Name and outline the characteristics of five strategies for reducing estate taxes in a family business

What will be an ideal response?

Answer:
? BUY-SELL AGREEMENT. A buy-sell agreement is a contract that co-owners often rely on to ensure the continuity of a business. In a typical arrangement, the co-owners create a contract that states that each agrees to buy the others out in case of the death or disability of one. That way, the heirs of the deceased or disabled owner can "cash out" of the business while leaving control of the business in the hands of the remaining owners. The buy-sell agreement specifies a formula for determining the value of the business at the time the agreement is to be executed.
? LIFETIME GIFTING. The owners of a successful business may transfer money to their children (or other recipients) from their estate throughout the parents' lives.
? SETTING UP A TRUST. A trust is a contract between a grantor (the founder) and a trustee (generally a bank officer or an attorney) in which the grantor gives to the trustee legal title to assets (e.g., stock in the company), which the trustee agrees to hold for the beneficiaries (children). The beneficiaries can receive income from the trust, or they can receive the property in the trust, or both, at some specified time. A revocable trust is one that the grantor can change or revoke during his or her lifetime. Under present tax laws, however, the only trust that provides a tax benefit is an irrevocable trust, in which the grantor cannot require the trustee to return the assets held in trust. The most basic type of trust is the bypass trust, which allows a business owner to put up to $3 million into a trust naming his or her spouse as the beneficiary upon the owner's death. The spouse receives the income from the trust throughout his or her life, but the principal in the trust bypasses the surviving spouse's estate and goes to the couple's heirs free of estate taxes upon the spouse's death. An irrevocable asset trust is similar to a life insurance trust except that it is designed to pass the assets in the parents' estate on to their children. The children do not have control of the assets while the parents are still living, but they do receive the income from those assets. Upon the parents' death, the assets in the trust go to the children without being subjected to the estate tax. A grantor retained annuity trust (GRAT) is a special type of irrevocable trust and has become one of the most popular tools for entrepreneurs to transfer ownership of a business while maintaining control over it and minimizing estate taxes. Under a GRAT, an owner can put property in an irrevocable trust for a maximum of ten years. While the trust is in effect, the grantor (owner) retains the voting power and receives the interest income from the property in the trust. At the end of the trust (not to exceed ten years), the property passes to the beneficiaries (heirs). The beneficiaries are required to pay the gift tax on the value of the assets placed in the GRAT but no estate tax on them.
? ESTATE FREEZE. An estate freeze attempts to minimize estate taxes by having family members create two classes of stock for the business: (1) preferred voting stock for the parents and (2) nonvoting common stock for the children. The value of the preferred stock is frozen whereas the common stock reflects the anticipated increased market value of the business. Any appreciation in the value of the business after the transfer is not subject to estate taxes.

? FAMILY LIMITED PARTNERSHIP. Creating a family limited partnership (FLP) allows business-owning parents to transfer their company to their children (thus lowering their estate taxes) while still retaining control over it for themselves. To create a family limited partnership, the parents (or parent) set up a partnership among themselves and their children. The parents retain the general partnership interest, which can be as low as one percent, and the children become the limited partners. As general partners, the parents control both the limited partnership and the family business.