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Case Study: Simplifying an Estate Plan for a Smoother Transition

By Jamee Bollinger, CPA

June 30, 2022

Simplifying an Estate Plan for a Smoother Transition

GC Niche: Estates and Trusts

GC Team Members Involved: Jamee Bollinger, CPA

Type of Industry: Food Production

Date Project Completed: Ongoing

Situation

A client, who leads a well-known local fine foods manufacturing and distributing business, came to GC with questions about his family’s estate plan. Since the early 1900s, the family business has been steadily growing and is now a sprawling family operation that includes multiple businesses and generations of family members. The owner, the managing partner and patriarch of the family, sought Grimbleby Coleman’s help in updating his estate plan. He believed the existing estate plan was complicated and could lead to family challenges should he pass away.

In general, we recommend families review estate plans every three years and/or after major life events, such as the birth of a child or a marriage. Since the plan was last reviewed, his children had grown older, with some joining the business, while others moved on to various endeavors. These changes prompted the owner and his son, who is the main successor, to purchase land and ownership interests from the other family members. Although the owner was in good health and still in control of the business, he thought it would be smart to revisit the plan. However, updating the plan presented circumstances that needed special consideration.

Challenges

  • Laws had changed since the development of the initial estate plan. In 2017, Congress passed the Tax Cuts and Jobs Act, which doubled the federal state tax exemption to $12 million in net assets. The exemption is due to sunset in 2026. The updated estate plan had to take advantage of this exemption to avoid gift tax and related transfer taxes.
  • Our client had established multiple trusts for his children. Now that they were older and fully established, the children could now take control of those assets rather than leave them in trust.
  • Their operation included multiple businesses and some ownership interests were tied up in trusts which needed to be separated. The goal was to contain all the various business and ownership interests in the current plan to be within our client’s branch of the family tree.

Considerations and tactics

  • Our Estate and Trust team worked closely with the family attorney to draft a solution that would be fair to all parties involved. The updated estate plan primarily focused on his son — the future successor to the operation.
  • The owner wanted to clearly communicate his wishes to his children and involve them in the process, giving the children the chance to learn and acknowledge the responsibilities associated with the family business, while providing clear direction for all parties moving forward.
  • The original six trusts for the owner’s children were closed. After the owner discussed the family business’ direction with them, the assets were retitled to their individual names, out of the trusts. This allowed the owner’s children to take control of assets originally intended for them, and it allowed the owner to reduce the amount of annual tax return filings that GC prepared for him.
  • We used an intentionally defective grantor trust (IDGT) to further their estate planning goals. This type of trust allows the grantor to isolate certain trust assets. Under the IDGT, he remains the owner of the trust for income tax purposes and pays income taxes on the assets held within, but he is no longer the owner of the trust assets for estate tax purposes. This means the trust is held outside of his estate while providing tax advantages for him and his successor. The IDGT allows our client to continue gifting and selling assets to the trust that will benefit his son, who will avoid tax responsibility on the trust until either the client passes away or the client’s powers are revoked and his son fully assumes the trust.
  • Together with the family’s attorneys, GC developed a plan that streamlined their current estate plan to one that is straightforward and easier to implement in the long run. This included taking the unusual step of closing six trusts and distributing the assets. Closing trusts is out of the norm but was highly effective in this case — the move eliminated the costs of running the trusts, including the cost of annual tax returns.

Step-by-step process

  • The owner had individual discussions with his children about the process, the family’s overall goals, and the future of the family business. This up-front, honest communication was essential to the success of the endeavor.
  • The GC Estate and Trust team reviewed every trust within the estate plan to assess whether it was worthwhile, needed, and effective. Any trusts deemed superfluous or outdated were eliminated.
  • Our team worked directly with the family’s attorneys to create a plan that would benefit everyone involved and consolidate the ownership towards the father’s side of the family.

Final recommendation and outcome

We revised the estate plan, eliminated unnecessary trusts, and reduced the overall tax risk to the family. Businesses and property that were held in trust by various members are now consolidated into the owner’s branch of the family. The client plans to continue buying out the interests of extended family members, which means the GC Estate and Trust team will periodically revise the current estate plan to reflect changes as needed.

Overall, this process provides an excellent example of how to update and implement an estate plan properly. By initiating candid discussions, eliminating complications, and focusing squarely on the future, we were able to create a solution that eased the emotional and financial burden on his family.

Get in touch

If you are seeking advice for your business or family estate plan, we have experts on our team who can guide you. Reach out to us with questions about this article by emailing us at contactus@gccpas.net.