Accredited Wealth Management Advisor Practice Exam

What is the most tax-efficient method for John to sell shares of his corporation?

1. Working out a redemption buy-sell agreement with family members

2. Setting up a SEP-IRA

3. Setting up an ESOP

4. Taking his company public

The correct answer is: Setting up an ESOP

Setting up an Employee Stock Ownership Plan (ESOP) is often one of the most tax-efficient methods for selling shares of a corporation. An ESOP allows a company to sell its shares to its employees in a qualified retirement plan. In doing so, the selling shareholders can defer capital gains taxes on the sale of their stocks if specific requirements are met. ESOPs provide tax benefits both to the seller and the corporation itself, as contributions made to the ESOP can be tax-deductible. Moreover, an ESOP aligns the interests of employees with those of the company, as employees become stakeholders in the company’s success. This method can be particularly beneficial for closely-held or family-owned businesses looking to transition ownership while minimizing tax implications. Other options, such as a redemption buy-sell agreement with family members or setting up a SEP-IRA, generally do not provide the same level of tax efficiency. A redemption agreement could trigger potential immediate taxation and does not offer the same benefits as an ESOP. Setting up a SEP-IRA focuses more on retirement savings rather than serving as a vehicle for liquidating ownership stakes, and therefore does not address the objective of selling shares in a tax-efficient manner. Taking the company public can entail significant costs and regulatory requirements