Question

Margaret Merriweather owns 91% of Merriweather Enterprises, Inc. (ME). ME has one class of stock issued and outstanding. Margaret is the President of ME and is also the director of the board. The other three board members are her three adult children, Michael, Michelle and Mary each of whom own 3% of ME. The children's stock was given by Margaret over a period of five years when the children were born. each child is at least 30 years old. Margaret decided in 2011 that she wanted to retire and transfer the management and control of Me to her children. You advise Margaret to make a gift of some of the ME stock to each child in late November 2011. In early December 11 Margaret, under your advice, had Me redeem her remaining shares of ME for cash and promissory note. The redemption price was determined by an independent third party appraiser. The note will be paid in monthly installments of principal and interest that began in January 2012. The interest rate on the note is within market rates.

a. why did you advise Margaret to give each child some stock?

b. Does the redemption, talking into consideration only the facts stated above, qualify for CG treatment for Margaret? Be explicit.

c.Is there anything else about these transaction that you advised Margaret to do to be certain that the redemption qualifies?

Answer 1

Ans a) As per the 2018 rules, the annual exclusion amount for one person's gift to one individual will be going up to $15,000 So, if Margaret gifted her three adult children, she can save tax upto $45,000 as per the latest changes.Hence, we advised her to give child some stock.

Ans b) Yes, the redemption, talking into consideration only the facts stated above, qualify for CG treatment for Margaret as tax can be reduced when property ownership is transferred to family members in the low income bracket.So in the above case as Margaret children income is in low income bracket and on the year of selling the property your family member falls within 10% or 15% ordinary income tax bracket then she could avoid the capital gain tax entirely.

Ans c) There are accounts with tax-favored status. The most advantageous let gains accumulate in the account without taxes; taxes are paid only when the taxpayer withdraws funds from the account.

Tax may be deferred if the taxpayer sells the asset but receives payment from the buyer over a period of years. However, the taxpayer bears the risk of a default by the buyer during that period. A structured sale or purchase of an annuity may be ways to defer taxes.