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S Corporation Back to Top

A corporation whose income is generally taxed to its shareholders, thus avoiding a corporate level tax.

Sale to an intentionally defective grantor trust Back to Top

First let's define a grantor trust. This is a trust that is taxed to the grantor (settlor, trustor) who is the person that established the trust. Thus, for example, if you set up a trust that is taxed as a grantor trust, and it earned $5,000 of income, you would report that $5,000 of income on your personal income tax return and pay any tax due. The trust would not pay income tax on the $5,000.

The trust in this transaction is commonly referred to as an "intentionally" defective grantor trust, because you intentionally plan and structure the trust to be characterized for income tax purposes as a grantor trust.

A sale to an intentionally defective grantor trust is an estate, asset protection and family planning transaction in which you sell an asset (perhaps an interest in a family business or FLP or family LLC) to a trust. Because the trust is structured to be a grantor trust for income tax purposes there is no income tax triggered on the sale. It's as if it is a sale to yourself for income tax purposes. For estate tax purposes, however, the trust is deemed to be a completed gift and planned so as not to be included in your taxable estate.

The use of this technique can be compared to the use of a grantor retained annuity trust (GRAT). See separate definition for a GRAT. A sale to a defective grantor trust transaction may use a lower interest rate then a GRAT and permit allocation of GST exemption. A GRAT, on other hand, may offer more certainty when transferring an asset with uncertain value. In some situations both techniques may be used.

Second-to-Die Insurance Back to Top

Insurance for a married couple that pays a death benefit only on the death of the last spouse to die. This payment method makes the cost of such insurance less than insurance on just one person's life. This type of insurance is designed for an estate plan where, on the death of the first spouse, all assets are given tax free to the surviving spouse using the unlimited marital deduction. On the death of the second spouse, the insurance benefit is paid and provides the cash to pay the estate tax. Also called survivors insurance.

Section 2503(c) Trust Back to Top

A special trust established for minor children that permits gifts to it to qualify for the annual $10,000 gift tax exclusion, although they are not gifts of a present interest.

Section 6166 Deferral Back to Top

This code provision permits estate to defer the estate tax. The higher estate tax rates make this planning benefit more important to consider. This has been modified by the 1997 Act.

Settlor Back to Top

Person who sets up a trust. Also called grantor, trustor, and occasionally, donor.

Shareholders Back to Top

Owners of a corporation are called shareholders. This is analogous to owners of an LLC who are called Members.

Shareholders' Agreement Back to Top

A legal contract or agreement between the owners of a corporation (shareholders) is referred to as a Shareholders' Agreement. Every corporation should consider having such an agreement. The agreement should govern what happens if a shareholder is disabled or dies (e.g., how or should the shares be repurchased, by whom and at what price). It should also provide details as to how the business will be managed, who will make decisions, and within what parameters.

Situs Back to Top

The location where a trust or other entity is based and typically taxed is called the "situs" of that trust. Situs is not always the same as governing law. You might, for example, have a trust with a situs in State A, taxed in State A, but State X laws may apply. The tax situs of a trust is not often obvious, and there are significant differences in the rules between various states, and many are inconsistent so that planning traps and opportunities abound.

Small Business Investment Benefit Back to Top

Small business has always been the engine of employment and economic growth. There are a number of special provisions in the tax law favoring small business. One of these is Code Section 1202 of the tax laws provides for incentives to invest in small businesses. These incentives were enhanced by The Recovery Act. Prior to these changes you could have excluded 50% of the qualifying gain on investments you made in closely held businesses that met the requirements of the tax law. Generally, the business must be a regular corporation (a "C" corporation in tax jargon) and have gross assets of $50M or less. The 50% exclusion coupled with 28% tax rate meant a maximum tax of 14% (ignoring AMT). The new law increased the exclusion to 75% so that on the effective tax rate on the sale of stock in a qualifying small business would only be about 7% (ignoring AMT). If that isn't enough tax benefit you can even roll over gains by reinvesting them into another qualifying small business and deferring tax on the gain you cannot exclude.

Small Business Investment Company Back to Top

Gain on the sale of securities can be reinvested on a tax-free basis in qualifying small business investment companies.

Small Business Stock Back to Top

Up to one-half of the gain on the sale of certain small business stock may qualify for exclusion from taxation. This benefit can effectively reduce the capital gains cost on qualifying investments to a 14 percent level.

Sole Proprietorships Back to Top

A business run by you that is owned and operated without any legal entity (i.e., no corporation, partnership, or LLC). The advantage of using a sole proprietorship is simplicity and no cost. The tremendous disadvantage is that you will have unlimited liability for any problem. An LLC is not an option for a sole proprietor in most states since most states require at least two Members to form an LLC. The solution may be to make a spouse, child, partner, or business associate a nominal owner (Member) in order to form an LLC.

Special Needs Trust Back to Top

A Special Needs Trust ("SNT") is a trust established for a beneficiary withe mental or physical health issues and that receives governmental assistance. The purpose of the SNT is to provide for only those items that governmental benefits won't cover. This is why its referred to as a "special" needs trust. The governmental programs should cover basic needs (food, shelter, housing) but this trust can supplement with special benefits like companion care, toiletries, a television, etc. When crafting such a trust there are a host of tax and other issues that need to be addressed. This type of planning is also best done as part of a comprehensive overall estate and financial plan.

Special Needs Trusts – SNTs Back to Top

Special Needs Trusts – SNTs are unique trusts (legal agreements). Typically the person setting up a trust is the grantor or settler; however, a SNT must be established by a court, legal guardian, parent, or grandparent. If the person does not have a parent or grandparent or guardian they must have the trust established by court. The language of the trust should say assets can be used to supplement and not supplant what is provided for by government benefits. First party trust is a special needs trust. A third party trust is often called a supplemental benefits trust.

Split-Dollar Insurance Back to Top

Split-dollar is an arrangement under which the death benefit and the costs of life insurance are divided/shared between two different taxpayers. Split-dollar can be arranged between a corporation and its executive in a manner that provides for an insurance benefit to the employee; between a shareholder and corporation to provide a benefit to the shareholder; or between an individual and a family trust to provide a gift tax benefit, as examples. Regulations were issued in 2003 that govern most split-dollar arrangements occurring after the effective date of those regulations. Under these rules split-dollar arrangements are treated for tax purposes under either an economic benefit or a loan regime.

Spousal Right of Election Back to Top

See "Right of election". This is a right given to a surviving spouse to claim a portion of the deceased spouse's estate.

Springing Power Back to Top

A power of attorney is a document in which you authorize a person, called your agent, to take tax, legal and financial matters for you. Almost everyone should have a power of attorney. But if you do, when do you feel comfortable giving your agent the right to act on your behalf? Many powers give the agent the power to act as soon as you sign the document. But do you want your kid to have that level of power now? Many people prefer that their agent only have the right to act after they are disabled, when they'll really need the help. A power of attorney that "springs" into effect only when you become disabled, is called a springing power of attorney. While commonly used these are not simple documents and you really should have such a document prepared by an attorney. First, make sure that a springing power is valid in your state. Second, review carefully what must be done to demonstrate your disability in order for your agent to act. If the process is too involved you may defeat the point of having the power.

Springing provision Back to Top

The clause (provision) in a durable power of attorney that triggers (springs) the agent's power and authority to operate when the person giving the power of attorney (principal, grantor) becomes disabled. See "springing power".

SSVS No. 1 Back to Top

This stands for Statement on Standards for Valuation Services pronounced by the American Institute of Certified Public Accountants (AICPA). This provides guidance on standards that must be adhered to when a CPA provides valuation services. SSVS No. 1 provides that a CPA can provide a full valuation or a calculated value. If you retain a CPA to prepare an appraisal of a business, for example, these standards must be adhered to.

Step Transaction Doctrine Back to Top

A "step-transaction" is a transaction in which various components or steps in the process or matter are consolidated or condensed to arrive at a different single integrated transaction. The theory underlying this doctrine is that a taxpayer, for example, should not be able to arbitrarily break a single transaction into separate parts and achieve a better result simply becuase of the form of the steps, rather than based on the substance of what has really occurred. For example, Dad gifts $12,000 to each of his nephews and each of his children and grandchildren. Dad does this to take advantage of the annual gift tax exclusion. This is the tax benefit of being able to make gifts without incurring a gift tax or using your lifetime gift exemption. After these gifts are made the nephews give te $12,000 they each got to Dad's children. If the two steps the transaction are collapsed, gift to nephew followed by a pre-arranged gift to children, Dad will be subject to gift tax. The gifts to the nephews were not really a separate transaction or independent gift when the two legs of the transaction are collapsed. The step transaction doctrine can be advanced by the IRS in many different types of transactions. For example, if a parent gives assets to a grantor retained annuity trust (GRAT -- see separate definition) and the children who are remainder beneficiaires of te GRAT immediately sell their remainder interests in the GRAT to a dynasty trust, the IRS may argue that the step transaction doctrine should be applied and the two step collapsed to reveal the substance of the parent having made a gift to the dynasty trust. The step transaction doctrine can be applied in corporate and business tax situations, personal income tax matters and estate planning techniques.

Stepped Up Basis Back to Top

Basis refers to the amount generally used for tax purposes to calculate gain or loss on a sale of an asset. In simple terms it is the price paid for the asset, plus the cost of post acquisition improvements, less depreciation allowed or allowable (if you didn't claim depreciation you were entitled to, it is still applied to reduce basis).

Stepped Up Basis is an increase in the basis of an asset, such as at death of the owner, usually to the fair market value of the asset.

Example: You purchased raw land for $100,000. Five years later you build a fence around the land and pave a drive, all for a cost of $20,000. Your tax basis is $120,000. No depreciation was allowed or allowable. On your death the land was worth $300,000. The basis of the land is stepped up to $300,000. If instead you gave the land to your children before death their tax basis would be $120,000, called "carry over basis". Even though the land had appreciated to $300,000 by your death, because you had given it away before death. This basis "step up" will eliminate any capital gains inherent in the asset.

Basis step up becomes more complex if the asset is owned by an entity. If the land was owned by a corporation you in turn owned, you would get a basis step up in the stock of the corporation, but there would be no basis step up for the underlying land. If you owned 50% of a partnership or limited liability company that owned the land, the partnership or the limited liability company (taxed as a partnership) would have to make a special election under the partnership tax law provisions (Section 754) to adjust the basis in the land.

In the year 2010 the estate tax is scheduled to be repealed and with it will disappear (really, be modified) the above basis adjustment.

Stripped Preferred Stock Back to Top

Preferred stock in which the future right to dividends has been separated from the stock itself.

Succession Planning Back to Top

This is the process of planning for who should own and operate (and these two issues both need to be addressed, and they are often addressed independently) a business in the event a current owner or manager/executive becomes disabled, dies or retires. A component of this planning when a family or closely held business is involved is the estate tax implications of the plan. However, since the amount excluded from the estate tax in 2009 is $3.5 million few family and closely held businesses will have to face this issue (but for those that do, it remains vital). Too often succession planning is not addressed in its broad sense, leaving out disability, or just focusing on death. A buy sell agreement, whereby remaining partners buy out the interests of the disabled, deceased or retired partners is one component of this planning. A commonly used approach to this is for the business owners (e.g., partners) to set a price for the company in a document called "Certificate of Stated Value". If anyone dies, etc. during the next year that value governs. This avoids the complexity of having appraisals completed. This approach is not without complications and issues. There are a myriad of approaches. Larger privately held companies might consider an ESOP as part of their succession plan.

Suing an LLC Back to Top

See LLC lawsuit.

Supplemental needs Back to Top

Supplemental needs are those not covered by Medicaid or SSI. Medicaid pays medical bills. SSI pays for food and shelter. A SNT can pay for needs that are not medical, rent or food. It can pay for special wheelchairs, hair needs, personal grooming, vacations, etc. The language of the trust should provide that assets may be used to supplement and not supplant what is provided by government benefits.

Supplemental Security Income (SSI) Back to Top

Supplemental Security Income (SSI) – Means tested cash benefit for the aged, blind and disabled from Social Security. Your monthly income must be below the federal benefit rate ($674 in 2009) plus state supplement, if any ($31.25). You must have countable resources of less than $2,000 not counting the home or prepaid funeral benefits.