The Background

Jack is a second-generation business owner, age 70.  Jack was married once before and has two children from that previous marriage and two more with Dianne.  He and his ex-spouse have a decent relationship, but all financial ties have been severed. Jack’s business has boomed over the past decade, with 7 locations plus ownership of the real estate for all locations. Jack has been surrounded by a good law and CPA firm for his entire professional life and has many sophisticated trusts and entity structures in place for a myriad of reasons such as asset protection, estate planning and business succession. Jack would sell the business but would like to give his two children working in the business a chance to succeed him.  Jack also wanted to equalize their combined estate so that all 4 children would receive substantially equal shares of their wealth.

Dianne is age 62 and retired after a 35-year career as a teacher.  She is the proud mother of two and very supportive of her entrepreneurial spouse and all it takes to run the business entities. Dianne could have worked longer, as she loved her time in the classroom.  However, a diagnosis of Multiple Sclerosis caused her to realize that her freedom may become limited in short order and began to focus her time on the things she loved most; her grandchildren, reading, golf and the Garden Club.

The family tree is complex.  Two grown children from a previous marriage, each with two children.  Two children from their current marriage, with one gadult child having two children and the other unmarried with a same sex partner and no children. There are six grandchildren in total.

One of Jack’s sons from his prior marriage has a significant position in the company and Jack and Dianne’s daughter also having a significant role in the business.  The other two children are not involved in the business. The company also has a non-family member President who had no ownership interest at the time of our engagement commencement.

While Jack loves his company, the people that work for it and the role he plays, he also realized that nothing lasts forever, and he wanted to spend more time with Dianne and the grandchildren while she is healthy enough to enjoy the activities they love.

Financially, Jack and Dianne have a lot of assets but weren’t sure just how much because of the extensive business and real estate holdings. The business and real estate holdings made up 90% of their net worth. Their annual cash flow was substantial, with cash accumulating in every business and real estate account that they had.  When they felt that they had too much cash, they would expand the business or buy more real estate. Early on it was clear to us that their net worth was well in excess of the federal death tax limits, and that a whopping estate tax bill would be due if more advanced planning wasn’t done.

While surrounded by many financial professionals for decades, Jack and Dianne felt that something was missing.  There were many inter-company transactions, complicated trusts with several tax returns to be filed, bills being paid from the wrong accounts and no one running the show to coordinate the work of these outside professionals. Jack and Dianne are smarter than they think.  While their structure was sound, the governance of these structures from a tax and estate planning point of view were being mismanaged, primarily due to a lack of coordination. Each professional remained within their specialty silo without considering the impact on other areas of their financial situation and they rarely communicated with each other.

The Process

It all started with finding out how Jack and Dianne wanted to spend their 168 hours per week.  From there, we got a clear view of their vision for a happy life and what was most important to them.  The answer: family, more time with family and making sure that death taxes and sloppy planning don’t ruin what could be an enduring intergenerational wealth plan.

We then dove into a detailed review of all their legal agreements, corporate documents, tax returns and financial assets.

For brevity purposes, below is a summary of some of the tactics that we designed and implemented to meet the family’s objectives:

• Obtaining a third party to evaluate the business interests and real estate.
• Immediate usage of the federal death tax exclusion by making current gifts of valuable illiquid assets (primarily the real estate leased to the business) removing $30+ million from their taxable estate. We were able to take advantage of the discounting techniques allowed by tax courts for minority discounts and lack of control to leverage these gifts.
• Revise the estate plan to equalize their estate amongst the four children.
• Freeze the value of the business interests for tax purposes by entering into an installment sale of 75% of the business to his two children and his non-family President leaving Jack with 25% and a salary as Chairman of the Board.
• Making sure that annual gifts are made to their children and grandchildren to further reduce any future death taxes.
• Funding 529 Accounts for all 6 grandchildren.
• Providing pro-active income tax planning for the business, its former owner, and the current owners.
• Creating a cash flow stream that will pay for their desired lifestyle forever with little to no risk.
• Evaluate life insurance strategies proffered by his agent to further reduce the potential death tax burden. Jack and Dianne elected to pass on the insurance plan and continue to maximize their gifts to family and charities.
• Design a corporate infrastructure with job descriptions, shareholder and succession agreements for the owner/operators, and a bonus plan for the 3 new owners of the business.
• Implement a plan for Jack and Dianne to re-structure their balance sheet from 90% business interests to 15% business interests over a 7-year period.
• Diversify their net worth from 90% business to a more diversified net worth with new asset classes acquired.