Page 29 - MetalForming December 2010

An IDT wins taxwise over a typical sale to Sam. The huge tax burden on Sam for a typical sale disappears. For example, if the income-tax rate is 40 percent (state and federal combined), Sam must earn about $167, pay $67 in income taxes to have $100 left to pay his dad. With an $8 million price, Sam must earn more than $13 million to pay Joe the $8 million.
3) Make sure that Joe and Mary can maintain their lifestyle for as long as they live. First, a little more informa- tion: Sam does a good job as one of 80 employees at Success Co., is well liked by his fellow employees, but does not have what it takes to manage the business. Joe and Mary want to keep Success Co. in the family, so Sam is the only choice. But what to do about management?
David, the key employee, is the log- ical choice. We created a nonqualified
deferred compensation plan that gives David the benefits of ownership—a share of the profits gets paid if he gets sick (covered by insurance) and $1 mil- lion (again insured) for his family if he dies—without owning Success Co. stock.
David immediately took over as pres- ident of Success Co. and took over the day-to-day management of the com- pany. Joe continued as chairman of the board and consulted with David regu- larly. Joe had absolute control (owned all the voting stock) but never (two years after the sale to the IDT) has found a reason to exercise the control.
Joe continues to work, at full salary, but only works half days. The intent is for Joe to cut his salary and days worked once his IDT note is paid in full.
Success Co. has grown in sales and net profit since David took over.
4) Remove Joe’s bank guarantee for
Success Co.’s loans. A meeting at the bank caused the term-loan provisions to be rewritten, removing the guarantee once the IDT loan to Joe was paid.
5) Treat the nonbusiness children fairly. Besides Success Co., Joe and Mary have only $4.5 million in other assets, not enough to treat their daugh- ter, Susan, equally, which is their defi- nition of fairly. Remember, Success Co. is an S corporation and every year the IDT will receive a dividend from Success Co. equal to that year’s profit.
We had the IDT buy second-to-die life insurance on Joe and Mary. Susan is the beneficiary of the IDT for the amount of the insurance, enough to treat Susan fairly. Where do the premium dollars come from? The dividend distributions each year are first used to pay the insur- ance premiums, and the balance to pay the $8 million IDT note. MF
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