Case Study: A Family Business Succession Plan with Zero Estate Tax and a Large Charitable Bequest

Case Study: A Family Business Succession Plan with Zero Estate Tax and a Large Charitable Bequest

Case study posted in on 18 October 2012| comments
audience: National Publication | last updated: 14 November 2012


Clients that want to keep businesses in the family often have many constraints to overcome. These may include control issues, transfer taxes, successor leadership, cash flow challenges and estate equalization, to name a few.  In this case study and accompanying 42-page report, David Holaday of Wealth Design Consultants describes a set of strategies that solves the Rubic’s Cube puzzle of how to give clients everything they ask for in an estate and business succession plan.  The solution features a stock recapitalization, gift and sale to an intentionally defective irrevocable trust, life insurance, buy-sell agreement, charitable foundation, and a testamentary charitable bequest to eliminate estate tax.

The Facts

George and Carol Weiss, now age 72, have two children and six grandchildren.  They met when George was a Captain in the U.S. Army.  During George’s military career, he gained experience working in the U.S. Army Logistics Branch and the Financial Management Command evaluating the development of computer database and management systems. When he retired from the Army he decided to start his own software development company.  He was confident that his new company, Weiss Intelligent Systems, Inc. (“WISE”), could land military contracts and deliver software systems faster and better than many of the companies already in that space.  As things turned out, he was right.  Now, after celebrating 25 years of business, the company employs 600 people in four states and has over $120 million of annual revenue. 

George and Carol’s two sons, Jeff and David are both married and they each have three children.

Jeff served a tour of duty in Iraq with the Marines.  When he returned, he took advantage of the GI bill and got a BA in accounting from the University of Virginia.  He worked with a regional accounting firm for a few years and then took a job with a business development consulting firm.  For the last 4 years he has worked at WISE as the Comptroller.

David got a software engineering degree from Stanford University.  He worked in Silicon Valley for several different start-ups before getting married.  Then he decided to take a position in the family company for a more family friendly lifestyle and for advancement opportunities.

When the boys were young, George and Carol transferred some shares in the company to them since they were advised that making gifts of appreciating stock would be a good way to move assets out of their taxable estates.  They had some misgivings about the possible adverse impact of giving too much to their kids, but they decided to go ahead with the gift knowing that the boys would have no control and that they would receive no dividends for many years to come.

Before the boys interviewed for jobs at WISE, George made it very clear to his key executives that he did not want the company to be an aristocracy but rather a meritocracy.  In other words, if his boys were not qualified for the jobs, they should not get the jobs.  Carol was relieved when they both got their jobs at the company.  George was relieved also but happier still when he began to receive reports several months later that both boys were receiving good performance reviews.

George and Carol have always been philanthropically inclined.  They have been active at their church since the boys were small.  The whole family is quite aware of the stress that a military life can put on family relationships and they have been active with ministries that help military families.  Carol has a degree in environmental engineering and has been actively involved with several charities that promote conservation and sustainable development.

George is a disciplined and values-driven man.  His core values include integrity, hard work, service, respect, loyalty and duty.  He built the company on these principles.  He has considered several offers to sell the company over the years but he has always rejected them for various reasons including his strong desire to maintain the culture of the company and to be loyal to his team who would invariably be treated badly (he thought) by a new owner.

When Jeff and David joined the company, George began to wonder if (and hope that) his boys might be able to take over the company one day.  Although it is still too soon to tell if they will develop the leadership ability required, he wants to keep his options open.  He feels they understand and buy into the values that have contributed to the success of their family and their business.  He thinks, at the very least, they possess the depth of character and commitment to his values that would make them capable of providing leadership at the board level, even if they are not cut out to be executives.

George had a health scare recently.  He had been feeling some pressure in his chest when he exercised.  Carol persuaded him to have it checked out and the doctor immediately admitted him to the hospital for surgery.  The cardiologist inserted a stent in his left main coronary artery (a.k.a. the widow maker).  After several weeks of physical therapy and progress, Carol again persuaded George to do something he had been avoiding.  They made an appointment to talk to their lawyer about updating their estate plan.

Their Financial Situation

Here is the financial information they provided to their lawyer.


Savings and checking

$    1,000,000

Marketable securities


WISE, Inc.




Investment real estate


Primary residence + lot


Vacation home


Personal property




Total net worth


Sources and Uses of Cash





Investment earnings


Total income


Lifestyle needs


Income taxes


Home maintenance and RE taxes


Life insurance premiums


Total outlay




Their Goals

Their lawyer spent some time with them asking what was important to them about their lives that should be reflected in their estate plan.  After careful reflection, they settled on the following list of planning objectives.

  1. Maintain our customary lifestyle.  This should take about $500,000 annually after all taxes and gifts.
  2. Retain 100% ownership and control WISE within our immediate family for the purpose of furthering our values and the company’s values.
  3. Remain involved at the strategic planning level with the company.
  4. Increase our involvement with and giving to the causes we care about including our church, military families and the environment.
  5. Leave our boys an opportunity to continue to work together to build the company, not an opportunity to retire early.  Our interest is to enable them to continue to serve our employees and clients, not to make them independently wealthy. 
  6. Keep 100% controlling interest in the company in our immediate family. Protect assets from threats from lawsuits, creditors and potential divorces of our children and grandchildren.
  7. Fund a family controlled charitable foundation to support our charitable involvements and to build character, capabilities, confidence and values in our family members.
  8. Leave our vacation home to a multi-generational trust to make it possible for our children and grandchildren to continue to enjoy the home together.
  9. Eliminate any estate tax using charitable gifting techniques provided that our goals for family wealth transfer and family control of the company can be met.
  10. Set aside up to $200,000 per grandchild to fund higher education or other life and character building endeavors.

The Family Wealth Blueprint

With George’s approval, the lawyer reached out to the accountant, company CFO (a close personal friend and advisor to the Weiss family) and the financial advisor and asked them all to participate in a collaborative process to vet and design planning strategies.  After working together for a number of weeks, the wealth design team made a series of recommendations to George and Carol.  They implemented the following strategies.

1.     Update their Revocable Living Trusts.

They added a bequest from the estate of the surviving spouse to their new charitable foundation.  This charitable bequest will be the primary means by which George and Carol will eliminate estate tax in favor of charitable giving.

2.     Recapitalize the company.

They recapitalized the company and created 10% voting and 90% nonvoting shares.  This enabled George and Carol to transfer the nonvoting shares while maintaining control of the company by keeping all the voting shares.  They plan to increase dividend distributions from the company as needed each year to meet new cash flow requirements of their estate plan.  Like most growing companies, they have kept most of the cash in the company to fund growth.  However, now they realize the need for addressing other issues and they were willing to divert some of the profits for estate planning needs.

3.     Form a new wealth transfer trust for their family.

They established a new Intentionally Defective Irrevocable Trust (“IDIT”) for the benefit of their sons and made gifts of $4 million each of nonvoting shares to the trust.  George and Carol would each use the balance of their lifetime exemption before the Bush tax cuts (the laws that permit this transfer to be sheltered by their lifetime exemptions) expire.  This trust will also be a generation skipping trust.

4.     Sell nonvoting shares to the IDIT

George and Carol sold $70 million of new nonvoting shares (after discount for lack of control) to the IDIT in exchange for a promissory note.  This was a 30-year note with an interest rate of 2.23%.  Only interest of approximately $1.55 million was due annually but principal could be repaid without penalty.  If any of the principal value of this note remains in the estate of the survivor of George or Carol, it would pass to the family foundation.  The team was confident that the company could easily distribute some of the approximately $15 million of annual profits to cover this obligation.  The IDIT is a grantor trust for Federal income tax purposes which means that George must report and pay the income tax on any earnings within the trust.  Therefore, most of the profits of WISE will be reportable as income to George.  The annual interest on the note will be insufficient to pay his income tax liability.  Therefore, the plan will be to have the IDIT repay principal on the note annually in amounts sufficient to meet all of George and Carol’s obligations, including their lifestyle needs.

5.     Have the boys transfer their WISE shares (gifted to them by their parents years ago) to a Buy-Sell Partnership.

This partnership will be the recipient of dividend distributions.  The partnership will use the dividends to acquire $18 million of survivorship life insurance on George and Carol.  This life insurance will be used ultimately to acquire the balance of voting shares of WISE from the estate of their last surviving parent.  This partnership served an important purpose of capturing and using the new dividend distributions from the company.  Since the IDIT needed cash to service the debt on the promissory note to George and Carol, it was necessary to increase pay dividends to all shareholders on a pro rata basis.  Without the partnership, the boys would have received dividends directly due to their ownership of WISE stock.  If the life insurance is insufficient to buy all the voting stock from the survivor’s estate, the IDIT could purchase the additional stock from the estate in an installment sale.

6.     Establish a Private Foundation. 

They plan to fund the foundation at higher levels immediately and become more intentional with their family in philanthropic activities.  They also named their Private Foundation as the beneficiary of the estate of the survivor. 

7.     Set up 529 Plans for the grandchildren.

They will decide each year how much they want to transfer to these accounts.

George and Carol were very happy with their new plan.  It leaves them in complete control for now and creates a structure that can keep the company under family control for generations.  It is generous to their children and gives them opportunity and responsibility without giving them a windfall of cash.  It replaces a large estate tax with a large charitable foundation, also family controlled.  It is flexible enough to work whether the boys can take over the company at the executive level or if they just want to provide guidance with respect to values and culture.

Additional Information

If you would like additional information about these concepts, we invite you to follow the Attachments link below to download the accompanying 42-page Family Wealth Blueprint. In addition, you may contact the author at or call (317) 571-3616 and reference the PGDC October 2012 Case Study.

© 2012 Wealth Design Consultants, LLC. Used by permission.

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