights 5.0735.074

power struggles 4.001–4014

compensation issues causing 4.0424.043

deadlocks see deadlocks

different operating philosophies causing 4.0424.043

divorce causing 4.0134.014, 4.024

expectations of participants and nonparticipants 3.049–3.052

founder refusing to seek control 4.0204.021

incompetent relatives causing 4.0304.035

managerial vacuum causing 4.009

marriage causing 4.037

personal ambitions and self-interest causing 4.0284.031

personality conflicts causing 4.0254.028

preventative planning 4.0584.061

rivalries between family members 4.0124.019

squeeze outs see squeeze outs

that individual causes 4.0084.014

prenuptial agreements 3.0823.093

alternatives 3.094

drafting suggestions 3.087

validity of 3.0853.089

see marriage and divorce

private annuities

combining a private annuity and a GRAT 16.063

contributions to 6.0466.048

described 9.0219.026

self-canceling installment note compared 9.0279.028

spousal rights 6.1206.121

QBID see qualified business income deduction

qualified business income deduction 14.04314.047

qualified personal residence trust

described 8.071

gift splitting 8.066

valuation for gift tax purposes 8.068

qualified plan see retirement plans

qualified small business stock exclusion see section 1244 stock

qualified terminable interest property

defined 8.030

Election 8.0318.037

reverse QTIP election 8.0938.095

second marriage situations 8.0438.044

rabbi trust 5.0485.050

rabicular trusts

see also rabbi trust and secular trust

described 5.0525.053

funding 5.050

substantial risk of forfeiture 5.048

tax consequences 5.0525.053

redemptions at death (section 303 redemptions) 10.054

advance planning 10.06210.066

checklists executor elections Ch 10 Appendix I 327

described 10.054

dollar limitation 10.06010.061

election 10.068

election calculations Ch 10 Appendix III 329–30

income tax consequences 10.055

life insurance funding planning for 10.06810.071

liquidity

analysis 10.07310.074

liquidity worksheet Ch 10 Appendix II 328

thirty five percent rule 10.058

related business entities

see also controlled groups

affiliated service groups 6.0346.037

attribution rules 6.0286.031

brother-sister group 6.0266.027

businesses under common control 6.0326.033

retirement plans 6.023, 6.047

estates and attribution 6.0286.030

percentage ownership rules 6.0286.030

retirement plans 6.0246.027

stock options and attribution rules 6.0286.030

related party rules

accrued expenses between related parts 15.03515.039

anti-churning and other rules 15.05815.060

capital gains versus ordinary income 15.02715.029

chapter 14 valuation rules 15.06115.072

checklist related party transactions and family attribution, Table 15.115.001

compensating family members 15.04015.043

controlled groups 15.002–15.009

ESOPs 15.08315.086

installment sales 15.01715.023

loss transactions between related parties 15.03015.034

minority discount 15.06115.072

related party installment sales of depreciable properties 15.02415.026

sales of passive activities to related parties 15.07715.082

taxation of regular corporations and their shareholders 15.04415.057

transactions between spouses 15.01015.016

remarriage see divorce and remarriage

rentals passive activity rules 15.07715.082

restricted property 5.1625.166

restricted stock

see also phantom stock, stock appreciation rights

described 5.0555.064

mechanics 4.0934.098

S corporation 5.0605.065

UCC requirement 4.094

valuation of restricted stock 5.064

retirement plans

see also golden handcuffs, restricted property, section 83(b) election, related entities

basics 6.0016.002

comparison of tax situation with and without qualified plans 6.0076.010

potential problems 6.0036.004

qualified plans 6.006

qualified versus non-qualified plans 6.005

distribution planning 6.079

beneficiary designations 6.0826.087

benefit options 6.091

estate planning and pension plans 6.093

pensions and divorce 6.092

stretching out distributions 6.0946.095

survivors rights in pension plans 6.0886.080

tax effect of combined income and estate taxes 6.0806.081

non-qualified plans 6.011

benefits of non-qualified plans 6.012

common names to identify non-qualified plans 6.022

disadvantages of non-qualified plans 6.0136.017

ERISA requirements 6.018

severance pay plans 6.0206.061

top-hat plans 6.019

planning problems 6.123

estates with large qualified plan assets 6.1246.125

impact of family attribution 6.1266.128

liquidity problems 6.129

qualified plan design 6.042

creative uses in family succession, buyouts, and wealth transfer to children 6.0776.078

rules of thumb 6.0746.076

skewing benefits toward family owners 6.0666.076

types of plans 6.0436.065

special considerations with multiple family members or related entities 6.023

affiliated service groups 6.0346.037

attribution rules 6.0286.031

businesses under common control 6.0326.033

controlled group rules 6.0246.027

excess accumulations and distributions 6.070

leased employees, owners and directors 6.0386.041

life insurance in qualified plans 12.147– 12.152

taxation of 6.096

divorced spouses 6.1176.119

income taxation of retirement income 6.097

long-term capital gain treatment 6.1006.103

lump-sum payment 6.0986.099

rollovers 6.1126.114

Roth IRA, Roth 401(k) and conversions to Roth IRA 6.1046.108

spousal rights 6.1206.122

spousal rollovers 6.1156.116

withholding 6.1096.111

risk tolerance family members 3.0533.054

Roth IRA 6.1046.108

Roth 401(k) 6.1046.108

sale of business assets 9.012

amortization deduction 9.012

goodwill 9.012

installment sales 9.013

private annuities 9.012

self-canceling installments notes 9.013

taxes 9.012

sale to a defective grantor trust

description 9.0969.054

life insurance to reduce estate tax 8.051

tax savings 9.0519.052

S corporations

buy/sell arrangements 12.135

changes in form of entity to 14.06914.072, 14.07614.087, 14.094

choice of entity 14.22

compensation 5.0025.117, 15.04115.042

dividends 5.024, 5.028

ESOPs 6.060, 9.0999.103

FICA 5.028, 5.038

flow through taxation 5.002

interest expense limitation 13.061

options for selection of business entity 16.00716.015

redemption related parties Chapter 15 Appendix 500

required year 14.11214.115

restricted stock 5.060

section 1202 stock 13.02213.030

self-employment tax 5.038

stock options 5.083, 5.148

tax considerations 5.020

tax rate 13.05413.055

section 83(b) elections 5.060, 5.063, 5.090, 5.163

and stock options 9.048

corporations 5.150

section 199a 5.002, 5.030, 5.128, 13.054, 14.021

section 303 redemptions see redemptions at death (section 303 redemptions)

section 401(k) plans

see also Roth 401k)

described 6.053-6.054

limits 6.068, 6.075

section 501 (c)(3) 8.123, 14.041

section 1202 stock 13.022-13.030, 14.048-14.050

section 1244 stock

qualified small business stock exclusion

section 1244 qualification 13.03113.037

tax rules 13.02

section 6166 see extension to pay estate tax

secular trust

see also rabbi trust and rabicular trust

described 5.051

tax consequences and disadvantages 5.051

self-cancelling installment notes (SCINs)

see also sale of business assets

advantages 9.0279.028

described 9.013, 9.0279.032

outright sales, installment sales, self-canceling installment notes compared 9.016

risk premium 9.029

self-employment tax

partnerships 5.0345.035, 5.038

separation see divorce and remarriage

severance pay 6.0206.021

shareholder meeting

quorum requirements 4.107

supermajorities 4.105

small business corporations see section 1244 stock

soft issues 3.006

special use valuation see valuation

special use valuation (section 2032A)

described 9.0899.090

highest and best use 11.01111.012

spit dollar insurance 12.07212.073, 12.088, 12.09012.097

estate tax 12.096

exit strategy 12.095

Illusory benefit 12.089

Intergenerational split dollar 12.146

loan regime 12.094

split ups

deadlocks resolved 4.1214.122

spouse, role of 2.046

squeezeouts

excluding relatives’ employment 4.05

limiting participation on board of directors 4.041

loans and leases diverting funds 4.055

waste of corporate assets 4.054

withholding dividends from minority shareholders 4.049

state and local taxes in retirement 5.151

stock appreciation rights

see also phantom stock

described 5.0735.075

stock bonus plans

in context 6.055

spousal rights 6.120

stock options

buy sell agreements 5.076

capital gains 5.0775.080

and nonqualified deferred compensation 5.1415.145

non-statutory options 5.0815.084

S corporations 5.148

statutory options 5.0775.080

taxable event upon grant option 5.0815.084

stock ownership

basis 3.106

squeeze outs see squeeze outs

stock appreciation rights 5.0755.077

transferability of stock 4.0824.085

transfer restrictions see stock transfer restrictions

unrestricted stock 5.055–5.064

valuation see valuation

stock redemption

see also redemptions at death control shifts using

corporate redemptions to shift control 9.079

forcing a buyout 4.0514.053

from C Corporations 9.0799.085

incident to divorce 3.1043.119

stock transfer restrictions

basic overview 4.0824.083, 4.0974.098

buy/sell agreements 4.0994.101

directors’ approval 4.085

mandatory sales 4.089

prohibition against transfers to specified person 4.090

right of first refusal 4.0864.088

shareholder approval 4.085

state law applicable to 4.0654.067

Uniform Commercial Code provisions 4.094

validity of 4.092

strategic planning 3.1513.155

substance abuse by employees 3.094

substantial risk of forfeiture

compensation issues 5.047, 5.057, 5.064, 5.092

deferral 5.1415.142

FICA 5.0315.033

and section 409A 5.094

succession planning

anti-meddling provision

checklist chapter 7 appendix 228–229

co-successors 7.0867.088

conflict resolution and 2.0662.079

conflicts of interest 7.012

divorce effect 7.060

emotional component of 7.0017.004

and estate taxation 7.009, 7.065

founder refusing to cede control 4.0204.021

and generation skipping transfer tax 7.028

grantor retained annuity trust

post succession role of founder 7.0077.082

power struggles where lack of 4.0154.016

prenuptial and postnuptial agreement in

sale of business 7.0227.023

sale of stock using 7.0777.082

sale to defective grantor trust

selection of successor 7.0477.055

written plan 7.0627.076

target benefit plans cross tested plans compared 6.018, 6.065

tiered structures 14.120

top hat plans

described 6.0186.019

filing requirements 5.0655.072

transfer for value 8.0538.056, 10.008, 12.10812.109, 12.15312.154

unified credit

Uniform Commercial Code

stock transfer restrictions 4.094

unrelated business income

see also section 501(c)(3)

applications 8.118, 9.057, 14.041

Valuation

planning opportunities and issues

buy-sell agreements 11.06911.079

effect of capital gains and built-in gains taxes on valuation 11.065

family limited partnerships restrictions affecting valuation 11.080

FLP court cases under a variety of theories 11.08811.099

lapsing restrictions – I.R.C. section 270411.08111.082

tiered entities 11.083

purpose of the valuation 11.003

effect on value 11.00411.014

penalties 11.02211.023

publicly traded vs. closely held corporations 11.01511.017

strategies for valuation reports 11.01811.021

Rev. Rul. 59–6011.024

concept of the willing buyer and willing seller 11.02511.031

effect of industry rule-of-thumb valuations 11.04711.052

effects of bona fide offers and recent transactions on valuation 11.04511.046

eight valuation factors 11.03211.043

practicality of comparing private and public companies 11.044

valuation discounts 11.053

blockage discounts 11.058

IRS attack of discounts under I.R.C. section 203611.08411.087

lack of control 11.05411.056

lack of marketability 11.057

limitation on discounts – the willing seller 11.064

potential whipsaw-control premium 11.06211.063

range of discounts, expected IRS reactions 11.06611.068

stock restrictions 11.05911.060

swing vote attributes 11.061

voting agreements

directors agreements 4.118-4.119

pooling agreements 4.113

voting trusts 4.114

waste of corporate assets 4.054

wealth replacement planning described 12.15512.158

who is the client? 1.0471.049, 7.012