Jim and Jan are 60 and 52 respectively. Several years ago they started up a national sales and education business. After a few years getting the business off the ground and building their intellectual property, the capture of new markets and increased margins are generating rapidly increasing revenues and profits. As a result, they have recently been approached by a 3rd party buyer and it has motivated them to begin thinking about their business succession plan. Their eldest son has become very involved in the business, playing an ever increasing role in day to day operations, and would like to take the business over at some point.
Their current net worth is approx. $22M with $20M tied up in the business. Until now, all of the profits were reinvested into the business to help generate their rapid growth. Jim and Jan feel they can finally afford to distribute some of the excess profits and begin to plan for their future retirement.
The primary planning goals are to:
- Build personal wealth outside of the business.
- Create a business succession/transition plan.
- Equalize the inheritances for their children.
- Provide pathways into the business should their other 3 sons decide to participate.
- Support their church and other community causes through charitable planning.
- Protect the business and family wealth from estate taxes
3. Maintain Lifestyle
• Assuming $250,000+ before taxes and gifts
3
Maintain
Lifestyle
Build
Personal
Non-
business
Wealth
Busines
s
Successi
on/
Transitio
n
Encoura
ge
Children
Charitabl
e
Causes
Protect
Busines
s From
Estate
Tax
4. Build Personal Wealth
• Accumulate liquid wealth outside business
• Reduce future personal financial reliance on the
business
4
Maintain
Lifestyle
Build
Personal
Non-
business
Wealth
Busines
s
Successi
on/
Transitio
n
Encoura
ge
Children
Charitabl
e
Causes
Protect
Busines
s From
Estate
Tax
5. Business Succession/Transition
• Management / Control Roles
• Day to day
• Strategic
• Keep or sell
• Compensation
• Incentive Programs
5
Maintain
Lifestyle
Build
Personal
Non-
business
Wealth
Busines
s
Successi
on/
Transitio
n
Encoura
ge
Children
Charitabl
e
Causes
Protect
Busines
s From
Estate
Tax
7. Support
Church and Community
Develop
• Vision
• Goals
• Milestones
• Funding
Eliminate Risks
• Estate tax
• Lack of plan
Maintain
Lifestyle
Build
Personal
Non-
business
Wealth
Busines
s
Successi
on/
Transitio
n
Encoura
ge
Children
Charitabl
e
Causes
Protect
Busines
s From
Estate
Tax
7
15. Goals Addressed
• Maintain lifestyle and build liquidity
• Keep control - no major moves
• Protect business from estate tax
• Encourage children and future generations
• Plan for supporting church and causes
15
16. Plan Components
• Re-cap ownership – IP Company
• Convert IP Company to LLC
• Create incentive and discretionary trust for children/heirs
• Gift IP Company to trust
• Create testamentary CLAT or outright charitable gift
• Life insurance for wealth replacement or taxes
16
20. Incentive Trust
Advantages
• Provides structure for
encouraging heirs to be
productive members of society
• Assets are estate tax free
Disadvantage
• Incentives may not work
20
Incentive Trust
Children
Grandchildren
and Beyond
• To acquire or improve a primary residence based on child’s contribution of sweat or cash equity
• To establish or maintain a business or professional practice
• To match personally earned income
• To match a child’s financial contributions to charity
• To reward a child for career choices that are often not financially rewarding such as artist, teacher,
mission worker or nurse
• To recognize and reward a child’s contribution to raising a family
22. Gift IP Company Shares to Trust
Advantages
• Maintain control of IP Company
• Leverage use of exemption
• Move cash flow out of estate without gift or estate tax
• Provide liquidity
• Reduce estate tax
22
Jim Incentive TrustGift
IP Company
Non-Voting
Shares
23. License Intellectual Capital
Advantages
• IP Company decisions made by controlling shareholders
• Moves cash flow out of estate with no gift tax consequence
• Provide cash flow flexibility – $275k illustrated in plan (amount is flexible)
• Cash to create liquidity
• Flexibility in event of sale of company. Price could be allocated to Business or IP
Company as desired
23
Business IP Company
Annual
Royalties
License
Agreement
24. Charitable Gift at Second Death
Advantages
• Reduce / Eliminate estate tax
• Fund charity
Disadvantage
• Not all assets go to heirs
24
Charitable
Foundation
Jim & Jan’s Taxable
Estate
Reduce / Eliminate
Estate Tax
32. Complex Plan‐Sale to GDOT
Goals Addressed
• Maintain lifestyle and build liquidity
• Keep control – not ownership of Business
• Protect Business from estate tax
• Encourage children and future generations
• Plan for supporting church and causes
32
33. Components – Part 1
• Re-cap ownership – Business
• Retain ownership of voting shares
• Transfer non-voting shares to new trust
• Part Gift
• Part Sale
• Note from trust finances the sale
33
34. Components ‐ Part 2
• Use incentive trust for heirs
• Charitable trust or charitable gift at second
death
• Use life insurance for wealth replacement or to
pay estate tax
34
38. Incentive Trust
Advantages
• Provides structure for
encouraging heirs to become
productive members of society
• Assets are estate tax free
Disadvantages
• Incentives may not work
38
Incentive TrustIncentive Trust
Children
Grandchildren
and Beyond
• To acquire or improve a primary residence based on child’s contribution of sweat or cash equity
• To establish or maintain a business or professional practice
• To match personally earned income
• To match a child’s financial contributions to charity
• To reward a child for career choices that are often not financially rewarding such as artist, teacher,
mission worker or nurse
• To recognize and reward a child’s contribution to raising a family
40. Gift and Sell Non‐Voting Shares
Advantages
• Maintain control
• Eliminate Business appreciation in
your estate
• Pass more assets to heirs
• Protect business from estate tax
Disadvantages
• No ownership
• More complexity
• Jim & Jan still owe
income tax
40
Jim & Jan
New Incentive Trusts
GDOT
Gift $5M
Non-Voting
Shares
Sell Balance
of
Non-Voting
Shares
Promissory Note
41. Cash Flow – Post Gift and Sale
Advantages
• Cash flow to Jim and Jan for
taxes
• Allows cash to build-up in
trust for future inheritance
41
Business
Incentive Trust
GDOT
Jim & Jan
Interest/Principal
Tax Reimbursement
Discretionary Distributions
Dividends
44. Charitable Gift at Second Death
Advantages
• Reduce / Eliminate estate tax
• Fund charity
Disadvantage
• Not all assets go to heirs
44
Charitable
Foundation
Jim & Jan’s Taxable
Estate
Reduce / Eliminate
Estate Tax
51. Action Items
• Simple vs Complex
• Trust(s)
• Trustees
• Incentive provisions
• Re-do wills/living trusts
• IP Company
• Re-Cap corporate ownership as necessary
• Convert to LLC – need to establish tax consequences
• Create necessary license agreements
• Business
• Re-Cap corporate ownership as necessary
• Plan for church and causes
• TCLAT vs. Outright Gift
• Apply for insurance
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52. Incentive Plan ‐ James
• Outright ownership
• Control
• Asset protection
• Ownership in trust
• Share “carve out”
• Phantom/Synthetic stock
• Success Metrics
52