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CASE STUDY:
The Privately Held Business Owner And The Attorney

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.

Introduction

Although I was strongly referred in to meet with Mr. Insured, he was reluctant to meet with me at all. Every time I tried to schedule a meeting with him he made the kind of claims that are all-too-common....”I’ve done this kind of work before”....”I don’t need any more estate planning help”.... “It’s just going to be a repeat of everything else I’ve already done”.....and so on, and so forth.

Fortunately, I had worked with Mr. Insured’s attorney a number of times on other cases and he was as convinced as I was that Mr. Insured would benefit from moving through our planning process, so he agreed to use his influence to get Mr. Insured to agree to meet. Thank goodness for this proactive attorney, because he was able to convince Mr. Insured to move forward with the planning process.

Objectives

Mr. Insured came to us with the following objectives:

1. Update his last will and testament so that in the event of his death his spouse would receive ownership of their primary residence as well as their second home.

2. Mr. Insured was approximately 50 years old; he wanted to have enough assets in place to retire with full financial independence at age 60. Additionally, he wanted to ensure there would be sufficient assets to provide for his wife in the event of his death.

3. Purchase an additional home in the West.

4. Evaluate his current tax burden and focus on minimizing taxes wherever possible.

5. Develop a comprehensive plan for his business in the event of his death, ensuring the best strategy is in place for maximizing this asset.

6. Remove his ex-wife as trustee of the profit sharing account.

7. Review and audit how his estate is currently being administered.

Observations

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

1. Mr. Insured should update his will to provide fair distributions to his current wife and his children.

2. Mr. Insured should restructure his estate planning to eliminate unnecessary estate and income taxes of approximately $9 million. Additionally, he should re-title assets to take advantage of his wife’s unfunded unified credit; consideration should be given to whether their cottage should be titled jointly or as tenants in common.

3. Mr. Insured’s life insurance was a fully taxable part of his estate, creating an unnecessary tax burden of approximately $2.5 million; the planning process should determine the best way to move this insurance outside of the taxable estate.

4. Mr. Insured’s qualified retirement plans were also part of the estate; these combined retirement plans caused massive tax implications. The planning process should determine the best and most efficient way to handle these plans in terms of estate and income tax planning.

5. Mr.Insured had set up assets for his children (in the seven digit range apiece) to be distributed via simple inheritance when the children reached age 18; however, the children would not be mature enough to handle such significant assets at that age. The planning process should determine the best way to handle these assets and their distribution appropriately.

Recommendations

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

1. Mr. Insured should update his last will and testament to coordinate with the overall estate plan so that his current wife and his children were taken care of separately.

2. Mr. Insured should transfer the children’s investments to a family limited partnership, designating those assets for the children while allowing Mr. Insured to maintain full control over them after the children pass the age of 18. He can then transfer control to each child on a case-by-case basis when he is convinced he/she is mature enough and responsible enough to handle them appropriately.

3. Mr. Insured should create a second family limited partnership for investments, which would achieve a discount for tax purposes and shield these assets as a creditor protection vehicle.

4. Mr.Insured should re-capitalize his business, taking a 30% discount on the value of the stock. Additionally, he should create a buy/sell agreement with any child/children who express an interest in the business. A trust should also be created, giving provision for such child/children to buy voting shares upon reaching the age of 30. Prior to that point, other qualified people would run the business on behalf of the child/children.

5. Implement generation skip trust provisions in Mr. Insured’s last will and testament to save estate taxes.

6. Thoroughly review and audit all life insurance options.

7. Create a formal gifting strategy, with consideration given to using some of the unified credit now to reduce taxes rather than waiting until death for this to come into play.

Summary

Mr. Insured chose to implement all of the above recommendations. Since that time, his son has become and become an active participant in the business and Mr. Insured is enjoying the opportunity to work with more family involvement in the business. This has allowed him to keep a family generational business intact that can be effectively passed on to future generations who wish to be part of it. At the same time, his current wife is protected by having sufficient assets separate from the business.

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.