Keith Roth (74) has a closely-held corporation which has been involved in processing snack foods and distributing soft drinks for the last 42 years. Now he's trying to figure out how to retire and leave his two sons, Jerry (41) and Robert (46) in positions of ownership. Like most family owned businesses, Keith has reinvested most of the income his growing business has generated in capital improvements and development. Unfortunately, he didn't start any sort of a retirement plan until just a few years ago and counted on the business to continue producing income. Now that he has two heirs in line to take over the business, he wants to travel and enjoy the fruits of his labors with his wife of 45 years while they're both healthy. Like many start-up corporations, he deferred taking salary until the corporation became profitable. Once the business got off the ground, Keith took significant salary and bonuses, but the IRS soon came along and threatened penalties for excessive compensation. Naturally, the IRS wanted those dollars distributed out as taxable dividends instead of compensation, so Keith deferred additional salary and reinvested back in his business. A few years later, the IRS came back and wanted to know about retained earnings and tried to assess penalties for not distributing the doubly taxed dividends again. Because of planned plant expansion, Keith was able to avoid the 50% penalty, but the family corporation is cash heavy now that major building plans are completed. With two of his sons in the business, Keith already transferred additional shares to them to reward the boys for their "sweat equity" in building the profitable business. But, how to pass majority ownership to the boys without incurring tax? In the process of meeting with the family's financial advisors, it was suggested that an IRC §664 Trust might offer the family a tool to accomplish their estate planning and business continuity goals. The advantages of using this technique were:

• Jerry and Robert were able to gain control of the family corporation as their minority ownership changed to a majority interest, while the nonparticipating heirs were assured of equitable treatment and value by their parents
• excess accumulations inside the corporation were swept out by the redemption of Keith's stock from his CRT, thus avoiding tax and penalties
• Keith and his wife were able to fund their retirement in ways that eliminated the capital gains liability on his stock and reinvest 100% of their capital to produce more income
• "social capital" dollars that otherwise would have gone to the IRS to pay unnecessary taxes were re-directed back to nonprofit causes of special interest to the Roth family, but only after Keith and his wife passed away

Henry & Associates designed the Roth scenario* and compared the options. Option (A) sell stock and pay the capital gains tax on the appreciation and reinvest the balance at 7% or Option (B) gifting the property to an IRC §664 Trust and reinvesting all of the sale proceeds in a 7% diversified income portfolio.

 * Hypothetical evaluations are provided as a professional courtesy to members of the estate planning community. Call for suggestions or schedules on upcoming workshops for professional advisors, nonprofit development officers and charitable boards..

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