Wealth Management for Business Owners and Executives

Client Background:

A long time client and entrepreneur wanted to restructure his company in an effort to segregate one operation of the company in order to take it public through an Initial Public Offering (IPO).  As part of the preparation process he engaged The Wealth Strategies Group to review the titling and ownership of the current structure.

Our client’s primary concern was the effect any changes in ownership would have on his current tax situation as well as any Federal Estate Tax (FET) his family would face in the event of his passing.

Solution:

The Wealth Strategies Group engaged members from The Solution Network™ (our virtual network of independent tax, legal and other professionals) who determined the current ownership structure was originally built to deter legal liability, a concern to most start up operations.  The Solution Network put additional tools in place to reduce our client’s current income tax, capital gain tax and future Federal Estate Tax.

1. Our client’s shares in the “spin-off” portion of the company were put in an Estate Freeze Trust.  The current corporate shares were exchanged for shares of equal value, however, the new shares would not grow in value, i.e. they were “frozen”.  Our client’s family beneficiaries were gifted preferred shares of the new entity where all future growth would be realized.  Thus, the tax on future growth accrues to the preferred shares held by the heirs. Estates are required to pay taxes on unrealized gains, often forcing the business to be sold in a bad market or in a distress sale.  With this strategy our client will have little or no estate tax while allowing the heirs’ the flexibility to continue operations or liquidate the company.
2. Our client’s non-“spin-off” assets were restructured in a Limited Partnership where our client retained control as the general partner and the heirs as limited partners.  This structure allowed our client to transfer more assets to the heirs with less tax, as the ownership is a partial interest ownership.  Partial interest assets can reduce the owners estate value by as much as 30% and therefore reduce Federal Estate Tax (FET) by approximately the same amount.
3. Any unrealized capital losses were taken to offset capital gains realized in the reconfiguration resulting in a nearly non-taxable event.
4. The Wealth Strategies Group suggested a Family Limited Partnership (FLP) to hold other illiquid real estate and private equity investments.

Result:

The recommended structure created a family holding company that holds quarterly family board meetings:

• Allowing the children to become involved and comfortable in the process of making financial decisions. 
• The structure deters litigation through the ownership model. 
• Transfer of assets to the next generation is assured by structure. 
• The potential to continue as an operating business will not be interrupted from the need to sell for payment of Federal Estate Tax (FET). 
• Current income tax and future Federal Estate Tax is greatly reduced leaving more of the assets for the heirs of our business owner.