Wealth Transfer and Estate Planning for a Florida Business Owner
A successful business owner in Florida with business interests in Florida, Georgia, Tennessee, and New Jersey, generating over $5 million in annual income and over $40M in assets, approached John E. Geantasio, CPA, for assistance with estate planning and the transfer of the family business. The client aimed to transfer ownership to designated family members but was concerned about the potential
impact of capital gains and estate taxes on his family.
The client’s primary concerns were ensuring a smooth transfer of the family business to the next generation without burdening them with significant tax liabilities. He sought to understand the most tax-
efficient way to transfer the business while preserving its value for his heirs.
We provided three strategic options to help the client make an informed decision on transferring the family business:
- Simplicity: The estate plan clearly indicated who would inherit the business, ensuring the owner’s intentions were followed.
- Stepped-Up Basis: The business would receive a stepped-up basis at the owner’s death, potentially reducing capital gains taxes for beneficiaries if they sold the business later.
- Estate Tax Liability: For illiquid estates, there is a huge risk the business might need to be sold to cover estate taxes.
- Potential Family Disputes: If the business transfer isn’t explicit, it could lead to disagreements among beneficiaries.
Strategy 2: Lifetime Transfers to an Intentionally Defective Grantor Trust (IDGT)
We recommended using an IDGT to reduce the taxable estate. The business owner could gift or sell business interests to the trust in exchange for a promissory note, allowing for potential estate tax savings and continued personal cash flow.
Pros:
- Reduced Estate Tax: Assets transferred to the IDGT are removed from the taxable estate, reducing estate tax exposure.
- Personal Cash Flow: The promissory note payments provide the business owner with a consistent source of income.
- Asset Growth: Trust assets grow without being subject to income tax, as the grantor pays those taxes.
Cons:
- Complexity: Establishing an IDGT requires careful legal, tax, and financial planning.
- IRS Scrutiny: Discounted valuations of transferred assets can attract IRS attention, requiring meticulous reporting.
Strategy 3: Use a Grantor Retained Annuity Trust (GRAT)
We also suggested a GRAT, which allows the business owner to place the business into a trust, receive an annuity for a set period, and transfer the remaining assets (and their appreciation) to beneficiaries after the annuity term ends.
Pros:
- Future Appreciation: Any growth in the business’s value during the GRAT term transfers to beneficiaries free from estate taxes.
- Estate Tax Savings: Properly structured GRATs can significantly reduce the taxable estate.
Cons:
- Timing: If the owner passes away before the term ends, the assets may revert back to the estate.
- Interest Rate Sensitivity: GRAT performance is influenced by changes in interest rates, which could affect the overall outcome.
- After careful consideration of these strategies, the client opted for transfers to an IDGT to maximize tax efficiency. The result was a reduced taxable estate, significant tax savings for his family, and a clear succession plan for the family business. The client’s family will benefit from:
- Estate Tax Savings: The strategies reduced the potential estate tax burden significantly by approximately $11M, preserving wealth for future generations.
- Structured Business Transfer: Ownership of the business was smoothly transitioned to the next generation, ensuring continued family control.
- Personal Financial Security: The business owner retained income through structured annuity payments and promissory note obligations.
- John E. Geantasio, CPA provided expert counsel to ensure the client’s financial legacy was secure, guiding him through a tailored approach to wealth transfer and estate planning.
