First, let's explore why business owners (whether they own 100 percent of the business or a portion of it) search for the Holy Grail of tax planning, but never find it.
This is the story of a business owner (Joe, age 62), his wife (Mary, age 59) and their three sons (Pat, Paul and Peter, ages 39, 37 and 32). All three are married and are active in Success Co., which is a leader in its industry. There are six grandchildren.
Before we continue, it is important to understand that, unless you work with a knowledgeable, experienced expert who has an organized system for coordinating and integrating the various laws and option into a comprehensive plan, your efforts will fail.
The system we use starts with helping clients identify their goals. Joe and Mary have five core goals: to maintain their lifestyle; transfer wealth (the amount left after the second spouse's death) intact; protect assets, with Joe to control assets—including Success Co.—for life; and eliminate the impact of estate tax.
Joe and Mary have two additional goals: to have Pat, Paul and Peter each ultimately own one-third of Success Co and create a tax-favored plan to educate the six grandchildren.
The system is designed to create an exact list of goals and of Joe's and Mary's assets.
The easy part is selecting the right strategies to satisfy the goals based on the assets owned. Here's a list of the strategies we used (the strategy is first, followed by the asset—in parenthesis—that is impacted.) Strategies include 50:50 titles to Joe's trust and Mary's trust (residences); family limited partnership (business real estate and marketable securities); subtrust (use profit-sharing funds to buy $12 million of second-to-die life insurance); intentionally defective trust (to transfer Success Co. to the three sons—tax free); a single premium policy (used CSV to buy $2.3 million on Joe's life); and an education trust for each grandchild (income for various assets).
For most readers of this column or in a real-life situation, this system would've satisfied every one of their goals. It would be easy to finish the matter and get the documents drawn and signed.
However, in this case, Joe and Mary wanted their sons—individually and collectively—to sign off on the plan. When the decision maker(s) want input from more people, the system requires everyone to give input at the same time. Interestingly, most of the time was spent discussing the terms of the buy/sell agreement between the sons relating to their rights and duties (a) the day the agreement would be signed and (b) 25 years (or more) down the road.
Two more points before ending this story: First, Joe has been working on his tax plans for 18 years. He and Mary had traditional wills and trusts, a buy/sell agreement, a messed-up insurance portfolio and other documents. Over the years, they worked with six different advisers and spent a small fortune looking for, but not finding, the tax planning Holy Grail.
Finally, if both Joe and Mary were to go to business heaven before our system plan was implemented, their family would receive (after collecting the death benefits of their existing insurance portfolio and paying all taxes due) a net of $12 million. If their trip to heaven was delayed until the day after the plan was implemented, their family would receive (net or all taxes due) $26 million. The two reasons for the happy difference are the discounts allowed for tax purposes for the strategies used and the huge amount of new insurance, which escapes the estate tax. The longer Joe and Mary live, the greater the amount of wealth they would transfer tax-free to their family (due to the annual gifting program that is planned).