This is a war story.

We chatted for a while. Then I asked Joe, age 62 and the owner of a successful family business (Success Co.) in Kansas, a simple question: “What are your goals?”

Joe blasted me with a torrent of words: “Have the business continue… stay involved, but on a part-time basis… spend about 4 to 5 months a year in my Florida home… make sure that my son Sam eventually owns the business… but make sure I stay in control… take care of my wife Mary… and treat my children equally, including my two daughters, Lana and Dana, when I pass on… but keep them out of the business… and if possible, eliminate all estate taxes.”

Joes’s 36-year-old son Sam nodded in agreement. The three of us were having a typical “transfer-of-ownership/estate tax planning consultation” in my office. Joe and Sam had been working on a business succession/estate plan for four years. They had a plan but were not happy with it. They came to see me for a second opinion.

After looking at a stack of Joe’s old tax returns, financial statements, and a number of other documents, I prepared a discussion agenda. This led to lots of questions. Lots of answers. Lots of discussion. Some problems and a few sore spots were exposed.

The plain truth: Each member of the family had a separate agenda, unknown to any other family member. I took pages of notes. About three hours later, something interesting happened: Both Joe and his son said that for the first time, they knew what they wanted to do and how they wanted to do it.

It happens all the time. A frank, open discussion (sometimes in person, sometimes a telephone conference call) mixed with the choices available, get most — rarely all — of the family/business/human (you know, the emotional stuff) problems out in the open, where they can be examined, discussed and solved.

The result: A family-satisfying tax-saving plan shines through. The decisions reached at this meeting will fit like a glove most of the business owner/readers (particularly those who have one or more kids in their business and one or more who are not in the business) of this column.

Here’s a brief outline of some of the important decisions Joe and Sam made and the plan they implemented.

1. Success Co. (a C Corporation) elected S Corporation status. Then it was recapitalized to create two types of stock: voting and nonvoting. (This gives Joe the tool to retain control, yet transfer the corporation to Sam.)

2. Joe gifted all of the nonvoting stock, worth about $2.5 million, to a grantor retained annuity trust (GRAT). For tax purposes, the gift portion of the GRAT was valued at $325,000. This arrangement gives Joe control — via the voting stock — for as long as he lives. The nonvoting stock will belong to Sam when the GRAT will terminate after 15 years.

3. During the 15-year term of the GRAT, Joe will receive $235,000 each year from the GRAT, which is not subject to payroll taxes. The GRAT gets the money from Success Co. as S Corporation dividends. Joe will use a portion of this income to buy a $2.5 million life insurance policy (second-to-die) on Joe and Mary. The premium — $26,400 per year — will be paid for only 15 years and then the policy will self-carry (no more premiums). Actually, the policy was purchased by an irrevocable life insurance trust

4. ILIT. When the second of Joe and Mary die, the ILIT will collect the $2.5 million free of any taxes: income and estate.

5. Joe and Mary gifted their residence to Lana and Dana (via a qualified personal residence trust — QPRT). The QPRT removes the residence from Joe’s and Mary’s estate, but Joe and Mary have the right to live in it for as long as they live.

6. During Joe’s life, he will continue to receive a small annual salary of about $18,000 (but to be increased for inflation) for services actually rendered (this will allow Joe to continue to receive his customary fringe benefits).

7. When Joe dies, all of his remaining stock — voting — will be bequeathed to Sam. Then Sam will own 100 percent of Success Co.

8. Joe and Mary’s other assets — including a $700,000 building leased to Success Co. — will go to Lana and Dana along with the $2.5 million in the ILIT, which is written in such a way as to equalize the asset value to be received by each of the three children.

Although the above seven items do not give every nuance of Joe and Mary’s business succession/estate Plan, the Plan accomplishes every one of Joe’s objectives. Even his (and Mary’s) estate tax will be eliminated.

One more point: A week ago a member of my network called me to explain an exciting new concept that requires immediate sharing with readers of this column. The concept is called “Your Private Bank Trading/Money Management Software.” If you are like me and the other people who learned what the software does, you are about to be delighted. What does it do?

Well, starting in March 2002, the software has consistently earned its users in the range of 4 percent a month. Remember past results in no way predict future results.

To learn more about the software and how you might join the profit-making fun, fax me (Irv) at 847-674-5299. Include your name, address, all phone numbers where you can be reached (business, home, cell). Also estimated original funding amount (minimum $100,000) for your trading/money management account. Please mark “Your Private Bank Trading Software” at the top of your fax.

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Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP (CPAs) and Chairman Emeritus of the New Century Bank (both in Chicago). Contact Irv at 847-674-5295 or blackman@estatetaxsecrets.com. Web site www.taxsecretsofthewealthy.com.

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