A new client consisting of two 50/50 partners expressed a desire to develop a buy-sell agreement around life insurance policies that they had been sold prior to my engagement. This was an extraordinary business reflected by the unique synergy created by the 50/50 partnership. Each partner had brought unique skills sets to their business that had been affirmed by success beyond anyone’s imagination. The values involved were tens of millions. The planning initiative also involved the updating of estate document and the initiation of strategic gifting.

Prior to fade-out, the insurance salesman had mentioned to our clients a traditional trusteed cross purchase arrangement and even left behind a prototype document presumably provided by the life insurance company. I agreed with the general assumption of a cross purchase because of the structure of the businesses and the benefits of a step up in tax basis for the survivor. As I thought about what we were embarking upon, I asked myself, why should we allow wealth from buy-sell life insurance proceeds to be created in the estate of the surviving partner? When I subsequently presented this question to our two clients, their response was predictably, “Uncle Sam is not paying any of the life insurance premiums so we would be very pleased to cut him out of as much of this transaction as possible.”

With this tax avoidance endorsement, my partner Dave Ciambella, CFP and I designed a buy-sell agreement that among other “ad nauseam” details gave each partner the first option to purchase as much of the deceased partner’s interest as he desired. Conceptually, we all agreed that this purchase should be just enough to give the survivor voting control of the impressive operation consisting of ten independent operating businesses. After this “control option”, the agreement stipulated that a newly formed irrevocable trust would purchase the remaining minority portion of the deceased partner’s interest. However, unique to this design, this would be an intentionally defective, skip generation, irrevocable trust for the benefit of each partner’s children and grand children.

We subsequently suggested that we address strategic gifting by transferring to separate family accounts within this trust, interest in real estate LLCs also owned 50/50 by each partner. Since this transaction would make the newly formed trust and our client’s technical partners in the real estate LLC, we contended that we could transfer the personally owned life insurance to the irrevocable trust under the “partner” transfer for value exclusion.

After many days and hours of discussion, problems solving and negotiations, the deal was sealed. The above is a highly simplified description of a very demanding process that addressed what seemed to be endless contingencies relating to business valuation, payout terms, equalizing of insurance premiums, disability terms, retirement terms, qualified successor, divorce, bankruptcy, etc. Hearty shout-outs go to Bill Lowman, Esq. and Jennifer Junker, Esq. of the Shuffield Lowman Law Firm as well as mergers and acquisitions ace Micheal Goodbread, Esq. for their encouragement, brilliant drafting and technical support.

The net result is that we have provided our clients peace of mind that:

  • This extraordinary business has a viable succession strategy in the event of a partner’s death, disability, retirement or irreconcilable differences.

  • The surviving partner has confidence that he will have unencumbered control of the business if his partner voluntarily or involuntarily withdraws.
  • Both partners will be treated fairly in the event that they withdraw.

  • Strategic gifting will begin that will help control estate tax growth.

  • A structure is available to which the partners in the future can make additional strategic gifts and sales.

  • The deceased partner’s estate will be liquid through the application of life insurance.

  • The multi million dollars of life insurance that will relieve liquidity concerns for the deceased partner’s estate will project skip generation wealth to the survivor’s children and grand children and in so doing avoid millions of dollars of tax in the survivor’s estate.

  • The multi million dollar policy on the life of the survivor will remain out of his estate and provide estate tax liquidity for his heirs.

Hearty congratulations to all involved including other members of The Rawls Group such as Dan Thill who supported our creative process. Hopefully other business owners or advisors Seeking Successionsm can follow this or similar pathways. A 50/50 partnership is not a prerequisite. The only prerequisite I see is a cross purchase structure versus a stock redemption.

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