After building several successful businesses together, a father and son sold the enterprise and made considerable investments in commercial real estate. The long-time family attorney recommending setting up a series of irrevocable trusts for the benefit of the second generation’s three boys and starting a family partnership which could be used to make these real estate investments. The thought process was that these commercial real estate investments stood to produce massive financial returns and the first and second generations were already facing an estate tax. What they did not understand or foresee was explosive growth of this partnership to a value of over $400 million and possible future family issues.

When we reviewed their planning, we noticed two major things:

• They were effectively living out of the family partnership (which owned boats, planes, exotic cars, personal residences for the father and son, ), so it would never be respected by the IRS in an estate or gift tax audit.
• The three sons who had the trusts created for their benefit weren’t even aware of the existence of the trusts, nor what the trusts or family partnership owned and were doing with the assets that were held for the three sons’

Read on to see how we froze the value of the previous planning and repositioned the assets for the father and grandfather, as well as for the three kids/grandkids.

Overcoming a Costly Oversight in an Otherwise Smart Savings Plan

When this issue came to the forefront, the father and son presented the problem to the family attorney looking for potential solutions. Initially, the family lawyer presented them with a couple of options, but they all involved court processes and massive amounts of income tax that would be triggered to the first and second generations or the trusts. One of the big challenges to solving this problem was the fact that the trusts were non-grantor and transferring assets would incur tax.

We needed an answer to our problem that didn’t undo or undercut all the hard work we put into building up those assets. 

- client, addicus consulting group

Addicus came up with a far better solution. We devised a strategy to move all of the trusts to Delaware and convert them into “grantor trusts,” which would allow the first and second generations to buy their original assets back without incurring any tax. Furthermore, because of the taxable estate that the father and grandfather had outside of the trusts and the voracious growth of the family partnership, it made sense to do some additional planning for the father and grandfather. The grandfather formed a trust for the son and the son formed a trust for the grandfather, which were drafted to navigate “reciprocal trust doctrine.” Those two trusts then purchased the family partnership back from the old trusts.

When all was said and done, the assets came completely back into the grandfather and father’s control. The assets were also kept outside of the estate and protected from creditors. Not only that, but no tax was triggered and it was made possible for the assets to pass back to the three sons/grandchildren upon the grandfather and father’s deaths.

The financial result was that the father and son solidified control of the assets they worked so hard to earn, avoided tax and other ugly potential scenarios, and managed to keep a very smart and flexible estate plan that will last for generations.

The business learnings included recognizing how important it is for the client to understand and project how things could play out. Also, it is vitally important to have the right team of advisors. We had several law firms, accountants, and valuation firms work together on this project, and they were all unified by the desire to help the clients. Also, some states have much more favorable laws and mechanisms when it comes to trusts.