InKnowVision June 2014 HNW Case Study - Martin FWGA

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Jim and Jan are 60 and 52 respectively. Several years ago they started up a national sales and education business. After a few years getting the business off the ground and building their intellectual property, the capture of new markets and increased margins are generating rapidly increasing revenues and profits. As a result, they have recently been approached by a 3rd party buyer and it has motivated them to begin thinking about their business succession plan. Their eldest son has become very involved in the business, playing an ever increasing role in day to day operations, and would like to take the business over at some point.

Their current net worth is approx. $22M with $20M tied up in the business. Until now, all of the profits were reinvested into the business to help generate their rapid growth. Jim and Jan feel they can finally afford to distribute some of the excess profits and begin to plan for their future retirement.

The primary planning goals are to:
- Build personal wealth outside of the business.
- Create a business succession/transition plan.
- Equalize the inheritances for their children.
- Provide pathways into the business should their other 3 sons decide to participate.
- Support their church and other community causes through charitable planning.
- Protect the business and family wealth from estate taxes

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InKnowVision June 2014 HNW Case Study - Martin FWGA

  1. 1. JIM AND JAN MARTIN Meeting April 2014 InKnowVision, LLC
  2. 2. Goals Maintain Lifestyle Build Personal Non- business Wealth Business Succession/ Transition Encourage Children to Succeed Support Church and Community Causes Protect Business From Estate Tax 2
  3. 3. Maintain Lifestyle • Assuming $250,000+ before taxes and gifts 3 Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax
  4. 4. Build Personal Wealth • Accumulate liquid wealth outside business • Reduce future personal financial reliance on the business 4 Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax
  5. 5. Business Succession/Transition • Management / Control Roles • Day to day • Strategic • Keep or sell • Compensation • Incentive Programs 5 Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax
  6. 6. Encourage/Incent Children 6 Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax James Discretionary Distributions Jack Discretionary Distributions Future Generations Discretionary Distributions Matthew Discretionary Distributions Ben Discretionary Distributions Family Capital
  7. 7. Support Church and Community Develop • Vision • Goals • Milestones • Funding Eliminate Risks • Estate tax • Lack of plan Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax 7
  8. 8. Protect Business Projected Estate Tax - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 Estate Tax 2024 Estate Tax 2034 8 Maintain Lifestyle Build Personal Non- business Wealth Busines s Successi on/ Transitio n Encoura ge Children Charitabl e Causes Protect Busines s From Estate Tax
  9. 9. Solution Set
  10. 10. Planning Continuum 10 Current Simple Complex
  11. 11. Estate to Heirs After Tax 21,000,000 66,000,000 45,000,000 64,000,000 33,000,000 113,000,000 - 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 To Heirs 2014 To Heirs 2038 Current Simple Complex 11
  12. 12. Estate to Philanthropy 0 0 17,000,000 86,000,000 15,000,000 15,000,000 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 100,000,000 To Charity 2014 To Charity 2038 Current Simple Complex 12
  13. 13. Projected Estate Taxes 7,000,000 37,000,000 0 00 0 - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 Estate Tax 2014 Estate Tax 2038 Current Simple Complex 13
  14. 14. SIMPLE PLAN
  15. 15. Goals Addressed • Maintain lifestyle and build liquidity • Keep control - no major moves • Protect business from estate tax • Encourage children and future generations • Plan for supporting church and causes 15
  16. 16. Plan Components • Re-cap ownership – IP Company • Convert IP Company to LLC • Create incentive and discretionary trust for children/heirs • Gift IP Company to trust • Create testamentary CLAT or outright charitable gift • Life insurance for wealth replacement or taxes 16
  17. 17. Re‐Cap Voting/Non‐Voting Shares Advantages • Maintain control without ownership • Allows transfer of non-voting shares 17 IP Company Recapitalization Jim & Jan-Voting Jim Non-Voting Voting and Non-Voting Shares
  18. 18. Consider Conversion to LLC Advantages • Fewer restrictions when dealing with • Trusts • Charitable entities • Current low value Disadvantage • Income tax on conversion 18 IP Company (S Corp) IP Company (LLC)
  19. 19. Create Incentive Trust 19 Jim Incentive Trust w/Trustee(s) James Discretionary Distributions Jack Discretionary Distributions Jan Discretionary Distributions Future Generations Discretionary Distributions Matthew Discretionary Distributions Ben Discretionary Distributions
  20. 20. Incentive Trust Advantages • Provides structure for encouraging heirs to be productive members of society • Assets are estate tax free Disadvantage • Incentives may not work 20 Incentive Trust Children Grandchildren and Beyond • To acquire or improve a primary residence based on child’s contribution of sweat or cash equity • To establish or maintain a business or professional practice • To match personally earned income • To match a child’s financial contributions to charity • To reward a child for career choices that are often not financially rewarding such as artist, teacher, mission worker or nurse • To recognize and reward a child’s contribution to raising a family
  21. 21. Incentive Trust ‐ Choice of Trustee • Professionals • Family members • Trust companies • Friends 21 Incentive Trust Children Grandchildren and Beyond
  22. 22. Gift IP Company Shares to Trust Advantages • Maintain control of IP Company • Leverage use of exemption • Move cash flow out of estate without gift or estate tax • Provide liquidity • Reduce estate tax 22 Jim Incentive TrustGift IP Company Non-Voting Shares
  23. 23. License Intellectual Capital Advantages • IP Company decisions made by controlling shareholders • Moves cash flow out of estate with no gift tax consequence • Provide cash flow flexibility – $275k illustrated in plan (amount is flexible) • Cash to create liquidity • Flexibility in event of sale of company. Price could be allocated to Business or IP Company as desired 23 Business IP Company Annual Royalties License Agreement
  24. 24. Charitable Gift at Second Death Advantages • Reduce / Eliminate estate tax • Fund charity Disadvantage • Not all assets go to heirs 24 Charitable Foundation Jim & Jan’s Taxable Estate Reduce / Eliminate Estate Tax
  25. 25. Testamentary Charitable Lead Trust 25 Taxable Estate Charitable Trust Children At Second Death Family Charities Remainder To Children
  26. 26. Incentive Trust‐Wealth Replacement Advantages • Provides liquidity for estate taxes • Provides wealth replacement for charitable giving 26 IP Company Incentive Trust Life Insurance Company Buy Life Insurance $30M Provides Royalty Cash Flow
  27. 27. Outright Gift vs. TCLAT Outright gift • Simpler • More money for philanthropy • Less administrative expense • No estate tax TCLAT • More money to heirs • No estate tax 27
  28. 28. Estate to Heirs After Tax 21,000,000 66,000,000 45,000,000 64,000,000 - 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 To Heirs 2014 To Heirs 2038 Current Simple 28
  29. 29. Estate to Philanthropy 0 0 17,000,000 86,000,000 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 100,000,000 To Charity 2014 To Charity 2038 Current Simple 29
  30. 30. Projected Estate Taxes 7,000,000 37,000,000 0 0 - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 Estate Tax 2014 Estate Tax 2038 Current Simple 30
  31. 31. COMPLEX PLAN‐SALE TO INCENTIVE TRUST Sometimes referred to as IGT, GDOT, IDGT, BDIT, etc.
  32. 32. Complex Plan‐Sale to GDOT Goals Addressed • Maintain lifestyle and build liquidity • Keep control – not ownership of Business • Protect Business from estate tax • Encourage children and future generations • Plan for supporting church and causes 32
  33. 33. Components – Part 1 • Re-cap ownership – Business • Retain ownership of voting shares • Transfer non-voting shares to new trust • Part Gift • Part Sale • Note from trust finances the sale 33
  34. 34. Components ‐ Part 2 • Use incentive trust for heirs • Charitable trust or charitable gift at second death • Use life insurance for wealth replacement or to pay estate tax 34
  35. 35. Re‐Cap Voting/Non‐Voting Shares Advantages • Maintain control • Transfer equity growth and cash flow 35 Business (S Corp) Recapitalization Jim & Jan Voting/Non- Voting
  36. 36. Create Incentive Trust‐Jim 36 Jim Incentive Trust w/Trustee(s) James Discretionary Distributions Jack Discretionary Distributions Jan Discretionary Distributions Future Generations Discretionary Distributions Matthew Discretionary Distributions Ben Discretionary Distributions
  37. 37. Create Incentive Trust‐Jan 37 Jan Incentive Trust w/Trustee(s) James Discretionary Distributions Jack Discretionary Distributions Future Generations Discretionary Distributions Matthew Discretionary Distributions Ben Discretionary Distributions
  38. 38. Incentive Trust Advantages • Provides structure for encouraging heirs to become productive members of society • Assets are estate tax free Disadvantages • Incentives may not work 38 Incentive TrustIncentive Trust Children Grandchildren and Beyond • To acquire or improve a primary residence based on child’s contribution of sweat or cash equity • To establish or maintain a business or professional practice • To match personally earned income • To match a child’s financial contributions to charity • To reward a child for career choices that are often not financially rewarding such as artist, teacher, mission worker or nurse • To recognize and reward a child’s contribution to raising a family
  39. 39. Incentive Trust ‐ Choice of Trustee • Professionals • Family members • Trust companies • Friends 39 Incentive Trust Children Grandchildren and Beyond
  40. 40. Gift and Sell Non‐Voting Shares Advantages • Maintain control • Eliminate Business appreciation in your estate • Pass more assets to heirs • Protect business from estate tax Disadvantages • No ownership • More complexity • Jim & Jan still owe income tax 40 Jim & Jan New Incentive Trusts GDOT Gift $5M Non-Voting Shares Sell Balance of Non-Voting Shares Promissory Note
  41. 41. Cash Flow – Post Gift and Sale Advantages • Cash flow to Jim and Jan for taxes • Allows cash to build-up in trust for future inheritance 41 Business Incentive Trust GDOT Jim & Jan Interest/Principal Tax Reimbursement Discretionary Distributions Dividends
  42. 42. Consider Conversion to LLC Advantages • Fewer restrictions when dealing with • Trusts • Charitable entities • Current low value Disadvantage • Income tax on conversion 42 IP Company (S Corp) IP Company (LLC)
  43. 43. License Intellectual Capital Advantages • Allows personal cash build-up • Liquidity flexibility in event of sale 43 Business IP Company Annual Royalties Jim & Jan Distribute Dividends
  44. 44. Charitable Gift at Second Death Advantages • Reduce / Eliminate estate tax • Fund charity Disadvantage • Not all assets go to heirs 44 Charitable Foundation Jim & Jan’s Taxable Estate Reduce / Eliminate Estate Tax
  45. 45. Testamentary Charitable Lead Trust 45 Taxable Estate Charitable Trust Children At Second Death Family Charities Remainder To Children
  46. 46. Outright Gift vs. TCLAT Outright gift • Simpler • More money for philanthropy • Less administrative expense • No estate tax TCLAT • More money to heirs • No estate tax 46
  47. 47. Incentive Trust‐Wealth Replacement Advantages • Provides liquidity for estate taxes • Provides wealth replacement for charitable giving 47 Business Incentive Trust Life Insurance Buy Life Insurance $16M Profits
  48. 48. Estate to Heirs After Tax 21,000,000 66,000,000 33,000,000 113,000,000 - 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 To Heirs 2014 To Heirs 2038 Current Complex 48
  49. 49. Estate to Philanthropy 0 0 15,000,000 15,000,000 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 To Charity 2014 To Charity 2038 Current Complex 49
  50. 50. Projected Estate Taxes 7,000,000 37,000,000 0 0 - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 Estate Tax 2014 Estate Tax 2038 Current Complex 50
  51. 51. Action Items • Simple vs Complex • Trust(s) • Trustees • Incentive provisions • Re-do wills/living trusts • IP Company • Re-Cap corporate ownership as necessary • Convert to LLC – need to establish tax consequences • Create necessary license agreements • Business • Re-Cap corporate ownership as necessary • Plan for church and causes • TCLAT vs. Outright Gift • Apply for insurance 51
  52. 52. Incentive Plan ‐ James • Outright ownership • Control • Asset protection • Ownership in trust • Share “carve out” • Phantom/Synthetic stock • Success Metrics 52

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