Using the Family Business to Generate Growth and Protection for Family Wealth

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

Quick Read
Jack and Emily burns are 46 and 47 years old respectively, in good health, and have two children -- Kevin, 18, and Katherine, 13. Jack runs a very successful business (Burns, Inc., an S-Corp) valued at $14.5M (based on offers from publicly traded companies in the same business).  The total family net worth is approximately $22.5M.

Although the family lives a modest lifestyle, spending about $200K per year, Jack and Emily wish to retire with a more comfortable income of about $400K per year. In addition, philanthropy is very important to the family and they wish to leave 20% of their estate to designated charitable organizations.


Challenge
Jack and Emily have only completed simple estate planning which provides little or no tax benefits, limited asset protection, and no method for maximizing the amount of wealth that goes to the heirs.

The children are too young to determine if they have an interest in joining and eventually running the business. Plus, the lack of in-depth estate planning compromises the stability of the business should Jack become incapable of running the company.

Design
With the couple's belief that the estate exemption will be permanently capped at $3.5M, we began by establishing a Family Limited Partnership (FLP) and transferring in $3.5M of  S-Corp shares, providing a basis for asset protection as well as federal gift and estate tax benefits.

Next we re-capitalized the S-Corp into voting and non-voting shares, established a new Grantor Deemed Owner Trust (GDOT), and made a seed gift to the GDOT prior to selling LP interests and non-voting S-Corp stock to the GDOT for a promissory note.

In an effort to eliminate additional estate taxes, we transferred the couple's principal residence to a Qualified Personal Residence Trust (QPRT), established a succession plan for the S-Corp, and established a Family Foundation.

The Family Foundation was designated as the beneficiary of the current IRA accounts.  In addition, a specific share of the estate was designated to the Family Foundation after the death of both Jack and Emily, and an annual gifting program was established from Jack and Emily to the children and the Family Foundation, creating a well-oiled distribution machine.

Results
If Jack and Emily live to normal life expectancy, we will more than double the amount of the assets that the heirs receive (from $173M to $349M). Even at the current estate value, the advantage is $36M instead of $17M. All estate tax has been eliminated, and there is a significant gift to the Family Foundation.

Lessons Learned
Successful family businesses hold enormous opportunity for the transfer of wealth to the family  while also supporting the long-term health of the business. Conversely, those same businesses often translate to sizeable tax burdens when estate planning is insufficient. By implementing a well-developed strategy and the maintenance to sustain individual goals, the family business can easily provide growth and protection for family wealth, simplify business succession, and completely eliminate  estate taxes.


Why should you capitalize on family businesses?

            • They provide a means for funding trusts that will eliminate taxes and gifting limits.

            • There is opportunity for succession planning to bolster security for wealth transfers.

            • They establish a platform for all other estate planning purposes. 

 

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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