Family Business Can Avoid Unwanted Tax and Create Significant Benefit For Charity
I don’t have a crystal ball or other means to accurately see into the future, so I don’t know what would happen if the estate tax were to be removed from our tax system.
There has been much talk recently about the possible repeal of the federal estate tax. Many people are convinced that repeal would be a good thing. Others are concerned that elimination of the estate tax will cause a significant reduction in future charitable giving because the estate tax charitable deduction provides a significant motivation for people to provide for charity in their Wills and Revocable Trusts. Still others are not certain that charitable bequests are directly tied to the estate tax consequences, but realize that people would be much less motivated to talk with their advisors about their estate plans if the estate tax was not looming as a significant motivation--meaning that people would just "not get around" to making arrangements for the charities they care about.
I don't have a crystal ball or other means to accurately see into the future, so I don't know what would happen if the estate tax were to be removed from our tax system. However, there are some things I do know. First, most owners of family businesses are concerned about how best to arrange for the eventual transition of the business to the next generation. Second, the estate tax is a big motivator for these people to talk with their advisors about how to best accomplish their goals with as little estate tax as possible. Third, many of these business owners are interested in helping their communities by leaving funds for charity, but they often don't know how.
Here is one example of a family business transaction that was arranged primarily to avoid the estate tax, with a result that will provide a substantial benefit to charity. [The names have been changed to preserve confidentiality.] David and Sara Jones owned 100% of the stock in a family business that was worth approximately $10,000,000. They came to my office to discuss what was to happen to the business (and their other assets) after their deaths. Specifically, they wanted to arrange for the business to pass to their three sons without paying any estate tax. They also told me that they would really like to set aside some funds for charitable purposes, but they weren't sure this was possible because the value of their assets was mostly tied up in the business.
The first step was to obtain a life insurance policy that will be payable after both David and Sara have died. This policy was purchased through a Partnership owned by the three sons (they could also have used an Irrevocable Trust to own the policy for the benefit of the sons). Next, the family entered into a Shareholder Agreement that required the stock in the corporation to be sold to the Partnership after the death of both David and Sara. Finally, David and Sara signed revocable Trust Agreements providing that, after the death of the survivor of David and Sara, all of their assets will be held in a Family Foundation (for the exclusive benefit of charity). [The family could also have used a Donor Advised Fund at the Community Foundation.]
After the death of both David and Sara, the life insurance will be received by the Partnership (not subject to estate tax). The Partnership will use the insurance proceeds to purchase the stock in the family business from the estate of the survivor of David and Sara. Because the survivor's estate (now consisting of proceeds from the sale of the stock) will pass to the Family Foundation, there will be no estate tax due. As Trustees of the Family Foundation, the three sons will have a significant source of funds (free of income taxes) they can use for charitable purposes within their community for many years to come.
This is just one of many situations where a combination of business planning and charitable planning is able to accomplish a family's goals. It also provides a practical example of how the existence of the estate tax, and the availability of the charitable deduction, can become one of the primary motivating factors in the creation of a business plan that results in a significant benefit for charity.
Scott Blakesley is a partner in the law firm of Blackwell Sanders Peper Martin LLP. He may be reached at 816.983.8138 or e-mail sblakesley@Blackwellsanders.com.