Protecting Both the Family and the Business

Kleinbard’s Estate Planning team brings extensive experience to crafting personalized solutions for the owners of family businesses and other high-net-worth families. Senior partner Paul Bomze has advised families and trustees for more than four decades, while partner John Schapirowho has a strong background in corporate law, tax, and estate planning, excels in designing transactions to meet clients’ goals in all three dimensions.

Recently, an executive and 50% owner of a closely-held business with annual revenues of about $600 million approached Howard Davishead of the Firm’s Business and Finance Practice, with an urgent request. Davis had represented his company in a significant transaction five years before, but was not the company’s regular counsel. The executive had just been diagnosed with a serious illness that might be fatal within a few years. His children were very young. His business was experiencing explosive growth. What should he do?

Davis and Schapiro analyzed the company’s shareholder agreement – which would have produced a poor result for our client’s family if he had died or been required to cease working while it was in effect – and his current estate plan. They worked cooperatively with the company’s other owner and its management to restructure the agreement regarding what would happen in the event of our client’s disability or death, and created a set of lifetime trusts for the client to transfer a significant part of his stockholdings for the benefit of his wife, children, and future grandchildren. The team identified a method to shift the benefit of company-owned life insurance to trusts for the client’s children that would not be taxed as part of his estate, without subjecting the transfer of the life insurance to a substantial risk of gift tax or income tax at the company or the shareholder/employee level. In addition, they combined gifts with deferred-payment sales to a family trust to leverage the current year’s unique $10 million lifetime gift-tax exemption (available to husband and wife) into a transfer of non-voting stock with a potential near-term value of $22 million, without adverse income tax or gift tax consequences.

Our client would have faced a mandatory buyout of his stock for less than $40 million when his illness forced him to retire, and all of that would have been taxable in his or his wife’s estate. Under the plan we devised and put in place, their taxable estates will receive approximately $25 million in current value, and family trusts outside the estates of either spouse will receive approximately $80 million in current value. Moreover, his trustees will have the ability, if they wish, to continue to hold stock in the company until our client’s children are all 30 years old, and indefinitely if any of the children chooses to participate in the business.

We continue to work with our client and his wife on developing a family charitable plan that will engage the children in stewardship and community leadership as they mature.