Case Example:

A 70 year-old father, with two sons, owns 100 percent of a business and its real estate. Upon his death, the man leaves all assets of the business to his wife. The scenario can cause a number of problems:

a) Son #1 works at the business and grows it significantly after his father’s death, which greatly increases the estate taxes after his mother’s death.

b) Son #1 may continue to work in the business and never have ownership, for as long as his mother remains living.

c) Conflicts regarding day-to-day operations, son’s salary and mother’s income/benefits, expansion and sale of the business may arise.

d) Upon his mother’s death, Son #1 has no control over who inherits the business’ assets. Son #2 could inherit 50%, despite having never worked at the business or contributed to its growth.

Clearly this scenario would lead to family conflict, but can be avoided by adhering to the following recommendations:

a) Set-up voting and non-voting stock in the S corporation

b) Before his death, the father should begin passing stock to Son #1 through gifts and sophisticated selling techniques.

c) Father and Son #1 should enter into a shareholder agreement that is funded with life insurance. The wife/mother receives the life insurance proceeds and Son #1 receives 100% of the business upon father’s death.

d) The father could acquire life insurance in trust, with his wife as beneficiary to supplement her needs.

e) While living, father could gift or sell, through sophisticated techniques, other assets to Son #2 (who is not involved in the business.) Upon his death, father could bequeath other assets to Son #2 or provide a death benefit through life insurance. (Since any bequest over $3.5 million less any used unified credit will result in an estate tax, life insurance could supplement the bequest.)

Gifting, sophisticated selling techniques and the acquisition at the father’s death are structured to minimize the parent’s estate taxes, provide enough value to the wife for a comfortable retirement, and provide favorably to all family members following the demise of the business owner.