Irv Blackman Irv Blackman
Independent Financialservices Professsional

Succession, Estate and Lifetime Planning—Three Natural Companions for Family Businesses

April 1, 2011

Do you own all or part of a closely held business? Sooner or later, like it or not, you must deal with succession-planning problems. Hands down, most readers call me for help with their business-succession plan. Most do not have an estate plan or, if they do, it’s out of date. There is no to properly prepare a succession plan unless it’s part of a comprehensive estate plan.

Also, most readers fail to fully understand their most valuable asset—often called lifetime equity growth (LEG). LEG represents one’s ability to earn income, of all types for the rest of your life, encompassing the growth of assets over time. LEG cries out for a lifetime tax plan.

Also, remember that the estate tax can cause no harm until you (and spouse, if married) leave this earth. Guesstimate your life expectancy—average for men is 75 to 77, average for women is 79 to 81. Write down how many years your LEG will likely increase your taxable wealth, and your potential estate tax liability. A lifetime plan will keep the LEG in the family, instead of losing it to the tax collector.

Following is an example of a typical reader (Joe) who called asking about a succession plan, which blossomed into three plans: succession/estate/lifetime. Joe (age 61) owns 100 percent of Success Co., an S corporation. He and his wife Mary (age 59) have three children, one of which (Sam) works in the business. Joe’s question: “What’s the best to transfer Success Co. to Sam without getting beat up with taxes?” Upon further review, it became clear Joe had three main goals: Avoid tax on the transfer of Success Co. to Sam; treat the two nonbusiness kids fairly; and create an estate plan that would transfer his wealth to his family without being reduced by the estate tax when Joe and Mary die.

Here’s the four plans we created for Joe, dovetailed into one comprehensive plan.

The Succession Plan

Establishing an intentionally defective trust (IDT) will accomplish Joe’s goal of avoiding taxes when transferring Success Co., valued at $16 million, to Sam. Due to discounts allowed by the tax law, Joe sold Success Co. to the IDT for $9.6 million (for tax purposes). To maintain control of Success Co., Joe retained the voting stock (100 shares) and sold the 10,000 shares of nonvoting stock to the IDT. The IDT saved Joe about $200,000 in taxes for the buyer (Sam) and seller (Joe) combined.

Plan to Treat Nonbusiness Kids Fairly

Here’s the unique challenge regarding this part of the plan: Success Co. is worth $16 million (before discounts), but all of Joe’s other assets total about $6 million, not enough to treat the nonbusiness kids fairly. The answer: Make each of the three kids equal, one-third beneficiaries of the IDT. The trustee will keep the stock until the last of Joe and Mary dies. Then, the properly drawn buy/sell agreement kicks in. The IDT distributes the stock to the two nonbusiness kids, and the stock is immediately redeemed (bought by Success Co.) using the life-insurance proceeds that funded the buy/sell to pay for the stock.

Note: If Joe dies first, the voting stock immediately transfers to Sam so that he can continue to run Success Co.

Estate Plan

We updated the wills and trusts for Joe and Mary, ensuring that these new documents are compatible with the other three plans.

The Lifetime Plan

…represents the heart of any estate plan. The typical estate-planning documents are essential, but they do nothing until you die. Sure, life insurance only pays after death, but buying life insurance clearly is a lifetime decision, typically made when you and your spouse are young and healthy enough to establish acceptable premium costs.

The lifetime plan includes a wage-continuation plan for Joe, when he no longer can work, based on his predicted life expectancy. Other tax-saving strategies used:

• A family limited partnership for the income, real-estate and stock portfolio;

• A qualified personal residence trust for Joe and Mary’s two residences;

• A 401(k) plan to help pay some of the required insurance premiums;

• A new management company to provide special fringe benefits to Joe and Sam, allowed by the tax law; and

• A lifetime gifting program to the kids (and grandkids) to reduce the potential estate-tax liability. MF

Industry-Related Terms: Die, Run, Transfer
View Glossary of Metalforming Terms

Technologies: Management


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