Reorganizing a business as a limited partnership,

Question: Meg owns and operates a plastics manufacturing company, and Maynard is a teacher. Maynard and Meg's principal asset is stock in the family business (Meg owns 80 percent of the stock, and Maynard owns the other 20 percent); the business was recently appraised at $7.2 million. They have about $1 million of other assets, all jointly held. Meg has four children from a previous marriage: Tom (age 26, a lawyer), Martha (age 24, a manager in the family business), and twins Hal and AI, both college students age 20. Both Martha and Hal have indicated an interest in continuing the family business. Neither Maynard nor Meg has made any lifetime transfers. They desire for their children to inherit all of their properties eventually. Since Meg is 10 years older than Maynard, she would like to ensure that Maynard has enough income to live on should he survive her, and she also would like to ensure that her children receive the entire estate after he dies. They would also eventually like to leave a gift of approximately $500,000 to State University to fund a scholarship program. Assume that you have been asked to assist Maynard and Meg establish a family financial plan that would accomplish their wishes. List the basic steps that you would suggest that Maynard and Meg take in order to accomplish their wishes. The following information should be used to help answer the question and incorporated into the answer. ESTATE PLANING • Provide for an orderly transfer of your property in accordance with your wishes. • Minimize the taxes on your estate and maximize the inheritance for your beneficiaries • Provide for the special needs of family members • Ensure the continued operation of a family business First, Meg and Maynard should decide on approximately how much annual income Maynard would need once Meg dies (in addition to the teaching salary), and the principal necessary to fund such an annuity should not be transferred during their lifetimes (this should also take into account the proposed charitable contribution). Meg will want to transfer enough property to Maynard immediately (with the marital deduction) so that Maynard will have enough property to fully utilize his unified credit if he dies first. As an alternative, Meg's estate could make a DSUEA election, so that most of Meg's unified credit will not be lost. Given these constraints, Meg and Maynard should consider: a. Starting an annual gift program of at least $28,000 a year to each of the four children, electing gift splitting. Since two children have indicated an interest in continuing the business, the first gifts should be from the other $1 million assets (starting with appreciating ones). b. Definitely make the gift to State University right away, perhaps in annual amounts up to 50 percent of AGI each year. Making such a gift saves significant income taxes. c. Given that two of the children want to continue the business, consider reorganizing the business as a limited partnership, with each child receiving a minority interest (for discounts on the gift or estate tax). Meg could remain a general partner to run the business and the two children who want to continue the business may be made minority general partners. d. Plan for a QTIP election at Meg's death so that some portion of the estate qualifies for the marital deduction, and yet the property will automatically pass to the children. Transfers could be maximized with a "reduce to zero" marital clause.                                              

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