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Small Business Owner Planning

This information is for hypothetical and educational purposes only and should not be considered specific tax, legal, investment or planning advice, which will only be provided on a personalized basis. These are not actual clients, this is for educational purposes only. This information is based upon on our understanding of current laws, which is subject to change.


When I first met Mr. Investor, he was approximately 50 years old, happily married, and had three children, one of whom was actively involved in Mr. Investor’s business. All of Mr. Investor’s time was spent focused on growing the business.


Mr. Investor came to us with the following objectives:

1. Retire with a monthly income of approximately $6,000 to $7,000 net after taxes.

2. In the event of his death, provide his wife with approximately $6,000 per month survivorship income net after taxes.

3. Develop a plan for passing his business to the son who is active in it, while also equalizing assets to the estate for the other children not actively involved in the business.

4. Review and update last will and testament, with a focus on reducing and controlling estate taxes.

5. Create a plan allowing the flexibility and opportunity to slow down in his late 50’s, working just part time in the business; this plan should include necessary steps to bring his son up to speed by that time so he could take over control of the business.

6. In the event of his death, structure his estate so the business would keep going long enough for his son to be in a position to take it over and operate it effectively.


After reviewing Mr. Investor’s information thoroughly, we made the following observations:

1. Mr. Investor had no last will and testament; in the event of his death this would create significant unnecessary expenses, red tape, and delays in settling the estate.

2. Mr. Investor was paying over $70,000 per year in income taxes while not taking advantage of any tax planning opportunities to reduce this tax burden.

3. Mr. Investor's business structure was a sole proprietorship, exposing him to major liability risk.

4. Mr. Investor had not saved enough money for retirement and was way short of what was needed to fund the lifestyle he wanted; what’s more, his overall asset structure and life insurance portfolios were over $1 million short of what was necessary to provide a satisfactory lifetime income for his wife in the event of his death.

5. Most assets were in Mr. Investor’s name or jointly held, which did not fully take advantage of his wife’s ability to pass assets down tax free.

6. All the life insurance in Mr. Investor’s estate was taxable, unnecessarily inflating the tax burden on his estate.


In designing a balanced set of solutions for Mr. Investor, we suggested the following:

1. Mr. Investor should change the format of his business from sole proprietorship to S corporation, thereby providing greater liability protection.

2. Mr. Investor should reduce his salary and take the difference in the form of S distributions; this would reduce his annual income tax burden by about $15,000 and allow those dollars to be used for pre-funding retirement needs.

3. Mr. Investor should draft a new tax planning will to utilize some of the unified credits at both deaths; additionally, the will should be structured to coordinate with the rest of the estate planning process so the son who is active in the business would have the opportunity to receive the business assets in the event of Mr. Investor's death.

4. Mr. Investor should form a family limited partnership for real estate holdings, allowing him to maintain control of cash flows and management decisions while leveraging the assets to reduce estate costs by 30% to 40%. This would effectively freeze these values in today’s dollars and allow for aggressive gifting.

5. All life insurance purchases should be made through the family limited partnership, providing necessary cash flow while shielding the majority of the insurance by moving it out of the estate.

6. Mr. Investor should purchase an additional $1 million insurance coverage and place it inside the family limited partnership to ensure satisfactory support and care for his wife.

7. Mr. Investor should begin a pension plan through his business to accumulate sufficient financial support for his retirement needs.


Mr. Investor chose to implement all of the above recommendations, with positive results. Today, some than 15 years later, Mr. Investor has achieved his objective of only working in the business a couple of days per week; ensured that his children not actively involved in the business will receive equivalent assets separate from the business; and ensured his son working in the business will receive those assets in reward and recognition of the time, effort, and hard work he has put into it.

Investing involves risks, including loss of value. Gifts do not receive a step-up in basis. As such, heirs may be subject to capital gains taxation. Other limitations and restrictions may apply not identified above.