Ottawa Devices Equity - Assignment Example

Question 1

The current position of the Ottawa Devices Company is critical given that the current management wishes to maintain family legacy when they retire (Reiling & Midgley, 2003). There exist certain scenarios where the brothers have conflicting needs that can result in the downfall of the company. For example, both Tom and James have the same views on how to acquire their retirement benefits through gaining liquidity from the company, which contradicts Robert’s views on how to obtain retirement benefits. Increasing liquidity for retirement can affect the capital structure of Ottawa Devices because it will result in the lack of liquidity when the company needs it most. In addition, passing the company to the next generation is a huge challenge because none of the three brothers’ children wish to work in their family business (Reiling & Midgley, 2003). The company has no exit strategy because of the tax burden it is currently facing, therefore, if Tom, James, and Robert have no skills to evade several IRS taxing policies. The financial burden can lead to the company’s downfall.

Question 2

Estate freeze refers to the management strategy where an individual transfers his or her assets without incurring taxation costs (McNulty, 2011). This is usually done through issuance of preferred shares where an organization can issue the stock to the beneficiaries at a nominal value. Besides, when a person transfers his or her assets through preferred stock strategy, there are no capital gains that are subjected to taxation.

Estate freeze helps in tax reduction and retaining enough wealth that covers the retirement needs till death. In addition, the strategy is important in maintaining the legacy of a family in business through giving control of the company assets (McNulty, 2011). However, the major limitation is that there are costs incurred at the implementation stage and annually when there is a need to meet tax-report obligations.

Question 3

The annual gifting to the grandchildren was a good idea since it is an effective estate planning strategy that enabled Sarah Rollins to pass future appreciation of her estate ton her grandchildren. For example, when her vocational home was valued, it was 6 million in value at the time of her death, and the current value is of huge difference to the initial value of her estate. In addition, the annual gifting strategy makes it possible for individuals to leverage income tax rates, which helps in lowering inheritance tax liabilities that the grandchildren could incur in case of death (McNulty, 2011). Also, it also helps in ensuring personal satisfaction when a person sees the other members of his or her family benefit from their investment. The gifting strategy gave Sarah an opportunity to split her income among her beneficiaries, and it helped minimize estate tax. It allows an individual to make unlimited payments to any program that supports the beneficiaries such as medical and insurance bills. Therefore, I think annual gifting was a great strategy (McNulty, 2011).

Question 4

The Grantor Retained Interest Trust is a valuable estate-planning tool that includes gift valuation taxing tools that are used on retained interest earned from trust investment that family members benefit from (Hoffman, 2015). Therefore, it involves irreversible establishment of trust fund where the grantor can transfer her or his assets to the GRIT while retaining the income for a fixed period. The trustee of the trust fund distributes the revenue to the grantor on an annual basis or any other time frame established in the contract. Therefore, in the case study, if the GRIT program were set up correctly it would have been a useful technique since the assets from the grantor would have been valued at a discount rate when according to the federal gift tax procedures. However, the rate of discounting depends on the specified period in the established trust fund by the grantor (Hoffman, 2015).

Question 5

In calculating the equity value of Ottowa Devices Company, I used SDE Multiple formula where the value of the company = [revenue/ (intangible assets+cash+accounts payable+inventory+real estate+other tangible assets-liabilities)]

= (72,500/3412) =21.24% and this value is higher compared to the value of the previous year when revenue was at 65,796 dollars with a net income of 4,245 dollars.

Based on the valuation of the business the transfer plan is effective considering the capability of the business to grow over the years.

Question 6

The phantom stock is an employee benefit plan, which gives the selected employees in an organization stock ownership benefits without granting them any real stock ownership (Hoffman, 2015). Therefore, instead of getting physical stock, an individual takes a pretend stock that is valued according to the actual price value of the stock that is regularly paid according to the profits level in an organization. The phantom stock can help an organization to retain its crucial employees without increasing their pay. However, the ownership remains to the management as they aim in increasing the value of the organization (Hoffman, 2015). This helps in growth of the organization since it provides the cashless alternative in increasing income as the phantom value appreciates. Besides, they provide long-term income opportunity to the organization without affecting the private assets of the organizations.

However, the main disadvantage of phantom equity plan is that it can be a costly form of incentive on a long-term basis. Besides, it does not represent the actual ownership of an organization especially in an organization that does not participate in the public trading of shares. Therefore, it does not carry the voting rights that are linked to the stock ownership in an organization because they are not real (Hoffman, 2015).

Question 7

The benefits presented in the case study are generous considering the individual contribution to the company. For example, in the case of estate actions that Tom, James and Roberts have taken, they were able to satisfy their long-term interest of passing the company to their futures generations. However, they used a share transfer system because of using sophisticated tools that increased their voting power in the organization. The company benefits also enabled them to set up suitable financial; trust such as the crummy and life insurance trusts. This allowed them to transfers gifts to their children hence minimizing tax expenses based on a number of assets that could be claimed in cases involving legal settlement (Hoffman, 2015).

Question 8

According to the estate, planning goals of the Rollins brothers contains some difference in preferred financial plans among them depending on the individual history of the organization (Reiling & Midgley, 2003). Tom Rollins was the eldest and had worked in the company the longest compared to each of his brothers since he dedicated all his professional life to the development and management of the family company. However, over the years, he has never paid himself a significant salary, which made him, felt threatened in case he retired. To secure, his future and that of his family he wanted to create some liquidity for himself and to his family to compensate for the time he has worked for the organization. His secondary goal was to pass the ownership of the firm to the children using the most tax efficient procedures which would help reduce the level of financial burden (Reiling & Midgley, 2003).

The goals for Robert Rollins were similar to those of Tom given that they have both stayed with the company all their professional life and have secured insignificant assets. Acquiring liquidity for retirement was an important strategy to secure their retirement and the family assets. In addition, he also wanted to transfer his inheritance to the family with minimum estate tax (Reiling & Midgley, 2003).

However, in the case of James Robins, he had different retirement goals compared to his brothers in relation to his history in the business. Initially, James had worked in real estate industry where he was able to secure significant savings that could serve him and his family upon retirement. Therefore, he did not recommend for additional liquidity due to his attitude towards debts. In addition, he did not prefer selling the company for the sale of estate planning (Reiling & Midgley, 2003).

Tom and Robert’s goals are the same because of their history with Ottawa Devices where they have worked for a long time compared to their brother James. Spending all their professional life in the organization generated the need to secure their retirement since they had no significant assets that would support them and their families.

Question 9

The Rollins brothers have similar estate planning despite the difference in risk tolerance and the retirement goals (Reiling & Midgley, 2003). Each wants to secure the future of their families without imposing huge taxation burden that the company was facing in case they transferred the inheritance to their children. In addition, the retirement goals are different because of the history each individual has with Ottawa Devices. Both Tom and Richard spent the longest time working in the management roles, and it took all their professional life. However, James the youngest brother was risk averse and felt no need to liquidate the company (Reiling & Midgley, 2003).

Question 10

Given the differences in retirement goals and competing interests among the brothers, there can result in serious disagreements, which can lead to the downfall of the organization (Moore, 2014). There is a need to conduct the business evaluation which will help them in asset diversification and transfer of ownership to the third generation. The process of transfer is easy because each of the brothers have an equal share of the company. However, there is also need to consider the level of interest each party have in the business. For example, in the case of James, none of his children works in the organization, and they never want to work at Ottawa Devices. Therefore, the distribution of assets can be done according to the degree of interest each party has in the welfare of the business (Moore, 2014). That is, Tom and Richard’s wish to liquidate the company should be granted since there is nobody in the family that wants to continue the family legacy of managing the company.