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

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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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Estate Planning & Tax Liability 7 passed down while not eating into the grantor's lifetime exemption from estate and gift taxes. (Kagan, 2019) Other assets can include dividend interest from a for profit entity, cash, real estate, life insurance policies, stock portfolios, and income produced from intellectual property. A maximum of $15,000 can be transferred into an irrevocable trust or multiple trusts each year tax free. To receive the tax benefit, transfer must be considered a “present interest gift.” This means, the beneficiary must be able to access all or at least part of the assets immediately. If the income fluctuates you would use a Grantor Retained Unitrust (GRUT). Assets that are gifted to the estate are generally not included in the taxable estate upon an individual’s death. Lastly, a grantor has control over when and under what terms the assets are distributed. An irrevocable intervivos trust can be funded with real property that is, a personal residence of the grantor. The Qualified Personal Residence Trust (QPRT) under §2702 of the IRC allows an individual to remove a personal home from their estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary. The technique allows the individual to transfer the house to beneficiaries with a reduced gift-tax cost and, should the benefactor live long enough, remove the value from their estate. Using an irrevocable life insurance trust, you can shield heirs from estate tax and decide how you want to pass along control of your estate, including ownership of any closely-held businesses. GRAT’s on the other hand are excellent for adding extra liability protection to personal property from creditors for individual members of an LLC specifically FLLC aka closely-held corporations. An individual might want to create a single member Family Limited Liability Corporation (FLLC) by contributing partnership interests in a Family Limited Partnership (FLP) that holds financial assets and alternative investments (private equity) assets to

Estate Planning & Tax Liability 8 of the (FLLC). If the taxpayer is the only owner of the (FLLC) there should not be any income taxes or gift taxes associated with the creation of the (FLLC). It the individual however, wants in gifting, they would contribute some or all the (FLLC) member interests to a (GRAT). The underlining factor to these schemes of reducing an individual’s federal tax burden is the tax bracket that an individual would belong in. For instance, Jeff Bezos, founder, CEO and President of Amazon.com Inc. reportedly net worth as of August of 2019 is $113.7 billion. This individual wealth place Mr. Bezos in the top one percent. In most instances transferring assets under the named financial instruments before they appreciate such real property, stock, bond, and intellectual property avoids any gift or estate tax on the appreciation. B. For estate planning purposes, what are the advantages of setting your business up as a corporation versus a partnership? Defend your response. Under Subchapter K of the Code, a Family Limited Partnership is treated as a pass- through entity for income tax purposes. Income and loss is determined at the partnership level and reported on IRS Form 1065 for informational purposes, items of partnership income or loss are allocated to each partner on Schedule K-1 of IRS Form 1065. Each partner must then report his or her “ pro rata ” share of partnership income and loss, including certain separately stated items of partnership income, gain, loss, deduction or credit, on their 1040 individual tax form. Therefore, p artnerships are generally not taxed at the entity level. In contrast, Individual share owners of large publicly traded companies such as Amazon report interest and dividends as capital gains and therefore causing double taxation, once on the profits of the analogous legal entities and again on its shareholders principle. On the surface sounds troubling for the market, but as we have asserted in questions A many shareholders will

Estate Planning & Tax Liability 9 avoid the double taxation and never pay the capital gain tax on their interest producing assets, that is if they transfer such assets in the estate planning vehicles that have been mentioned. A trust can be treated as a separate tax paying entity a conduit that distributes income and deductions to its beneficiaries. Trust taxation is like that of individual taxation with an exception, the trust will most likely take a deduction on amounts distributed to the beneficiaries. Separate, and unlike large corporations and their contribution plans the Uniform Prudent Investor Act of 1994 allows trust to invest in a wide variety of investments so long as such investments in the aggregate would be deemed reasonable given the purpose of the trust. In this way trusts are no longer restricted to using common trust funds, U.S. large cap stocks and U.S. Treasury securities. Modern portfolio theory expands trust investment options. This means that trustees are free to invest among a broad spectrum of asset classes if the trust’s portfolio, taken as a whole, is designed to achieve the desired level of risk and return. Because of the UPIA when selling a capital asset that is held longer than twelve months, a trustee can place the asset inside a (Family) Limited Partnership, sell the asset, and distributed gains would be characterized as income being credited to the income beneficiary’s ledger. C. Describe your company’s succession plan and whether it aligns with your company’s vision. According to Geekwire Amazon.com Inc has a succession plain for the founder and CEO Jeff Bezos and all senior executives. Full-time employees at for Amazon’s fulfillment centers are offered, health insurance, disability insurance, retirement savings plans and company stock. Most employees can become owners of the company through the granting and vesting of Restricted Stock Units (RSUs). A restricted stock unit (RSU) is compensation issued by an employer to an employee in the form of company stock. Restricted stock units are issued to an employee through

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Estate Planning & Tax Liability 10 a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a length of time. RSUs give Amazon employees interest in company stock. However, these stocks do not have any tangible value, at least until the vesting is complete. The restricted stock units are assigned a fair market value when they have vested after which they are considered income, and a portion of the shares is withheld to pay income taxes. The employee receives the remaining shares and can sell them at his or her discretion. Andy Jassy received 35.6 million in total compensation in 2016. Mr. Jassy is the CEO of Amazon’s Amazon Web Service (AWS) segment. The segment in 2016 generated $12 billion in revenue Mr. Jassy compensation was a mix of salary of $175,000 and awarded shares valued in 2016 at $35.4 million. For its 2019 fiscal year, Amazon.com Inc, listed the following executives on its annual proxy statement to the SEC: Equity total compensation Jeffrey P. Bezos Chief Executive Officer, Director $ 1,681,804 0 $1,681,840 Jeffrey A. Wilke CEO Worldwide Consumer $19,466,434 $19,722,047 Andrew R. Jassy CEO Amazon Web Services $19,466,434 $19,732,666 Brian T. Olsavsky SVP and Chief Financial Officer $6,770,149 $6,933,349 Jeffrey M. Blackburn SVP, Business Development $10,221,162 $10,399,662 Amazon explained its compensation policy, which emphasizes long-term success over immediate achievement, in the SEC filing ahead of its annual shareholder meeting that the company believe that a fundamental measure of its success will be the shareholder value it create over the long term. As a result, we may make decisions and weigh tradeoffs differently than

Estate Planning & Tax Liability 11 some companies. For example, under our compensation philosophy, we have prioritized stock- based compensation that vests over an extended period of time. In addition, we believe granting stock-based compensation to employees at all levels across the Company results in motivated, customer-centric people who think and act like owners because they are owners. D. Based on your responses, what estate planning strategy would be most effective in minimizing tax liability? Why? The Uniform Partnership Act (UPA) provides governance for business partnerships in several states in the US. Personal liability in a partnership can depend on the type of partnership, as well as the partners position in the partnership. That is, if the partner is an incoming partner to an already established partnership. It can also depend on the laws of the state in which the business operates and in situations where it can be proved that there is “ sufficient connection ” for the state to claim, “ personal jurisdiction ”. (Cornel Law School, 2019) Limited partnerships (LP), limited liability partnerships (LLP), and general partnerships provide business owners with different level of liability protection. Members of a limited liability partnership enjoy the liability protection shield. This means as rule of thumb that members of a business entity are not personally liable or accountable, directly or indirectly for any debts, obligations or liabilities of, or chargeable to, the registered limited liability partnership or each other, whether arising in tort, contract or otherwise, which are incurred, created or assumed by such partnership. (Hoyle, Schaefer, & Doupnik, 2014) Risk for personal liability of other partners in an LLP would arise under several conditions one being the fiduciary duties or “ duty of care ”. (Hoyle, Schaefer, & Doupnik, 2014) Duty of care can be tested if the grieving party files suit for each partner that they feel is responsible for the tort. In other instances, the courts may set as side the limited liability,

Estate Planning & Tax Liability 12 “corporate vail piercing” and hold members of the LLP personally liable for the actions or debts. Never-the-less, it would be up to the courts to determine the level negligence. References: Aldridge, Christine. "Audit Procedures for Revenue Cycles". Chron.com. New York, NY, United States: Hearst Newspapers, LLC. Retrieved: 13 June 2019 from, http://smallbusiness.chron.com/audit-procedures-revenue-cycles-15750.html. Amazon.com Inc. (2018). Amazon.com Inc 2018 Annual Report . American Institute of Certified Public Accountants (AICPA), (2019) "Summary of Sarbanes- Oxley Act of 2002." Durham, NC. Retrieved: 29th August 2019, from http://www.aicpa.org/info/sarbanes_oxley_summary.htm Audit IT. (20190). “ Accounting Estimate ”. Readyratios.com. Kaliningrad Russia. Avdeev & Co. Retrieved: 29th August 2019, from https://www.readyratios.com/info/avdeev.php Bragg S. (February 12, 2019). “ Accounting for Contingencies ” Accounting Tools, Denver, CO. Retrieved: 29th August 2019, from https://www.accountingtools.com/articles/accounting- for-contingencies.html Burns, S. (2018, January 9). Stockholders’ Equity and Revenue Recognition Amazon.com Inc . Southern University of New Hampshire. Retrieved: 11th June 2019

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Estate Planning & Tax Liability 13 Cornel Law School. (2019). Personal Jurisdiction . New York, NY: Retrieved: 30th August 2019, from Legal Information Institute: https://www.law.cornell.edu/wex/personal_jurisdiction Garber, J. (May 16, 2019). “ Grantor Retained Annuity Trust (GRAT), A Special Type of Irrevocable Gifting Trust ”, Estate Planning, Understanding Trusts. Dotdash publishing company. York, NY: Retrieved: September 14, 2019, from https://www.thebalance.com/what-is-a-grantor-retained-annuity-trust-or-grat-3505397 Hoyle, J., Schaefer, T., & Doupnik, T. (2017). “ Accounting for an Estate ”, In Advanced Accounting (13th. ed). New York. NY: McGraw-Hill Education. LaMarco, N. (2019, February 13). “ Accounting Methods Available to Partnerships ”. Chron.com. New York, NY` United States: Hearst Newspapers, LLC. Retrieved: 13 August 2019, from http://smallbusiness.chron.com/accounting-methods-available-partnerships- 43073.html Minkoff, Ron (2015) Understanding & Securing the LLP Shield in New York (Part 1) New York Legal Ethics Reporter, New York NY, United States. Retrieved: 22nd August 2019, from http://www.newyorklegalethics.com/understanding-securing-the-llp-shield-in-new-york- part-1/ NCCOUSL, (July 19, 1996) Uniform Partnership Act (1997) “Annual Conference Meeting In its One Hundred and Fifth Years ” San Antonio, Texas. San Antonio, TX. Retrieved: 22nd August 2019, from https://users.wfu.edu/palmitar/ICBCorporations-Companion/Conexus/UniformActs/ RUPA1997.pdf

Estate Planning & Tax Liability 14 Public Company Accounting Oversight Board (PCAOB). PCAOB Web Page. Retrieved: 22nd August 2019, from http://www.pcaobus.org/index.aspx. Richter, F. (2014). Amazon Online Sales Dwarf the Competition. Hamburg: Statista. Retrieved 9th January 2019, from https://www.statista.com/chart/2214/10-largest-online-retailers/ Rocketlawyer.com. (2019) “ Irrevocable Trusts: What Does Irrevocable Mean? ” Living Trusts. San Francisco, CA: Rocket Lawyer Incorporate. Retrieved: 14th September 2019, from https://www.rocketlawyer.com/article/irrevocable-trusts-what-does-irrevocable-mean- cb.rl Kagan, J. (September 14, 2019). “ Grantor Retained Annuity Trust (GRAT) ” Trust & Estate Planning. New York, NY: Dotdash Publishing. Retrieved: 14th September 2019, from https://www.investopedia.com/terms/g/grat.asp Securities and Exchange Commission. (2003). Publication of Staff Accounting Bulletin: Staff Accounting Bulletin No. 104 . Washington, DC: Securities and Exchange Commission. Retrieved: 10th January 2019, from https://www.sec.gov/interps/account/sab104rev.pdf Statista (2019). Annual net sales of Amazon in selected leading markets from 2014 to 2018 (in billion U.S. dollars). Statista.com. Hamburg, Germany, Retrieved: 10th June 2019, from https://www.statista.com/statistics/672782/net-sales-of-amazon-leading-markets/ Statista (2019). Annual net revenue of Amazon from 2006 to 2018, by segment (in billion U.S. dollars). Statista.com. Hamburg, Germany, Retrieved: 10th June 2019, from https://www.statista.com/statistics/266289/net-revenue-of-amazon-by-region/ Statista (2019). Annual operating income of Amazon from 2014 to 2018, by segment (in million U.S. dollar). Statista.com. Hamburg, Germany, Retrieved: 13th June 2019, from https://www.statista.com/statistics/241835/amazon-operating-income-annual-by-segment/

Estate Planning & Tax Liability 15 Statista (2019). Quarterly revenue of Amazon Web Services from 1st quarter 2014 to 1st quarter 2019 (in million U.S. dollars). Statista.com. Hamburg, Germany, Retrieved: 11th June 2019 from, https://www.statista.com/statistics/250520/forecast-of-amazon-web-services- revenue/ U.S. Congress. Sarbanes-Oxley Act of 2002. Washington DC. Retrieved: on 20th August 2006, from http://www.law.uc.edu/CCL/SOact/soact.pdf. Pagliarini, R. (October 9, 2013). “ 6 Asset Protection Strategies To Shield Your Wealth ”. Forbs.com, New York NY: Forbs Media LLC. Retrieved: 12th September 2019 from, https://www.forbes.com/sites/robertpagliarini/2013/10/09/6-asset-protection-strategies- to-shield-your-wealth/#6e8be781199a by acting as both the owner and beneficiary of life insurance policies.

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