Passing the Torch: Succession, Estate and Lifetime Planning

Three natural companions for family business owners.


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If you own a closely held business, sooner or later you must deal with succession planning problems. There is no way to do a succession plan right unless it is part of a comprehensive estate plan, which is a tax-saving strategy for every significant asset you own.

Following is an example of Joe, who consulted me about a succession problem. Joe owns 100% of Success Co. Joe and his wife, Mary, have three children. Only one of the children, Sam, works in the business. Joe called me with one question: “What’s the best way to get Success Co. to Sam without getting beat up with taxes?”

Joe had three main goals: Avoid tax on the transfer of Success Co. to Sam, treat the two non-business kids fairly and create an estate plan that would transfer his wealth to his family without being reduced by the estate tax when both Joe and Mary die. Following is a description of the three plans we created for Joe, which form one comprehensive plan.

The Succession Plan: The first thing we did was set up an intentionally defective trust (IDT), which will accomplish Joe’s goal of avoiding taxes when Success Co. is transferred to Sam. A professional business valuation expert valued Success Co. at $16 million, but because of discounts allowed by the tax law, Success Co. was sold to the IDT for $9.6 million (for tax purposes). Joe was able to keep control of Success Co. by retaining 100 shares of voting stock and selling 10,000 shares of non-voting stock to the IDT. For each $1 million of the price, an IDT saves about $200,000 in taxes for the buyer and the seller combined (in this case, $1.92 million was saved).

As part of the succession plan, Joe wanted to make sure the non-business kids were treated equally to Sam. Here’s the killer that none of Joe’s professionals could solve: Success Co. is worth $16 million, but all of his other assets (two homes, 401(k) plan, stock portfolio, the real estate Success Co. rents and some other minor assets) total only about $6 million. For Sam, $16 million is too much, but the $6 million in other assets is not enough for Sam’s siblings. What to do?

The answer is simple: Make each of the three kids equal beneficiaries of the IDT. Instruct the trustee to keep the stock until both Joe and Mary die. Then, the properly drawn buy/sell agreement kicks in. The IDT distributes the stock to the non-business kids, and the stock is immediately redeemed (bought by Success Co.) using the life insurance proceeds that funded the buy/sell to pay for the stock.

Estate plan: We updated both Joe and Mary’s will and trust to make sure that all aspects of these new documents were compatible with the other plans.
Lifetime plan: The heart of any estate plan is always the lifetime plan. Typical estate planning documents are essential, but they do nothing until you die. Sure, life insurance only pays after death, but buying life insurance is clearly a lifetime decision.

The lifetime plan includes a wage continuation plan for Joe so he and Mary can maintain their lifestyle when he can no longer work. For the lifetime plan, we also used other tax-saving strategies: We created a family limited partnership for the income real estate and stock portfolio; created a qualified personal residence trust for the two residences; invested in a 401(k) plan to help pay some of the required insurance premiums; created a new management company to give special fringe benefits allowed by tax law to Joe and Sam; and we created a lifetime gifting program to the kids and grandkids to reduce the potential estate tax liability.

When all the plans were done, Joe was amazed at how easy it was to accomplish every one of his goals.