Case Study: Planning for the Family Business

Case Study: Planning for the Family Business

Case study posted in Privately Held Business Interests on 5 July 2012| comments
audience: National Publication, Two Hawks Consulting, LLC | last updated: 5 March 2014


Family businesses represent one of the most complex challenges for financial and estate planners; particularly when the business is owned horizontally and vertically within the family structure. In this case study and accompanying 78-page report, Randy Fox of Two Hawks Consulting, LLC integrates planned gifts to help a family plan for retirement, provide sufficient estate liquidity,  reduce estate taxes, and fund the family's foundation. 


Duncan and Tina are both 65 and have two sons, Jason and Jeremy. They live a comfortable lifestyle, spending about $1,600,000 a year after taxes. Their annual income exceeds their spending. With assets worth approximately $62M and annual income of over $7M, they currently pay just over $2M a year in income taxes and have an increasing estate tax liability and ongoing income tax exposure.

Duncan and Tina own minority interests in a family company where the majority interests are owned by Tina’s brother, Tad. This business has continued to grow and produce significant income, which has raised questions about the ability of the current stock redemption agreement to meet its intended result.

Duncan and Tina’s son Jason is actively involved in the business and they would like to pass further interests in the company to him, as long as they maintain enough interest in the company to cover their lifestyle and charitable desires. Tad is also interested in moving some of his interests in the business to Jason immediately, as long as he still maintains a majority interest for the time being. With only one son involved in a profitable and growing business, Duncan and Tina are very concerned with how to provide an equal inheritance to their son, Jeremy.

Duncan and Tina are also very charitable. They make significant annual gifts to their family foundation and would like to continue increasing those gifts.

A little more than half of Duncan and Tina’s wealth is comprised of Duncan’s, Inc. This company provides approx. 95% of their annual income and plays a large role in their ability to cover their lifestyle and charitable needs. They have another $9.5M invested in real estate: $2M in commercial real estate and $7.5M in residential. They are not without liquidity; they have almost $18M in cash and securities.


The primary planning goals are to:

  • Make sure that they have sufficient funds to live on for the rest of their lives (approx. $600,000/yr. after taxes and gifts)
  • Assure that Duncan's, Inc. does not have to be liquidated as a result of their death.
  • Provide a successful transition of the business to their son, Jason, while ensuring an equal inheritance for their son, Jeremy.
  • They would like to leave 50% of their estate to Jason and Jeremy and another 25% to their grandchildren and other family members.
  • They wish to continue annual giving to their family foundation and ultimately leave 25% of their estate to the family foundation at death.
  • Make sure the company buy/sell agreement accurately reflects the wishes of the family owners in the most tax-efficient manner possible.
  • Reduce or eliminate estate taxes.


As with all our clients, integrated planning solutions vary from client to client. This situation used eight different planning strategies, which were designed to meet all the client’s goals and mitigate as much risk as possible.

GDOT (Grantor Deemed Owner Trust)

With such significant business value and taxable income produced from Duncan’s, Inc. coupled with Duncan and Tina’s desire to pass business interests to Jason now, a sale to a grantor deemed owner trust (GDOT) was the ideal solution.

A sale of interests in the company enabled us to freeze the value of the stock so that all future appreciation and growth of the business interests sold would accumulate in an asset-protected and estate tax free vehicle while keeping the estate value constant. Selling the business interests at full value assured that we would be able to provide Duncan and Tina with plenty of cash flow to meet their lifestyle needs.

The income tax burn created by the GDOT will likely cause the estate to be in depletion mode. Because of personal cash flow concerns, this income tax burn will need to be monitored and in time, the grantor status of the trust may need to be revoked.

Revised Stock Redemption Agreement

Under the existing stock redemption agreement, Duncan’s, Inc. redeems shares with life insurance proceeds. In the event of the death of Tina’s brother, Tad, the estate of Duncan and Tina would thus be increased by the insurance proceeds, to no particular advantage. A restructured stock agreement would have the GDOT purchase Tad’s shares with life insurance proceeds, keeping the business value outside of Duncan and Tina’s estate, thus saving taxes.

Life Insurance

Even with the freeze and income “tax burn” strategies in place, there still remained two issues to deal with. The first was to make sure a facility was in place to be able to buy any stock remaining in the estate at Tina and Duncan’s death.

The second was to find assets that could provide an inheritance to Jeremy equal to that passing to Jason.

Permanent Life Insurance

While we were able transfer a large portion of the business to the GDOT with the sales transaction, we did have to leave some of the company inside of Duncan and Tina’s estate for cash flow purposes. This means that they will die owning company stock.

To ensure that the business interests pass to Jason immediately and not to charity through the TCLAT, we recommended that the GDOT purchase a $15M survivorship life insurance policy which can be used to buy the remaining interests from Duncan and Tina’s estate at the second death.

Inheritance Insurance

This carefully structured survivor-ship universal life policy starts by providing a death benefit of $28M for years 1-10. This enables the family to accomplish their inheritance goal of 75% of their estate to children and grandchildren for the first 10 years.

It also allows for inheritance equalization for the first 10 years while the business value is still greater than the excess cash accumulating in trust for the benefit of Jeremy.
As time passes, and the assets in trust accumulate, it is not necessary to continue to own a $28M policy, so we project the death benefit to decrease to $13M in years 11-20 to accomplish their inheritance goal of 75%.

We illustrated that after year 20, the policy may be terminated, as there should be sufficient assets in trust to meet their inheritance objective. However, there is an advantage to using this universal life product instead of typical term insurance because it allows for the possibility of continuing some or all of the policy death benefit beyond 20 years depending on the financial situation of the family and the GDOT.

Annual Gifts to Charity

It was very important to provide sufficient cash flow for significant annual charitable gifts. The family currently makes annual gifts to their family foundation of $2M. Coupled with the family’s lifestyle expenses, this would play a large factor in how much of the business interests we could transfer to the trusts.
To overcome this, we recommended the trusts be given the power to make annual gifts to their family foundation. This relieved Duncan and Tina of a personal “expense” but also allowed them to take advantage of the income tax deduction due to the grantor status of the trusts.


Two 10-year qualified personal resident trusts (QPRTs) were designed, with Duncan having a QPRT on their Florida home, and Tina a QPRT on their Pennsylvania home. Each spouse would be named the beneficiary of the other’s QPRT and would be allowed to live in the other residence, after the QPRT term.


Finally, a testamentary charitable lead annuity trust (TCLAT) was employed at the second death to virtually eliminate the estate tax and provide the potential for a significant deferred inheritance for the next generation.

Annual Meetings and Maintenance

Our annual maintenance program helps Duncan and Tina to stay on track with monitoring their cash flow and lifestyle needs as well as the choices they made in the planning process.


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