When the Whole Family is in on the Planning

MOST CLOSELY HELD business owners spend 10 years (often 20 years, or even longer) working on tax-related planning. You know, that not-so-easy stuff like business succession, estate planning, asset protection and related areas. If you’re a member of this club, read on. You just might find the answer you’ve been looking for in this column.

First, let’s see why most business owners (whether you own 100% of the business or less) search and search for the Holy Grail of business tax planning but never find it. A review of a real-live case should open the right planning door for most readers. Why? Because most of the problems and concerns are what we call “core goals” and apply to almost every business owner.

This is the story of a business owner (Joe, age 62), his wife (Mary, age 59) and their three boys (Pat, Paul and Peter, ages 39, 37 and 32). All the boys are married and are active in the business (Success Co.), which is a successful leader in its industry. There are six grandchildren.

Before we continue, it is important to understand that unless you work with a knowledgeable and experienced expert who has an organized system for coordinating and integrating the various laws, options and solutions into a comprehensive plan, your efforts will fail. No matter how many years you try.

A system? Yes, an absolute must. Just like the most expensive car won’t move an inch without gasoline to fuel it.

The system we use starts with helping clients identify their goals. Joe and Mary have five core goals:

1. Maintain our lifestyle;

2. Transfer wealth (amount after second death) intact;

3. Protect assets;

4. Joe to control assets — including Success Co. — for life; and

5. Eliminate impact of estate tax.

Do all or most of the above five core goals sound like yours? Joe and Mary have two additional goals:

• Have Pat, Paul and Peter each ultimately own one-third of Success Co., and
• Create a tax-favored plan to educate the six (or any new) grandchildren.

The system is designed to get an exact list of goals (shown above) and an exact list of Joe and Mary’s assets. Their significant assets follow:

• Residences (two): $1.9 million;
• Business real estate: $4 million;
• Profit-sharing plan: $2.1 million;
• Success Co.: $8 million;
• Marketable securities: $2.3 million;
• Cash surrender value of life insurance: $700,000;
• Total assets: $19 million.

Now, the easy part (selecting the right strategies) to satisfy the goals based on the assets owned. I selected the strategies. Then, Joe, Mary and I met for an hour and 15 minutes to explain how each strategy selected accomplished one or more goals. And how each asset would be dealt with now and in the future. Just to satisfy your curiosity, here’s a list of the strategies we used:

• The residences were converted to 50/50 titles and put in Joe’s trust and Mary’s trust.
• The business real estate and marketable securities were put into a family limited partnership.
• The profit-sharing funds were used to buy $12 million of second-to-die life insurance held in a subtrust.
• Success Co. was transferred to the three boys tax-free through an intentionally defective trust.
• The cash surrender value of the life insurance was used to buy a single premium policy for $2.3 million on Joe’s life.
• Income from various assets funded an education trust for each grandchild.

Remember, this article is more about the system rather than a detailed explanation of the strategies.

For most readers of this column, or in a real-life situation (like Joe and Mary) the system would have satisfied every one of their goals. It would be easy to finish the entire matter: Get the documents drawn and signed, and the plans would be done.

But in this case, no champagne yet. Joe and Mary wanted the boys — individually and collectively — to sign off on the plan. So, there were six of us, the entire family and me. This was a long meeting (four hours) following an hour-and-a-half lunch to lay the groundwork.

Interestingly, most of the time was spent discussing the terms of the buy/sell agreement (between the boys) relating to their rights and duties (a) the day the agreement would be signed and (b) 25 years (or more) down the road.

Two more points before ending this tax story.

Before all this transpired, Joe had been working on his tax plans for 18 years. He and Mary had traditional wills and trusts, a buy/sell agreement, a messed-up insurance portfolio and assorted other documents. Over the years he had worked with six different advisers and spent a small fortune looking for (but not finding) the tax-planning Holy Grail.

And, finally, if both Joe and Mary were to go to business heaven before our system plan was implemented, their family would receive (after collecting the death benefits of their existing insurance portfolio and paying all taxes due) a net of $12 million. And if their trip to heaven were delayed until the day after the plan was implemented, their family would receive (net or all taxes due) $26 million.

The two big reasons for the happy difference are the discounts allowed for tax purposes for the strategies used and the huge amount of new insurance that escapes the estate tax. The longer Joe and Mary live, the greater the amount of wealth they would transfer tax-free to their family (due to the annual gifting program that is planned.)

Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].