Case Study: The Curley Family
Randy Fox, CFP, InKnowVison, LLC
The Best of Both Worlds: How to Increase Tax Deductions and Decrease Tax Obligations without Compromising the Maturity of Wealth
By: Randy Fox
Firm Name: InKnowVision
Contact: Randy@inknowvision.com
Location: Naperville, IL
Industry: Tax Consulting
Quick Read
Peter and Loretta Curley are 64 and 58 respectively, have four grown children and 14 grandchildren, and are "small town" people. Of the current net worth totaling $23M, around $15M represents the value of the family business, Curley Well Services. Peter operates the business as a sole proprietorship and reports all of the net income on Schedule C. While he has sustained a very successful business, he would like to sell in five years since the children are not currently involved, and have shown little interest in continuing the business.
Challenge
The structure of the business creates a lot of excess cash flow and with it, very high income tax obligations for the clients. The future estate tax issues are equally disconcerting. With no prior planning beyond their outdated wills, much needs to be done to help them reduce current and future taxes, while also smoothing their transition out of the business.
Design
As we discovered after utilizing the Family Wealth Diagnostic, their current planning would have them paying more than $8M if they both were to die this year and close to $40M if they live to normal life expectancies. Adding insult to injury, their next five years of income taxes are projected to be cumulatively more than $7M. In order to deliver a positive impact for the family we developed a sophisticated structure for:
· Reducing income and estate tax
· Creating greater wealth for heirs
· Selling the business in five years
Using the Family Wealth Goal Achiever and with the assistance of the couple's attorney, we were able to develop a successful strategy which helped the client to establish a means of achieving all of their goals and more:
- Established a Limited Liability Company (LLC) with voting and non-voting units
- Transferred Curley Well Service to LLC
- Created a C Corporation (or an LLC taxed as a C Corp) to manage LLC, creating tax deductible employee benefits for Curley family members including health insurance, long term care insurance, pension plans, and more
- Formed a Captive Insurance Company (CIC) in an offshore jurisdiction, where the CIC is owned by a Trust for the children's benefit
- Purchased $20M second to die life insurance policy on Peter and Loretta through ILIT
- Made one-time premium payment of $337K utilizing some of their lifetime exemption, with payments resuming in 11 years
Once the CIC was established under the Trust, Peter and Loretta will be able to contribute $1.2M a year of insurance premium which is tax deductible to Curley Well Service but because of the Captive structure, will not be taxable income to the Captive. The Captive will be required to pay any claims but if there are none or if they are minimal, the remaining premium balance becomes "profit" of the Captive. As profits accrue over the next several years, they ultimately inure to the benefit of the Trust for the children, which is the ultimate owner of the Captive.
This transfer of wealth is done without gift taxes and is, in fact, tax deductible to the Curleys.
Results
With the new plan in place, we were able to save the Curleys $3.5M of income taxes over the next five years. We are also able to transfer $67M to the heirs at life expectancy -- a $33M improvement over their current plan.
Lessons Learned
· Reform the character of business assets to reduce taxes
· Change the nature of the business entity as a means for creating tax deductions
· Increase liquidity after death through life insurance policies
Randy Fox, CFO, InKnowVision, LLC
www.InKnowVision.com
randy@inknowvision.com
LinkedIn: Randy Fox
To learn about Randy Fox click here!
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