John Jenkins owned two successful businesses. The first was a beer distributorship operating in five states. The second was a group of seventeen senior living complexes. John had a significant net worth, most of it tied up in the two businesses.
The businesses were run by John’s daughters, Jennifer and Emily. 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, John was widowed and remarried and had a son from this second marriage. John’s son, Thomas, had a successful career and had no interest in joining the family business.
John 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 gift tax.
- Second, he wanted to make sure that he had enough retirement income so that he and his wife, Julie, could maintain their lifestyle and meet their income needs for the rest of their lives.
- Lastly, he wanted to make sure that he treated his son fairly. He appreciated that fair did not always mean equal, since his daughters had already put years into building the business. But he felt that Thomas should still receive a significant amount. Yet he did not want Thomas 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.
John’s estate planning attorney worked with John 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 assets from one generation to another, John 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 John’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.
John’s lawyer also consulted with a trusted insurance professional. Together they structured a life insurance plan that was affordable to John and to the company. The life insurance would pay when John and his wife died and provide an inheritance to Thomas in an amount that satisfied John’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 John to discuss how the plan was working. John 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. John’s most important comment was that he achieved what he was hoping to achieve with the plan, and was thankful for the thoughtfulness and expertise brought to the table by each of his advisors.