The Benefits of Business: Creating Asset Liquidity for Stabilization of Family Wealth and Legacy

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

Quick Read
Thomas and Laura Blanchard are 57 and 56 respectively, have 11 children and 11 grandchildren, and maintain a lifestyle that is relatively modest ($250K) when compared to their net worth of $22M. Most of this wealth is tied up in several businesses that are owned and operated by the couple; businesses that are all highly successful and growing rapidly. Currently Thomas and Laura are healthy, have made no taxable gifts to their many children, and are paying premiums to a small life insurance policy ($775K) that is in an Irrevocable Life Insurance Trust (ILIT). They are gifting one-twelfth of their assets to charity as part of the current estate plan but would like to do even more without reducing the amount of wealth that transfers to their children.

Challenge
A major lack of liquidity means that if both individuals died today they would have an estimated estate tax obligation of $8M, and at life expectancy a dazzling $238M. Virtually all of their wealth is tied up in their businesses, which cause their children to have to either liquidate the companies or borrow heavily to pay any estate taxes. Furthermore, their income taxes are very high relative to their living expenses, and like many business owners, Tom hates income taxes.

Design
Due to the fact that most of their wealth is tied up in the businesses there is an alarming lack of liquidity which sets the stage for near-disaster when the assets are transferred to the children. In other words, the children would be responsible for liquidating the companies or borrowing heavily in order to pay the estate taxes on the assets transferred to their taxable estates. In order to create a positive impact for the family we developed a sophisticated structure for:

·         Eliminating high income and estate taxes

·         Increasing charitable intent

·         Protecting the transfer of assets

·         Maintaining current lifestyle

 
Because of the unique goals of this couple we utilized several strategies to relieve the Blanchards' estate and income taxes, while establishing a means of achieving all of their goals and more:

1. Re-capitalized two largest business entities into voting and non-voting shares
2. Appraised shares, then established individual Grantor Deemed Owner Trusts (GDOTs)
3. Made small gifts to individual trusts to provide economic viability
4. Sold all non-voting shares to GDOTs for installment notes, which pay principal and interest over 15 years
5. Utilized some cash flow from GDOTs to complete two additional planning elements:

   • Funding a $40M survivorship insurance policy
     
   • Providing the reserve capitalization for a Captive Insurance Company (CIC), formed as a standalone company and owned by GDOTs

6. Established charities as beneficiaries of their qualified plans when the second spouse dies
7. Established a Testamentary Charitable Lead Annuity Trust (TCLAT)

A feasibility study and an actuarial analysis was performed on the established CIC revealing that the CIC (as owned by the GDOTs) will insure selected risks of Blanchard Industries and underwriting profits will accrue to the CIC. Premium is expected to be $1M annually and is deductible to Blanchard Industries which saves Tom and Laura $400K of income taxes per year. Because the CIC is a "small" captive, the premium it receives is not taxable income to the CIC. Depending on claims, the CIC could accumulate as much as $35M at the Blanchards' life expectancies.

Because the qualified plans are set to go to charity when the second of the couple dies, the total transfer should be around $3.5M. The established TCLAT will take any amount of their estate over their remaining exemption amounts and provide income to charity for 25 years and then transfer the balance of the assets to their heirs at the end of that period. The $40M of life insurance is calculated to make up for the "delay" involved for the heirs receiving the balance of the estate.            

Results

With the new plan in place, we have completely eliminated all of the estate tax, increased the amount to the heirs by $166M, and met the Blanchards' charitable goals.  

Lessons Learned

·         Increase liquidity of assets by incorporating shares into trusts

·         Consider company ownership under trusts to preserve and grow wealth

·         Establish life insurance as a means of charitable transfers

Randy Fox, CFO, InKnowVision, LLC

www.InKnowVision.com

randy@inknowvision.com

LinkedIn: Randy Fox 

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