Executive Financial Services

Financial Planning Consultants, Financial Planners, Financial Services

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(901) 682-7581Call Visit WebsiteVisit Website Map & DirectionsDirections3400 Players Club Pkwy Ste 110Memphis, TN 38125 Write a ReviewWrite Review

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Executive Financial Services

Tax Planning
Gift Tax Leverage. One of the principal goals of gift and estate tax planning is to make lifetime gifts of assets whose values are temporarily deflated, but that will appreciate rapidly in the hands of the donee. The concept of the ESOP “post-transaction drop-in-value” presents an opportunity for a business owner to make a gift of this type of asset (a “leveraged gift”). In order to fully understand how this opportunity arises in connection with an ESOP transaction, it is imperative to understand the concepts of enterprise value and equity value.

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Extra Phones: Fax: (901) 682-8653
Neighborhood: Buckingham Farms
Other Link: http://www.execfin.com
Categories: Financial Planning Consultants, Financial Planners, Financial Services, Investment Management, Investments, Mutual Funds, Stock & Bond Brokers, Taxes-Consultants & Representatives

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Phone: (901) 682-7581

Address: 3400 Players Club Pkwy Ste 110, Memphis, TN 38125

Website: http://www.execfin.com

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Executive Financial Services

Tax Planning
Gift Tax Leverage. One of the principal goals of gift and estate tax planning is to make lifetime gifts of assets whose values are temporarily deflated, but that will appreciate rapidly in the hands of the donee. The concept of the ESOP “post-transaction drop-in-value” presents an opportunity for a business owner to make a gift of this type of asset (a “leveraged gift”). In order to fully understand how this opportunity arises in connection with an ESOP transaction, it is imperative to understand the concepts of enterprise value and equity value.
Estate Taxes
Tax Deductions
The company will make an annual contribution of cash to the ESOP, which provides an employee benefit to the ESOP participants and a tax deduction to the company. The ESOP uses this contribution to make payments on the Inside Loan (and the Seller Note in the event the selling shareholder does not refinance the loan). In addition to making annual cash contributions, the company can pay C corporation dividends or make S corporation distributions, as applicable, to the ESOP, which it can also use to pay the Inside Loan. This circular flow of funds from the company to the ESOP and back to the company is “cash-neutral” to the company because all of the contributions are immediately paid back to the company in satisfaction of the Inside Loan obligation. However, money should actually change hands as opposed to the parties merely making journal entries. The company uses the Inside Loan payment from the ESOP and other operating cash, if necessary, to make payments on the Outside Loan and the Seller Note (in the event the selling shareholder refinances the loan).
Income Tax
S Corporation ESOP Tax Benefits. The final tax benefit that is unique to ESOP companies is available only to S corporations that sponsor ESOPs. To the extent of the ESOP’s ownership of S corporation stock, the company’s earnings will not be subject to federal income tax. Thus, the income produced by a 100% ESOP-owned S corporation will not be subject to tax because it is a “flow-through” entity whose income flows through to its sole shareholder, the ESOP trust, which is a tax-exempt entity. This is a very powerful tax incentive that essentially allows for-profit corporations to operate on a tax-exempt basis.
Tax Deferral
Review the sponsor company’s and shareholders’ objectives including the need for liquidity, tax deferral, and value creation
Capital Gains Taxes
An ESOP sale also presents strategies Owner can use to provide for Inactive Child. ABC establishes an ESOP which purchases 51% of Owner’s stock in a leveraged transaction. ABC is able to borrow $5,100,000 from its bank (Outside Loan), and then loans this amount to the ESOP (Inside Loan). The ESOP uses the proceeds of the Inside Loan to pay Owner $5,100,000 in cash for 51% of his stock in ABC. Because ABC is a Subchapter C corporation, Owner defers $1,213,800 in capital gains taxes by electing the tax deferral provided by §1042 of the Code, and he receives income from the reinvestment of his QRP on the full amount of his ESOP sales proceeds.

Investment Management
Lastly, our team features AIF® (Accredited Investment Fiduciary) professionals who focus on fiduciary responsibility and investment management. They provide valuable insights into investment strategies, ensuring that the ESOP’s assets are prudently managed to maximize returns and minimize risks.
Mutual Funds
Another requirement for tax-favored treatment under § 1042 of the Code is that the selling shareholder must reinvest his sales proceeds in “qualified replacement property” (QRP) within a 15-month period beginning three months before the date of the sale and ending 12 months after the sale. The Code defines QRP to mean “securities” (as defined in § 165(g)(2) of the Code) that are issued by a domestic operating corporation other than the corporation that issued the stock involved in the transaction. Generally, QRP includes common and preferred stock, corporate fixed rate bonds, and corporate floating rate notes. The following investments do not constitute QRP: certificates of deposit, mutual funds, municipal bonds, U.S. government bonds, and foreign securities.
Bonds

Charitable Remainder Trusts
Suppose Owner has a favorite charity he would like to benefit as part of his ownership succession and estate plan. Continuing with the prior fact pattern, instead of holding all of his QRP until death, Owner contributes $2,000,000 of his QRP to a charitable remainder trust (CRT), which allows him to take an income tax deduction for the value of the gift without giving up future income on the QRP. Establishing the CRT as a charitable remainder unitrust (CRUT) provides Owner with an annual payment from the CRUT, which is a fixed percentage of the annual fair market value of the CRUT’s assets. Generally, § 1042(e)(1) of the Code provides that Owner’s gift of his QRP to the CRUT is a “disposition” that triggers a recapture of the gain with respect to the $2,000,000 of QRP. However, the Internal Revenue Service has issued a series of Private Letter Rulings in which it takes the position that if the CRUT complies with the Code and other guidance issued by the Internal Revenue Service, then Owner will not realize any gain on his transfer of QRP to the CRUT. Owner receives an income tax deduction in the amount of the present value of the remainder interest, which passes to Owner’s favorite charity at the end of the unitrust term.
Charitable Lead Trusts
It should be noted that charitable organizations described in § 501(c)(3) of the Code and exempt from tax under § 501(a) of the Code are qualified S corporation shareholders. However, a charitable remainder trust does not qualify. A charitable lead trust may qualify if it is a grantor trust for income tax purposes.

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