Planning for the Family Business. . . Everyone into the pool

Oil Can, The, First Quarter 2005 by Blackman, Irving L

Most closely held business owners spend 10 years (often 20 years, or even more) 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, smile. And read on. You just might find the answer (you've been looking for) in this article.

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 (a reader of this column) 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 with the rest of the story, 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 best, 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.

5. Eliminate impact of estate tax.

STOP! Think for a minute. Do all or most of the above five core goals sound like you? Joe and Mary have two additional goals:

1. Have Pat, Paul and Peter each ultimately own one-third of Success Co.

2. 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's and Mary's assets. Their significant assets follow:

Residences (2): $1,900,000

Business real estate: 4,000,000

Profit-sharing plan: 2,100,000

Success Co.: 8,000,000

Marketable securities: 2,300,000

Cash surrender value (CSV) of life insurance: 700,000

Total: $19,000,000

Now, the easy part (selecting the right Strategies) to satisfy the Goals based on the Assets owned. I selected the Strategies. Then, we met (Joe, Mary and me). A short meeting (1 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 Strategy is first, followed by the Asset-in parenthesis-impacted).

1. 50/50 titles to Joe's trust and Mary's trust (residences).

2. Family limited partnership (business real estate and marketable securities).

3. Subtrust (use profit-sharing funds to buy $12 million of second-to-die life insurance).

4. Intentionally defective trust (to transfer Success Co. to three boys... tax-free).

5. Single premium policy (used CSV to buy $2.3 million on Joe's life).

6. Education trust for each grandchild (income from various assets).

Remember, this article is more about the System rather than a detailed explanation of the Strategies . To learn all about the Strategies, keep reading this column. Or, if you need immediate knowledge, go to my website, www.taxsecretsofthewealthy.com.

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. When the decision maker(s) want input from more people, the System requires everyone giving input into the pool (really the conference) at the same time. So, there are six of us: the entire family and me. This was a long meeting (four hours) following an 1 hour 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 the 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: First, Joe has 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 advisors 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 was 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 which 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.)