Beauty is in the Plan of the Business Holder: Creating Greater Wealth & Liquidity for the Families of Successful Businesses

By: Randy Fox
Firm Name: InKnowVision
Contact: Randy@inknowvision.com
Location: Naperville, IL
Industry: Tax Consulting

Quick Read                                   
Brenda Gilmore is an 82-year-old widow, has four grown children and seven grandchildren, and retains active part ownership of a company she and her husband built years earlier (Gilmore Holdings, an S-Corp.)  With 35% ownership valued at $6.75M, her total net worth is $8.3M. As the only child involved in running and growing the business, Frank, Jr. inherited some stock from his father's estate and, because of his successful management of the company, is in line to receive the entire business once Brenda dies. She realizes that her other children will probably receive less than Frank, Jr. but wants to ensure an inheritance for them that reflects a certain value and significance.

Challenge
In the estate's current situation, Frank, Jr. will have to borrow heavily or sell part of the company to meet his share of the tax obligation once the business estate is transferred. Worse yet, the other heirs will not receive anything from Brenda's estate.  

Design
As we discovered utilizing the Family Wealth Diagnostic, Brenda's current estate tax liability is very close to $2.8M and there are not enough liquid assets to pay it. The $2M life insurance policy that Frank, Jr. owns on Brenda will provide some relief. However, if Brenda lives another seven years (her life expectancy) the tax rises to nearly $7M due to the rapid appreciation of the company under Frank, Jr.'s management. We turned to the Family Wealth Goal Achiever to assist in:

·         Resolving the liquidity issue

·         Reducing the estate taxes

·         Creating a stress-free business transfer

·         Ensuring an inheritance for the heirs

Using the Family Wealth Goal Achiever we were able to develop a successful strategy which helped the client to establish a means of achieving all of her goals and more:

1. Re-capitalized Gilmore Holdings stock into voting and non-voting shares
2. Appraised shares and sold 75% of Brenda's shares to a newly formed Grantor Deemed Owner Trust (GDOT) in exchange for a note (the amount of shares sold are in keeping with the cash flow needed for Brenda to live on, and her interest in retaining some company ownership)
3. Established that the note will pay interest only to Brenda over her lifetime
4. Used excess cash flow from GDOT to purchase a $4M life insurance policy on Brenda (while this is not as much insurance as might normally be indicated, it is all that the cash flow will allow)

Results 
Since the stock represents most of her wealth there are no additional strategies recommended for Brenda.  However the planning does produce very positive results for the Gilmore family. With these structures in place, Frank, Jr. can receive 100% of Gilmore Holdings and each of the other heirs will receive a little over $1M. The same is true if Brenda lives to life expectancy. We have also been able to reduce future estate taxes from $7M to $3.6M which is a decided advantage to the family.

Lessons Learned
·         Re-character business stock to increase liquidity and sell to GDOT for additional cash flow

·         Use the additional cash flow as a means of acquiring a large life insurance policy

·         Ensure greater inheritance and reduce taxes to the heirs via the insurance policy

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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