In terms of minimizing tax liability, how would estate planning differ from a partnership to a corporation?
Estate planning defines the legal transfer of an individual’s assets or shares to a rightful owner in anticipation of incapacitation or death. The essence is often to reduce the current taxable assets by shifting part of the tax liability to a future generation. The differences in the legal systems and tax obligations of corporations and partnerships influence their estate planning strategies. It is easier to offer lifetime gifts of commercial interests in corporations. Parents can, therefore, transfer part of their assets or shares from their commercial estates to their children or heir. In this regard, the tax liabilities on the parents is lessened as the value of the assets under their name reduces, while the tax obligation is shifted to their heirs. However, the recipients of the assets are categorized in an inferior tax bracket and will thus pay lower taxes on the equivalent value of assets (Kriesel, 2017). Inheritance of the shares of a corporation does not result in management or control of the organization. Estate planning is limited in partnerships as the recipient of the assets or shares may have inferred management and control rights in the organization. Transfer or 50% or more of the assets or shares may ultimately result in the termination of the partnership (Kriesel, 2017). The importance of estate planning in limiting tax liability is therefore not fully realized in partnerships due to its legal system.
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Trusts may be employed to diminish an estates tax liability. In partnerships, there are little to no confines on the number and type of trust partners authorized to maintain. Whereas, Corporations are rationed to the kind of trust which shareholders are authorized to use ( Thibodeaux, 2016). Hence, partnership partners have extra flexibility in the allocation of their estates.
For estate planning purposes, what are the advantages of setting your business up as a corporation versus a partnership? Defend your response.
Corporations have the advantage of the decline in liability, unlike in partnerships where the partners exclusively share all the liability. Corporations infer protection of estates and assets more than partnerships. The business risks or liability is only constrained to the sums invested into the corporation by shareholders. In the case of a lawsuit against the organization, only a section of the assets of the corporation is at risk of seizure. This is often the assets or estate of the sum capitalized by the shareholder(s) facing legal action (Wright, 2017). On the other hand, all the assets or estates of a partnership is at risk of legal seizure, especially if the sum contributed by the partner is less than the liability.
Ownership in Corporations is far easier to transfer, unlike in partnerships. Under partnerships, stock ownership transfer is more challenging, and at times ownership transfer may result in partnership termination. Conversely, corporations have limitless life and do not terminate in the event shareholders transact or transfer ownership. Partnerships and corporations may allocate income by shifting interest and stocks. Family partnership regulations may also play a role in the transfer of assets and shares in partnerships, whereas these regulations solely rely on the stipulated legal structures and functions of in a corporation (Kriesel, 2017). In some corporations, income transferring is only rationed to the degree that sufficient or rational compensation be paid to the staff of the company.
Describe your company’s succession plan and whether or not it aligns with your company’s vision.
The board of directors at Target are mandated with ensuring that the organizational status in terms of strength and succession plans is in line with the lasting objectives of the company. With the assistance of the CEO, the Board guarantees that Target only hires a highly productive team of management. The Target board does succession planning, assessment, and nurturing of the consortium of internal contenders who can take up top administrative ranks in the company annually. There are also measures in place for CEO emergency succession in the event that the company’s CEO is unexpectedly ousted, resigns, incapacitated, or dies. The succession planning is in line with the company’s mission: To make Target the preferred shopping destination for our guests by delivering outstanding value, continuous innovation and exceptional guest experience (Target Corporation, 2018).
Based on your responses, what estate planning strategy would be most effective in minimizing tax liability? Why?
Establishment of a corporation would be the most effective method of minimizing tax liability. The legal structure and tax laws governing corporations make it easier to transfer assets and shares to the next generation, thereby reducing the tax brackets of the corporate members without affecting the management and control of the organization ( Hoyle, Schaefer, & Doupnik, 2018). Corporations may also opt to use limited trusts to enhance their estate planning methods, significantly limiting their tax liability.
References
Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2018). Fundamentals of advanced accounting . New York: McGraw-Hill Higher Education.
Kriesel, W. T. (2017). Accomplishing Estate Planning Goals through the Use of Partnership Income Tax Rules. The CPA Journal , 87 (5), 30.
Target Corporation. (2018). Proxy Statement. Retrieved on 29 th June 2019 from https://www.sec.gov/Archives/edgar/data/27419/000130817918000237/ltgt2018_def14a.pdf
Thibodeaux, W. (2016, October 26). The Difference Between a Holding Company & a Trust Company. Retrieved from https://smallbusiness.chron.com/difference-between-holding-company-trust-company-24923.html
Wright, N. D. (2017). The Estate Freeze: Balancing Tax Incentives with Fairness & Simplicity.
