Erik is the sole owner of a small business that he started 20 years ago. Although he is not yet ready to retire, he is beginning to wonder about what would happen to the business should he die or decide to retire. Erik has a son who has graduated from college and worked at the firm for a few years. His son seems to enjoy the business and have a natural aptitude for the work. Erik is also concerned about maintaining a significant income from the business and, if possible, freezing the value of the business for estate tax purposes. Erik has already used his available applicable credit amount. Which one of the following is the most appropriate form of business transfer technique for Erik to use to achieve his objectives? A) Selling the business to the son on an installment sale basis, with the payments secured by the business assets B) A preferred stock recapitalization in which Erik retains stock that pays a noncumulative dividend and that has a fixed liquidation value, with annual exclusion gifts of nonvoting stock being made to his son C) A cross-purchase buy-sell agreement with his son that is funded with life insurance, with the purchase price being equal to the business's value at the time of sale or death D) A preferred stock recapitalization in which Erik retains stock that pays a fixed cumulative dividend and that has a fixed liquidation value and voting rights, with annual exclusion gifts of nonvoting common stock being made to his son

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Erik is the sole owner of a small business that he started 20 years ago. Although he is not yet ready to retire, he is beginning to wonder about what would happen to the business should he die or decide to retire. Erik has a son who has graduated from college and worked at the firm for a few years. His son seems to enjoy the business and have a natural aptitude for the work. Erik is also concerned about maintaining a significant income from the business and, if possible, freezing the value of the business for estate tax purposes. Erik has already used his available applicable credit amount.

Which one of the following is the most appropriate form of business transfer technique for Erik to use to achieve his objectives?

Selling the business to the son on an installment sale basis, with the payments secured by the business assets

A preferred stock recapitalization in which Erik retains stock that pays a noncumulative dividend and that has a fixed liquidation value, with annual exclusion gifts of nonvoting stock being made to his son

A cross-purchase buy-sell agreement with his son that is funded with life insurance, with the purchase price being equal to the business's value at the time of sale or death

A preferred stock recapitalization in which Erik retains stock that pays a fixed cumulative dividend and that has a fixed liquidation value and voting rights, with annual exclusion gifts of nonvoting common stock being made to his son

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