ACC630_estate_planning_and_tax_liability_considerations_amazon

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Running head: ESTATE PLANNING & TAX LIABILITY 1 Estate Planning and Tax Liability Considerations - Partnerships and Corporations Amazon.com Inc Shannon D. Burns ACC 630: Financial Reporting III Southern University of New Hampshire September 10, 2019

Estate Planning & Tax Liability 2 In four separate milestones we are tasked to prepare a report on the differences in accounting practices for partnerships versus corporations. Ascertain different scenarios, that each entity formation may encounter such as tort liability, consolidation, estate planning, and use of a trust. In this milestone, the first of the four, the paper look at, contingency reporting between the two types formations, tort liability, and laws governing such reporting. The paper attempts to describe the effects of estimates from the result of a lawsuit, the economic and financial effect estimates have on the financial statements of a corporation and a partnership.

Estate Planning & Tax Liability 3 III. Estate Planning A. In terms of minimizing tax liability, how would estate planning differ from a partnership to a corporation? Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death. (Hoyle, Schaefer, & Doupnik, 2017) An estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death. After amassing wealth, donors typically seek to achieve two goals:  Minimize the amount of assets that must be surrendered to the government.  Ensure that the ultimate disposition of all property is consistent with the donor’s wishes. The Trusts and Estates industry is composed of trusts, estates and agency accounts administered on behalf of beneficiaries under the terms established in a fiduciary contract. (IBISWorld, 2019) Estate planning is a very important process in maintaining and efficiently transferring the wealth accumulated throughout the individual[s] productive life[s]. (Mintz, 2018) A large part of that process involves finding ways to transfer one’s assets to the next generation in the most tax- efficient way possible. (Hoyle, Schaefer, & Doupnik, 2017; Mintz, 2018) The legal rules and regulations involving the areas of trust and estate planning is complex. The protection of assets is the main goal of a trust and estate planning, and in that regard the difference from a limited liability formation to a S and C formation depends on the individual[s] in all instances. Again, an estate refers to the property (assets) owned by an individual, or a separate legal entity holding title to the real and personal assets of a deceased person. There are general methods under IRC to mitigate and minimize tax liability on assets in estate planning. Therefore, it does not matter if these methods used in an estate planning is for an individual member of a

Estate Planning & Tax Liability 4 small private limited liability, or for an individual who has a board position in a large publicly traded corporation. The end goal is asset protection from government consumption and wealth transfer.  Generation Skipping: In most of the developed world many individuals will choose to transfer a portion of their estate assets to their grandchildren rather than transferring the full estate directly to their immediate children. This strategy skips the second generation and transfers the assets straight to the third generation. The strategy saves the assets from being eventually taxed twice after being transferred from second generation to the third generation. The most balanced strategy would be to transfer a sum that is enough for the second generation (off-springs) and then transfer the excess to the third generation (grandchildren).  Spousal Exemptions: This tax exclusions exist for the purpose of transferring smaller estates without an inheritance tax being levied upon the assets. For couples, this means that they have two exclusions available to them, the first when the first spouse passes away, and the second when the second spouse dies. Thus, when the first spouse dies, it is often most beneficial to transfer some amount from the estate to a third-party if they eventually intend to bequest the assets to them anyway, and the rest to the surviving spouse. The tax benefits of this tax exclusion would be wasted if the entire estate is transferred over to the spouse upon death.  Charitable Gratuitous Transfers: In many estate plans, individuals can and will set aside assets to give to a charity upon their death. In many instances it is an advantageous move to donate to charity over one’s lifetime for the income tax deduction on donations, and because of the federal gift tax scheme. Organization

Estate Planning & Tax Liability 5 must have 503(3) status. This means gifts may be made to or for the use of any corporation provided that the corporation is organized and operated exclusively for "religious, charitable, scientific, literary, or educational purposes, including the encouragement of art or to foster national or international amateur sports competition, and the prevention of cruelty to children or animals. It interesting to note that funds donated is exempt of investment taxes. These methods of minimizing an individual’s tax liability are utilized in multiple financial schemes for estate planning reasons. In this discussion we will observe how irrevocable trusts make use these methods. An irrevocable trust is constructed on the premise that the terms of such a trust cannot be modified, amended or terminated without the permission of the grantor's named beneficiary or beneficiaries. (Kagan, 2019) One form of these trusts is the “ Irrevocable Life Insurance Trust ” (ILIT). An irrevocable life insurance trust is an estate planning tool that allows for the possible exclusion of life insurance proceeds from the estate tax. The main purpose of an (ILIT) is to avoid federal estate tax. The trust is considered a separate entity, therefore the policy that it holds is not owned by the individual that the policy was made out for. Life Insurance Trust (ILIT) can own both individual and second to die life insurance policies. The Second to die policies insure two lives and pay a death benefit only upon the second death. The individual creating the trust names the (ILIT) as the beneficiary of the life insurance policy, while they themselves are considered the Granter of the trust. The trustee is the person who is responsible for administering the trust. Because an ILIT is irrevocable, any cash transfers that is made to the trust are considered taxable gifts. The important point here is that estate tax is imposed only on property in which you have an ownership interest. The (ILIT) is created to own

Estate Planning & Tax Liability 6 and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death. A life insurance trust is ideal for “ family business ” owners or wealthy individuals who have large or complex holdings. An individual can effectively reduce their estate tax under an annuity trust scheme. Grantor Retained Annuity Trust (GRAT) is a financial instrument for anyone who has an estate or plans to have an estate valued greater than the current and expected estate tax exemption amount. (Kagan, 2019) A (GRAT) is another irrevocable trust where the granter losses control to revoke or annul the trust agreement. Once the terms of the trust agreement have been written they cannot be amended for any reason in the future except by court order. The grantor gives up all right, interest, and title to the assets that are held in the trust and appoints a trustee to manage it. Under a grantor retained annuity trust, the annuity payments come from interest earned on the assets underlying the trust or as a percentage of the total value of the assets. A grantor transfers property into the trust in exchange for the right to receive annually fixed payments, based on original fair market value of the property being transferred. Assets are transferred into the name of the (GRAT) who then retains the right to receive an annuity that is paid out every year, until the trust expires, at which time the beneficiary receives the held assets tax-free. Any person, aside from the grantor, can be named the beneficiary of the trust. Just about any asset can be transferred to this trust. For example (GRAT) are good for individuals who want to shield from stock price appreciation. firms that are doing will may look to gain access to new territory and reach a bigger consumer base. These firm’s shares, when they initiate a public offering go public (IPO) will usually outpace the IRS assumed rate of return. Using the Grantor Retained Annuity Trust (GRAT) in this way money can be

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