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Saturday, May 4, 2024
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Case Studies |
A $3 Million "Hand-me Down"
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Case:
Printing Shop, Inc., has been a staple in the printing business for over 80 years. Jacob Kestrel founded the company in 1922 when he opened his first store on the corner of a busy little New York City street. As a hands-on owner, Jacob cherished his relationships with his customers. In fact, he knew all of them by first name and frequently sent them thank-you gifts for their continued patronage of his store. Printing Shop flourished under Jacob's direction. Obviously proud of his shop, Jacob actively recruited his family into the business. Not surprisingly, the entire Kestrel family spent much of their time working in the family business. Therefore, when Jacob passed away in 1961, his oldest son Marc took over control and ownership of the business. Once Marc passed away, James, the second oldest son, assumed the top spot. Under the direction of James, the business went from a successful "mom and pop" shop to a $3 million printing company. Now, James is ready to retire and pass the torch to his cousin, Ruby. James had, however, used his entire exemption equivalent six years ago when he made very large gifts to his four children.
Question:
James now faces a problem the Kestrels are unfamiliar with - how to transfer the family business to his cousin without being subject to the gift or estate taxes associated with such a transfer. In addition, James would like to benefit his wife and charity with some of the added value he created in the company. How can James accomplish these goals?
Solution:
James currently owns 60% of the company stock and Ruby owns 40%. The company has cash reserves of $750,000 and had significant other resources to provide for future growth and meet the cash needs of the company. Therefore, James decided, on the advice of counsel, to do a charitable bailout plan. The plan consisted of James transferring 1/3 of his 60% interest - 20% - to a Charitable Remainder Unitrust (CRUT). The value transferred into the CRUT was approximately $600,000. The next step would be for the company to make an offer to repurchase all of the outstanding shares of the company. Obviously, Ruby would not be interested in selling her shares; however, the CRUT would be very interested. Thus, under a limited exception to self-dealing, Printing Shops, Inc., would purchase the shares from the CRUT. The effect of this transaction was that Ruby now owned the 50% of the outstanding shares in the company. She merely had to purchase an additional 1% from James in order to gain control of the company. In addition, James now had $600,000 in his CRUT, which would be used to benefit his wife and charity with no adverse estate tax consequences to him. Finally, James decided to create a family limited partnership (FLP) and charitable lead trust (CLT) plan, so he could pass the remaining shares of his stock to his children with no gift or estate tax.
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