Trusts & Estates

September 03, 2013

[statement]”Our client’s estate and business succession plan strategically addresses multiple issues – family, taxes and control.” – Eric Kramer, Partner[/statement]

A solid estate plan helps the owner of a successful manufacturing company ease the transition to the next generation and pass the company to his heirs while retaining control of the business and minimizing estate taxes.

In this case, there were both familial and financial issues to consider, according to Eric Kramer, partner in the Farrell Fritz Trusts & Estates Group. The familial issue: the owner’s decision to select his younger – rather than his firstborn – son as his successor.

“Situations like this can fracture a family,” Eric explained. “The father wanted to make sure he left the business in the most capable hands; however, he also wanted his older son to remain active in the company and head off any potential issue between the brothers in the future.”  While the father wanted to pass the company to his heirs, he was not ready to relinquish control – and including such a substantial asset in his estate would have had significant tax consequences.

The solution: Change the owner’s company stock into 99% nonvoting shares and 1% voting shares. The nonvoting shares were gifted to a Grantor Retained Annuity Trust (GRAT) for the wife and children; he retained the 1% voting stock – and therefore control of the company – as well as received an annual annuity payment. He also retained the right to determine his salary and bonus.

“At the time, the business was appraised at $20 million,” Eric noted. “Now, a few years later, the company is worth close to $60 million, a significant appreciation. Had the business been included in the owner’s estate, the estate taxes would have been substantial.”