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Saving The Family Business

JD Anstar owned two successful businesses. The first was a food distributorship operating in five states. The second was a group of seventeen nursing homes. JD had a significant net worth, much of it tied up in the two businesses.

The businesses were run by JD's daughters. They handled almost all of the day-to-day operations and were very good at what they did. He felt it was time to start transferring ownership of the business to them.

Many years ago, JD had remarried and had a son from this second marriage. JD's son had a successful career and had no interest in joining the family business.

JD knew he faced several major hurdles.

First, because the business value was significant, he knew he faced challenges in transferring ownership of the business to his daughters without paying a hefty tax.

Second, he wanted to make sure that he had enough retirement income so that he could maintain his lifestyle and meet his income needs for the rest of his life.

Lastly, he wanted to make sure that he treated his son fairly. He appreciated that equal did not always mean fair, since his daughters had already put years into building the business. But he felt that his son should still receive a significant amount. Yet he did not want his son to have to wait for his sisters to make distributions from the business, nor did he want the daughters to feel like they were constantly under scrutiny from their brother.

He started with an appointment with his company lawyer, who referred him to an estate planning specialist. The specialist worked with JD to create a plan that minimized gift tax (the tax due when transferring assets to a child) and yet accomplished the transfer of the business to his daughters. Because the transfer was structured as an installment sale, a planning strategy used for transferring asset from one generation to another, JD was comfortable that his cash flow needs could be met for the remainder of his life.
As a side advantage, any future appreciation in the assets would belong to the daughters. This would save estate taxes later at JD’s death.

From the daughters’ point of view, the plan was attractive since it meant that future growth would belong to them. This made sense to everyone because the daughters were the ones showing up every day and creating new value.

JD’s lawyer also consulted with a trusted insurance professional. Together they structured a life insurance plan that was affordable to JD and to the company. The life insurance would pay when JD and his wife died and provide an inheritance to JD’s son in an amount that satisfied JD's desire to be fair to all of his children. The insurance was structured in such a way that neither the premiums nor the death benefit would be subject to gift or estate tax.

During his annual meeting, five years after the plan was put into place, the lawyer visited with JD to discuss how the plan was working. JD reported that even in the down economy his daughters had been growing the business and providing the cash flow needed to complete the installment sale as well as funding the insurance premiums. JD’s most important comment was that he got what he wanted from the plan and was thankful for the thoughtfulness and expertise brought to the table by each of his advisors.

Business succession is often tied in tightly with estate and wealth transfer planning. In today’s environment, be sure that the members of your planning team have the expertise needed to help you accomplish your goals.

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