An entrepreneur, his family, and an enduring legacy

When you are a business owner, there are many demands on your time. Not only do you have to oversee daily operations but also anticipate long-term planning needs. If you are considering the sale of your business, there are even more factors to think about, like minimizing taxes, ensuring steady cash flow, transferring wealth to heirs, and planning a smooth transition.

At Westmount, we’re privileged to advise a number of families who have accumulated considerable wealth through their privately held businesses. Typically, these clients want to leave a legacy for their children while preserving enough capital for their own future plans—whether that means maintaining their current lifestyles, starting a new venture, or retiring early and becoming financially independent.

Given the prevalence of these issues, we have created the case study below. The clients described reflect real situations we have encountered, with identifying details removed.

The Situation

Meet the Smiths: Jack is 33 and David is 45. They are married with three children, each under the age of three. Jack is the founder of a tech startup. David is a stay-at-home dad.

The Smith family’s primary home is in the Midwestern U.S., with additional homes in California and Hawaii. Their approximate net worth is $100 million—much of it illiquid in Jack’s business. The couple has no estate planning documents in place and one life insurance policy for $500,000 on Jack’s life.

The Goals

Jack and David have amassed a significant amount of wealth. They recognize the need to put structures in place to create a pathway to their goals, but do not know where or how to start the process. They share the following objectives:

• Selling Jack’s business while capitalizing on the more favorable tax treatment of residency in the Midwest.
• Returning to California as their primary, long-term residence—ideally after selling Jack’s business.
• Minimizing income tax and estate tax from the sale of the business.
• Providing an enduring financial legacy for their three children.
• Preserving reliable cash flow to maintain their lifestyle, address unforeseen expenses, and engage in possible new ventures, anticipating that they may have many decades ahead of them.

The Process

We began our relationship with a thorough discovery process. Besides gathering information about Jack and David’s finances, we spent significant time speaking with them and learning more about them personally. We spoke at length about their goals and concerns, what keeps them up at night, what drives them, what they envision for themselves and their children, and what challenges they’re currently facing, personally or professionally. By asking these questions and listening attentively, we developed an informed framework to address their concerns and implement planning vehicles that would allow them to pursue their aspirations, minimize taxes, and create dynastic wealth. These conversations were instrumental to our ability to design custom-tailored strategies that reflected Jack and David’s specific challenges, dynamics, relationships, and legacy goals.

With this knowledge in hand, one of the first steps we identified for Jack and David was to purchase sufficient life insurance to cover their young family. We recommended they purchase policies for both spouses, recognizing that Jack and David each contribute to their family’s financial well-being. Through our financial modeling capabilities, we derived a number that would provide replacement income and cover their kids’ higher education costs in case of an emergency.

We also refined their life insurance strategy. When the owner and beneficiary of a life insurance policy is an Irrevocable Life Insurance Trust (ILIT), the proceeds are not subject to estate tax. We were able to transfer existing life insurance policies into the ILIT, as well as purchase new policies.

We also established basic estate planning documents in Jack and David’s state of residence, ensuring that their assets were titled correctly so that the estate could escape probate. Critical to the trust design was the desire to minimize taxes, provide for their children’s education in case of emergency, and transfer significant wealth to their children.  In addition, Jack and David wanted to retain sufficient assets to fund future home purchases, entrepreneurial ventures, and philanthropy. Furthermore, it was critically important to Jack and David that any trust structures would enable their children to thrive as individuals, allowing them to pursue their passions while motivating them to develop a strong work ethic—whatever their profession or calling.

After analyzing a few options, we suggested that Jack and David create an Intentionally Defective Grantor Trust (IDGT), an extremely flexible planning vehicle for wealth transfer. With an IDGT, they can make large gifts to the IDGT or simply gift any annual gift exclusion amounts that remain after paying life insurance premiums. Another unique feature is that Jack and David can sell their assets to the IDGT without income tax consequences. With this vehicle in place, they can continue to add to the trust and use the IDGT to make direct investments in the capital markets.

With the IDGT in place, we made substantial strides in advancing Jack and David’s long-term goals. However, some additional priorities remained: (1) minimizing income taxes on the sale of Jack’s business; (2) moving back to California; and (3) transferring significant wealth to their descendants while retaining sufficient assets to meet their lifestyle needs and accomplish other personal and professional goals. We explored a few different wealth transfer strategies and modeled out the scenarios to determine how to best advance these objectives. Ultimately, we identified a non-California Spousal Lifetime Access Non-Grantor Trust (SLANT) as the best route to achieve these aims.

By transferring the majority of their remaining interests in the business to non-California SLANTs (one each for Jack and David), they were able to select a state domicile that imposed no state income tax—a significant consideration given their intention to move permanently back to California. Another advantage of a SLANT is that income taxes are paid directly by the trust. This feature was an essential element, given Jack and David’s relative lack of liquidity prior to the sale of the business. More importantly, a SLANT’s non-grantor status provided Jack and David flexibility in timing their move back to California without having to worry about paying California income tax when the business sold. The SLANTs we created also allowed Jack and David to use their lifetime exemptions before they expire at the end of 2025, while still providing an emergency “backdoor.” In case of emergency, they could access the assets of the SLANTs as long as they were still married and alive.

The custom wealth plan that we created for Jack and David—leveraging an ILIT, IDGT, and SLANT—allowed them to gain confidence and peace of mind prior to the sale of their business and provided them with a roadmap to reach their planning goals. Because Jack and David started the planning process well before the business’s eventual sale, they had time to be thoughtful and strategic in choosing the right wealth transfer vehicles for their family. Time was critical in enabling Jack and David’s tax and legal team to vet various strategies before moving forward with the ones that were the right fit, while allowing the team to coordinate with tax and legal advisors across multiple states, facilitating clear communication and coordinated execution.

Key Takeaways

• Planning requires time. Our recommendations for Jack and David came into view over the course of several discussions, allowing us to weigh alternatives before we selected the best options. Given that many trust structures are irrevocable, it is important to approach these decisions with care.
• Your own financial security is of paramount importance. Jack and David were interested in establishing sizable legacies for their children. However, they could only take these steps once they had secured their own financial well-being. With possibly 40-50 years ahead of them, they had to be prudent in reserving a robust cushion above-and-beyond their anticipated financial needs.
• Earlier is better. The sooner you can begin the planning process, the more time you have to be thoughtful and deliberate in your approach. Implementing planning initiatives may require collaboration across the members of your team—your Westmount Advisors, your attorney and your CPA.

The Path Ahead

If you see reflections of your own circumstances in this case study, please reach out to us at 310-556-2502 or email us at info@westmount.com. We would be happy to learn more about your situation and discuss your options, helping you consider what’s next for you and the long-term well-being of your family.