Thirty year earlier an aging businessman transferred the stock of his small family business, a manufacturing company, to his two sons who were both in their early twenties at the time. This small manufacturing company had struggled over the years, but the vision and innovation of the father provided a great opportunity to substantially grow this small family business to multiples of what it was. The transfer of the stock to the boys was not legally or financially a challenge because the value of the business at that time was still quite small. What typically is a great challenge for a founder/owner is to emotionally take his “hands of the wheel” of the business and let his sons take the business and run with it. And run with it they did.
Over the next several decades the two brothers grew this small family business into a multi-million dollar company that distributed its produces literally all over the world. They went from a mere handful of employees to having hundreds of employees. It expanded from working out of the family barn to a huge manufacturing facility of tens of thousands of square feet.
Now, decades later, as these two brothers were approaching the end of their own business careers, they faced the same business succession planning decisions that their father had faced many decades earlier. But what was a simple business transfer and succession plan for their father was anything but simple for them.
Two major challenges faced these brothers: (1.) Which of their children would step into the leadership and ownership of the company going forward and (2.) how could they get the value of the business to these heirs without facing millions of dollars in crippling capital gains, gift or estate taxes on the transfer.
Step one was to begin the process of identifying of the brothers seven children who both had the gifts and abilities as well as the passion for the business that could be groomed and prepared to take over the leadership of the company when the brothers were ready to turn over the reigns of the business to the next generation. Each of her children were asked at a family meeting if they had any interest being involved in the leadership of the company going forward. Some who were stay at home moms or already had established careers indicated they did not have an interest in running the family business. Those who did indicate an interest were given assessments to identify their giftedness. Several personal interviews were conducted with each of these family members.
Because the two brothers were both Christians, they wanted those who would lead the company in the future to feel a real sense of divine calling to take over and lead the company going forward. As it turned out, two of the sons of one of the brothers were identified as being exceedingly gifted, called and anxious to take this already successful company to the next level.
Once these two brothers were identified as the family members who would run the company for the next generation and extensive, multi-year, training program was created to expose and teach these young men every aspect of this multi-department business from the ground up.
The second step was to now create a wealth transfer plan for each of these two families. Several challenges existed that had to be addressed. First, how to get the business to these two boys without paying millions in capital gains, gift or estate taxes. Second, how to get the other children an appropriate inheritance since the vast majority of both brothers’ wealth was in their company stock. Third, how to arrange the transfer so when the brothers transferred the stock, they would still have enough to provide for an ongoing stream of income for their retirement.
After considerable strategy planning it was determined that the most effective way to transfer the stock was to utilize a Charitable Stock Buy-Out Plan. The first step in the plan was to transfer a minority interest of stock to each of the two boys so that they were now minority owners of the company. Then, each brother at the appropriate time would transfer their stock into their own Enhanced Income Trusts (EIT).
Next, the company would offer to buy the stock from the trust on a ten year note using its after-tax company profits and pay the note off. Because this trust is tax exempt, it pays no capital gains taxes on the sale of the stock, leaving 100% of the sale proceeds in the trust to be reinvested. Going forward, for the rest of their lives, each brother and his wife will receive a regular, annual income from their respective trusts providing them with more than sufficient annual income for all their lifestyle needs and desires and all their charitable giving and gifts to their children.
Once both bothers had transferred their stock to their EITs and it was all purchased back by the company and retired, the two sons now own all the outstanding shares of stock and the ownership of this multimillions dollar company has been entirely transferred to the next generation – tax free! When each brother and his wife go to be with the Lord, their respective multimillion dollar Enhanced Income Trusts terminates and those assets will be given away to the Christian ministries and causes that the family wished to support.
The final component of the wealth transfer plan was the need to provide an adequate inheritance to the other children who were not taking ownership of the company. The parents wanted to get these children part of their inheritance during their lifetimes and the balance once both parents go to be with the Lord. The lifetime inheritances would come from the excessive cash flow of each brother’s Enhanced Income Trust. These lifetime gifts will be tax-free, using annual gift exclusions and their lifetime exclusions. Their testamentary inheritance would come through a Wealth Replacement Trust which they would also receive tax free once both parents pass on.
The bottom line of this very sophisticated plan was (1.) the brothers were able to successfully transfer their multimillion dollar business on to the next generation completely free of any capital gains, gift or estate taxes. (2.) It provided both brothers a lifetime income stream once they stepped away from the business. (3.) It provided the other non-business owner heirs an inheritance that the parents deemed appropriate. And (4.) this plan will help these two brothers give away about 100 million dollars during their lifetimes and beyond to Christian ministries and causes that they deeply cared about. This case study demonstrates the power of comprehensive and integrated creative planning. It truly is an excellent example of business succession planning at its best!