Do you own a family business? Getting ready to slow down or retire? Want to transfer your business to your successor? Then read every word that follows; you'll save a bundle of taxes.

The following example shows you how: Joe owns a profitable business (Success Co.), yet Joe is troubled.


Example: Joe has a succession plan problem. After my 45-plus years of experience, it is clear that most successful business owners have basically the same succession problems. Unfortunately, most Joes  think their problems are unique, and worst of all, unsolvable. Following are the three most common succession plan problems that trouble Joe:

  1. How do I sell/transfer my business to my business kid(s) without getting killed by taxes? (And, if possible, keep control.)
  2. How do I treat the non-business kid(s) fairly?
  3. When Joe has no child to take over the business: How do I sell my business to my key employee when he/she has no money?

The facts: Joe (married to Mary, both 68) is the perfect posterboy of a successful business owner. Joe wants to transfer Success Co. to Sam, his son. Joe is rich, but doesn’t feel rich.

Joe has five significant assets:

  1. Success Co. ($10.5 million and professionally appraised)
  2. Two residences ($1.7 million)
  3. Rollover IRA ($3.9 million)
  4. Other assets, mostly real estate and liquid investments ($7.6 million)
  5. Life insurance on Joe ($800,000 death benefit)

If Joe got hit by the proverbial bus and Mary pre-deceased him, his estate would be worth $24.5 million. Taxes, using Joe's present estate plan, would be about $5.4 million.

We structured a two-step plan for Joe and Mary. The first step reduced the value of Joe’s assets for estate tax purposes, yet keep him in control. This is what we did on an asset by-asset basis:

  1. Sold Success Co. to an intentionally defective trust (IDT); only the non-voting stock (which we created) was sold, while Joe kept the voting stock and absolute control. An IDT makes the sale tax-free to Joe. Sam winds up owning success Co. (also tax-free). Joe and Sam saved about $2.25 million in income and capital gains taxes.
  2. Transferred the residences to a qualified personal residence trust
  3. Profit-sharing plan (a magic bullet, which is discussed later)
  4. Transferred all other assets (the real estate and liquid assets) to a family limited partnership
  5. Transferred the life insurance to an irrevocable life insurance trust (ILIT)

These five strategies – because of discounts allowed by the tax laws –  lowered the value of these assets (for estate tax purposes) to about $16 million. We used up almost all of Joe’s and Mary’s unified credits (in 2014, when the plan was done; $5.34 million tax-free for each, $10.68 million for both), leaving a potential estate tax liability of about $2.2 million.

Since we already had $800,000 of potential insurance proceeds parked in the ILIT, we only needed about $1.4 million more of tax-free wealth to get all of Joe’s assets intact to his family with all taxes paid in full. What to do?

Now the second step: we bought a $3 million second-to-die life insurance policy (on Joe and Mary). When all the smoke clears (and both Joe and Mary have gone to heaven), the $3 million will be more than enough to pay any estate tax that may be due.

Treat the non-business kids fairly: the documents (the trusts for Joe and Mary) are drawn to make the lifetime gifts (and the assets to be inherited at death) based on values before the discounts allowed for estate tax purposes. So, the kids will be treated equally.

And finally, assume Joe wants the business to go to a key employee (Ken). Just substitute Ken for Sam in the IDT. The results, tax-free, would be the same.

Want to learn more about succession planning? Browse my website: Or if you have a question, call me (Irv) at 847-674-5295 or email me at

Note: Because of massive reader interest, this is a repeat of an earlier article.

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