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Estate Planning

THE FOLLOWING is a sample estate planning report I prepared a few years ago. The report was part of an estate planning exercise and based on an assumed set of facts provided as part of the exercise. The assumed facts were designed to represent a fairly standard estate planning scenario involving a husband and wife with some small business interests and the usual concerns and goals regarding their estate plans. While the report has not been updated since it was prepared approximately six years ago, it still contains potentially useful discussion of a number of common estate planning issues. If nothing else, it may be useful in treating insomnia.

Please Note: These materials should not be used as a substitute for professional advice where questions of interpretation should be addressed by a professional advisor. Please read the DISCLAIMER before continuing on this page.


Prepared by J. Randolph Robida, Attorney at Law


This report is designed to accomplish three goals:

(1) To evaluate your current situation in light of your planning objectives as we understand them;

(2) To discuss planning techniques which can help you reach you goals; and

(3) To point out other areas where proper planning could be of benefit to you.

This report is intended to be a general description of the planning opportunities which are available to you. If you decide to take advantage of any of the techniques described in this report, we will provide you with a detailed analysis of the technique, the procedure for implementing the technique and the projected financial impact of implementing the technique. This report is based on the facts as you gave them to us. It is very important that you understand that a seemingly inconsequential fact may have a dramatic impact on the analysis contained in this report. Therefore, you should let us know if we have omitted or misinterpreted any facts which might have an impact on the matters discussed in this report.

In our previous discussions, you have indicated that you have the following objectives with respect to your financial, estate and business planning:

A. Lifetime Goals.

(1) To provide business continuity plans for each of your businesses in the event of death, disability, retirement or walk-away;

(2) To provide $160,000 per year after tax for the two of you over and above your debt payments;

(3) To "clean up" your partnerships;

(4) To increase your corporation's book value over the next two years to $4 million;

(5) To liquidate or sell the horse business over the next several years;

(6) To reduce your $485,000 of personal debt to zero in the next two years;

(7) To provide protection of family assets from third party creditors.

B. Goals After William's Death.

(1) To provide $160,000 per year in after-tax income to Mary for the rest of her life; and

(2) To provide that Mary retains voting control of the S corporation following William's death while your sons operate the business.

C. Goals Following the Later of William's Death or Mary's Death.

(1) To provide efficient, cost effective and equal distribution of assets to your sons;

(2) To reduce estate settlement costs and the federal estate tax to a minimum given your other objectives; and

(3) To provide the liquidity necessary to pay all estate settlement costs so that there is not a forced sale of any of the family assets, particularly the business.

D. Charitable Giving Ideas and Vehicles for Both Lifetime and Post-Death Transfers.

To explore lifetime and post-death charitable giving ideas and methods.

Each of these objectives is discussed in more detail below.



This section of this report is a summary of the planning opportunities available to help you achieve your objectives. It does not discuss every planning opportunity which is covered in the body of the report, but highlights some of the more significant items. Its purpose is to bring into focus the many planning techniques which are discussed in more detail below. You may want to refer back to this section from time to time as you read the remainder of the report.

Perhaps the most beneficial planning technique available to you would be the use of buy-sell agreements in your various businesses. (A buy-sell agreement is a written agreement between the business entity and/or the business owners which contains rules regarding things like the transfer of ownership interests to third parties and the purchase of the ownership interest of a deceased or retired owner.) Use of buy-sell agreements could help achieve your objectives with respect to:

1) providing for business continuity in the case of death, disability, retirement or abandonment of or by one of the owners;

2) providing income for yourselves for as long as you live;

3) increasing the book value of the corporation;

4) providing that Mary has voting control of the S corporation following William's death;

5) reducing estate settlement costs and estate tax; and

6) providing the liquidity necessary to pay the expenses of your estates without a forced sale of assets.

The buy-sell agreements could be funded with life insurance policies on the lives of the business owners. This method of funding has a number of advantages which are discussed in more detail below.

In addition to buy-sell agreements, we recommend that you execute written partnership agreements for all of your partnerships. This could help you avoid conflicts between the owners over the operation of the partnerships and problems with the IRS over the proper tax treatment of the partnerships.

In order to help protect your family assets from third party creditors you should consider transferring ownership of at least some of your assets to Mary. You may also want to consider transferring assets to an irrevocable trust.

There are a number of planning techniques which can help you reduce estate settlement costs and estate taxes. First, you should make sure that each of your estates makes full use of the unified gift and estate tax credit. This credit against gift and estate taxes allows each of you to transfer up to $600,000 to your sons (or anyone else) free of gift or estate tax. If fully used by each of your estates you could transfer up to $1.2 million to your sons without any gift or estate tax.

An irrevocable life insurance trust can also help reduce estate taxes. By transferring the life insurance policies on William's life to such a trust you could remove the policies from William's estate and save a substantial amount in estate tax.

Finally, we suggest that you consider transferring assets to Mary in order to equalize the size of your estates. As outlined in more detail below, this could result in a substantial decrease in your combined estate taxes.

The remaining sections of this report discuss each of your objectives in more detail.


The first objective on your list is to provide business continuity plans for each of your businesses in the event of death, disability, retirement or walk-away. The current situation presents the following problems:

(1) The owners of your businesses are not prevented from transferring their interest in the businesses to outside parties. Consequently, an outsider could end up with an ownership interest in one or more of the businesses by purchase from an existing owner or through inheritance (e.g., a current owners' spouse could inherit an interest, remarry, and then leave the business interest to the children of the second marriage);

(2) Since your ownership interest in the corporation makes up such a large percentage of your combined estates, you may not have other assets available to pay all of the expenses (including estate taxes) associated with settling your estate. Therefore, you could be forced to sell the business or a portion of it in order to pay those expenses. Furthermore, stock in a closely held corporation is often very difficult to sell and the price received is often well below the underlying value of the stock;

(3) Another problem under the current arrangement is that there is no mechanism for setting the value of your S corporation's stock for estate tax purposes. Since placing a value on closely held corporate stock is a difficult proposition at best, your estates are likely to have to fight with the IRS over the proper value of the stock;

(4) There is no apparent source of funds should you wish to sell your stock to your sons or back to the corporation on your deaths. Such a sale could eliminate some of the problems discussed above, but in order to make such a sale, the purchaser must have the required funds;

(5) Under the current arrangement, there is no mechanism to deal with the problems created when an owner becomes disabled, retires or simply quits taking part in the business. For example, it might be appropriate to have the boys purchase William's stock should William become disabled. This would provide income to William and transfer control of the corporation to the boys. Or, it might be beneficial to require the boys to sell their ownership interests should they decide that they are no longer interested in taking part in the business. This would ensure that ownership remained with the family members who were taking an active part in business affairs.

Planning Opportunities:

All of the problems discussed above may be eliminated with a properly structured buy-sell agreement. A buy-sell agreement is an agreement between the business and/or the business owners under which the parties may:

(1) Impose restrictions on the sale of ownership interests to outsiders;

(2) Set the price of the stock (or other ownership interest) for purposes of transfers among the owners, and for estate tax purposes (if the agreement is properly drafted);

(3) Provide that in the case of the death, disability, retirement or abandonment of the business of or by one of the owners, the remaining owners and/or the business entity will buy out his or her ownership interest.

A buy-sell agreement provides the following benefits:

(1) It can prevent transfer of ownership in the business to outsiders;

(2) It can set the fair market value of the stock or partnership interest for estate tax purposes;

(3) It provides for continuity of ownership in the event of the death, disability, retirement or abandonment of the business of or by one of the owners; and

(4) It can provide funds to your estates for the payment of estate tax and other expenses.

(Buy-sell agreements may be used with partnerships and other business entities as well as with corporations; however, for the sake of simplicity, the following discussion refers to corporate buy-sell agreements. The same analysis applies to other business entities as well.)

Generally, buy-sell agreements are structured as either redemption agreements or cross purchase agreements. Under a redemption agreement, the corporation agrees to purchase the stock of the shareholder on the occurrence of one of the events specified in the agreement. While under a cross purchase agreement, the other shareholders purchase the stock. Both types of agreements have their advantages and disadvantages. For example, a redemption agreement may result in a substantial income tax liability for the corporation if the agreement is funded with insurance on the lives of the owners. (This results from the "alternative minimum tax" rules.) On the other hand, a cross purchase agreement can become very complicated if a business has numerous owners. The determination of which type of agreement best fits your needs depends on a number of factors including the tax posture of your business and of the individual owners, the financial condition of the business and its owners and the number of owners now and the expected number in the foreseeable future. Should you decide to pursue this planning option, we will help you determine the type of agreement that will work best for you.

In order for any buy-sell agreement to work, the other shareholders and/or the corporation must have sufficient funds to purchase the required stock when one of the events specified in the agreement occurs. If the corporation or the other shareholders already have the necessary funds, they could simply set those funds aside until they are needed. Alternatively, the corporation or the other shareholders could set aside small amounts of money over time in order to accumulate the necessary funds. However, there is always the chance that funds which have been set aside will be used for some other purpose or that one of the events requiring a stock purchase will occur before sufficient funds have been accumulated.

As a result of the above problems, many buy-sell agreements are funded with insurance policies on the lives of the shareholders. Depending on whether the buy-sell agreement is structured as a redemption agreement or a cross purchase agreement, the insurance policies are held either by the corporation or by the other shareholders. To the extent that a buy-sell agreement requires stock to be purchased on the disability of one of the shareholders, the use of disability insurance may be appropriate. And, finally, if the agreement requires the purchase of stock in the case of a shareholder's retirement, a high cash value policy may be used to meet the funding requirements.



Your second objective is to provide yourselves with $160,000 in income per year, after tax and debt payments. In order to achieve this objective, you will need to have approximately $430,000 in pre-tax income as determined by the following calculations.

(1) Total debts per your net worth statement:

Residence and lots $225,000;

Corporate properties $630,000

Other debts $485,000.

Total debts $1,340,000.

(2) The estimated payments on those debts assuming a 9% interest rate and a 30 year term is approximately equal to $128,000 per year.

(3) The after tax income required to make the debt payments and leave $160,000 per year equals:

Desired income after taxes and debt payment $160,000

Amount required for debt payment $128,000

Total pre-tax income required $288,000

(4) Assuming a combined federal and state income tax rate (after taking exemptions and deductions into account) of approximately 33%, the required pre-tax income, to leave you with $288,000 after taxes, is approximately $430,000.

Planning Opportunities:

While your share of the distributions from your corporation exceeded $430,000 in 1988 and 1989, your share of actual income from the corporation in 1989 was only $216,000 times 70%, or $151,200. However, since you are the controlling shareholders of the corporation, you are in a position to ensure that sufficient distributions are made by the corporation to meet your income needs. (Assuming that the corporation has sufficient income to make those distributions.)

To the extent that the corporation may not generate the income required to meet your needs, you will have to look to other sources of income such as income-generating investments. You may want to consider using some of your assets to purchase an annuity to give you a guaranteed income stream. The purchase of an annuity could, for example, be funded with the proceeds from the sale of your horse business.


Your business interests include interests in a number of partnerships. Our understanding is that there are no written partnership agreements for these partnerships. There are a number of problems with this situation. First, since the operating rules of the partnerships are not spelled out in written agreements, the potential for disputes between the owners about the operation of the partnerships is greatly increased. In addition, the proper tax treatment of partnership operations often depends on the terms of the partnership agreement (whether written or oral). Consequently, the lack of a written agreement substantially increases the risk of problems with the IRS over the taxation of the partnerships. Finally, state law dictates how certain partnership matters are handled when there is no partnership agreement. The rules imposed by state law may be contrary to your intentions; however, in the absence of a partnership agreement those rules would control.

Planning Opportunities:

Well-drafted partnership agreements would solve most, if not all of, the problems discussed above. Such agreements generally have provisions covering matters such as:

  1. How income and expenses will be shared among the partners;

  2. How the partnership will be managed, and who has authority to make management decisions;

  3. Whether, and to whom, the partners may transfer their partnership interests (in this regard the partnership agreement can serve as a buy-sell agreement);

  4. What happens on the death, disability or retirement of a partner; and

  5. Any other matters that the partners wish to address.

A well written partnership agreement serves to:

  1. Prevent disputes among the partners over the operation of the partnership;

  2. Clarify the proper income tax treatment of partnership operations; and

  3. Ensure that partnership activities are subject to the rules agreed to by the partners as opposed to the rules imposed by state laws in the absence of an agreement.

In addition to having written partnership agreements, you may want to consider restructuring your partnerships to achieve maximum legal, tax and administrative benefits. For example, it may be advantageous to combine the operations of two partnerships to avoid the Passive Activity Loss limitations imposed by the IRS. (The Passive Activity Loss limitations generally prevent you from offsetting losses from certain business or investment activities in which you do not participate on a day to day basis against other income such as wages or income from businesses in which you do actively participate.) Another option worth your consideration is converting from the partnership form of doing business to the S Corporation or Limited Liability Company form. Either of these options may offer substantial tax and legal advantages under the right circumstances.


Another of your objectives is to increase the book value of your S Corporation to $4 million over the next two years. One method of accomplishing this would be simply to retain the income earned by the corporation in the corporation. However, this would require that you forgo making distributions to yourselves and the other shareholders. Since income is taxed to the shareholders when it is earned by the corporation, whether it is distributed to the shareholders or not, there would be no tax benefit to retaining income in the corporation. In addition, retaining income in the corporation could make it difficult for you to provide yourselves with the level of income you need to meet your other objectives.

Planning Opportunities:

Another method of increasing the book value of the corporation would be to transfer one or more of your other businesses into the corporation. Such a transfer could be structured as an asset purchase by the corporation, as a purchase of an ownership interest in the other business by the corporation, or as a merger or consolidation; depending on which method worked best in your situation.

Alternatively, an increase in the book value of the corporation could be accomplished at least in part by the purchase of life insurance policies on the lives of the shareholders in conjunction with a buy-sell agreement as discussed in the Business Continuity section of this report. This method may be a better choice if your situation does not lend itself to a business reorganization as discussed above.

Since the amount of insurance needed to fund a buy-sell agreement in your case appears to be in the neighborhood of $10 million (based on the estimated fair market value of the corporation contained in your net worth statement), and since the desired increase in the book value of the corporation is only approximately $2 million, it may be possible for the corporation to achieve the desired result through the purchase of cash value life insurance.

A split-dollar insurance arrangement could offer substantial benefits in this situation. (A split-dollar arrangement is an arrangement under which the corporation pays a part of each premium payment and the shareholder pays the remainder. Such an arrangement can have substantial income and estate tax benefits.)



There are numerous tax consequences associated with the liquidation or sale of a business. A full analysis of all of the potential tax consequences associated with the sale or liquidation of your horse business is beyond the scope of this report; however, there are a few general considerations which you should keep in mind.

Planning Opportunities:

There are many ways of structuring the sale or liquidation of a business and each method can have significantly different tax consequences. The best method of structuring such a transaction depends on many factors, including the tax posture and financial condition of the business and its owners. Therefore, you should carefully analyze any proposed sale or liquidation transaction before entering into it. We will be happy to provide such an analysis should you want us to do so.

If it would fit in with your other objectives, you may want to consider retaining the horse business instead of selling or liquidating it. If you sell or liquidate the business now you may have to recognize income to the extent that the current fair market value of the business exceeds your tax basis in it. (Your tax basis is generally equal to the amount you paid for the business reduced by the depreciation you have taken on it on your tax returns.) If you retained the business until your deaths the recipients of the business (e.g. your sons) would get a tax basis in the business equal to its fair market value on the date of your death. As a result of this "stepped up" basis they would then be able to sell or liquidate the business without incurring a substantial income tax liability.


You currently have approximately $485,000 in personal debt. This is disadvantageous for income tax purposes because the interest paid on personal debt is not deductible. Thus, reducing the amount of your personal debt will have significant income tax benefits. The problem is that you may not have enough liquid assets to completely pay off the debt as soon as you would like.

Planning Opportunities:

You may be able to convert up to $100,000 of this debt to "home equity debt" by taking out a home equity loan on your house and/or your condo and using the proceeds to pay off a portion of your personal debt. The interest paid on up to $100,000 or home equity debt would be deductible for income tax purposes.

With respect to actually paying off the debts, you could take advantage of the $75,000 in cash value in your life insurance policies buy borrowing against the policies and using the cash to pay off a portion of the debt. This would reduce the face value of the policies, but would allow you to eliminate some of your non-deductible interest expense.

Finally, if you do sell the horse business you could use the proceeds of the sale to pay off some or all of your remaining personal debt.


The existing situation presents a number of problems with respect to protecting the family assets. First, substantially all of your assets are held in William's name alone. Any creditor of William's would be able to reach these assets, potentially leaving the two of you with very little. In addition, to the extent that William is a general partner (as opposed to a limited partner) in any of your partnerships, he is personally liable for any obligations of the partnership. This means that any of the creditors of the partnership can enforce their claim against William individually, and so could go after all of the assets which are held in his name.

Planning Opportunities:

There are a number of methods for protecting assets from third party creditors. Among these are transferring assets to family members who are less likely to be subject to such liabilities (i.e. Mary) and transferring assets to irrevocable trusts. In addition, restructuring the partnerships as corporations (either C or S corporations) or limited liability companies would eliminate the risk of losing your personal assets to business creditors.

You should also make sure that you carry the appropriate insurance on your businesses, your home and your automobiles. Doing so will protect you from losing your assets as the result of natural disaster, personal injuries to third parties and other covered risks. In addition to the standard insurance policies you can further protect your assets by purchasing an umbrella policy. Such a policy can increase the dollar amount of your coverage and fill in any gaps in coverage not addressed by other policies.



Another of your objectives is to provide Mary with $160,000 of income per year after taxes following William's death. Assuming a combined federal and state income tax rate of 33% (after accounting for personal exemptions and itemized deductions) the amount of pre-tax income needed to leave $160,000 after tax each year is approximately $240,000. As things stand now Mary's primary source of income following William's death would be the S Corporation. While the corporation has generated sufficient income over the past two years to provide Mary with the desired annual income, there can be no guarantee that the corporation will continue to generate adequate income; especially following the death of one of its key owners.

Planning Opportunities:

As discussed above, one method of alleviating this problem is through the use of a buy-sell agreement. Under such an agreement your sons, or the corporation itself, would buy William's stock on his death. The money received from the sale of William's stock could then be used to provide the desired income to Mary. One method of ensuring that Mary would receive the desired income for her life would be to use the money to purchase an annuity for Mary.

As an alternative to, or in conjunction with a buy-sell agreement, all or a portion of Mary's income needs could be provided for by insurance on William's life. As discussed above the insurance proceeds could be used to purchase an annuity for Mary, thus ensuring that she would receive the required income each year for her life.


Generally, providing for Mary to retain voting control of the corporation following William's death is simply a matter of arranging for her to own at least 51% of the stock after William's death. However, because the corporation is an S corporation there are some complications. For example, an S corporation may not have a trust as one of its shareholders, unless the trust is a special type of trust described in the tax laws. Under your existing estate plan the corporation is at risk of losing its status as an S corporation because part of its stock will be owned by a trust (Mary's QTIP trust) following William's death.

In addition, if Mary has voting control of the corporation following William's death she will be able to control who manages the corporation. Thus, your sons will not be guaranteed management control of the corporation without some type of agreement granting them that authority.

Planning Opportunities:

If Mary's QTIP trust does not comply with the special requirements imposed by the tax laws, its ownership of the stock will cause your corporation to lose its S status. (Only a careful review of the QTIP trust document will determine whether it contains the required provisions.) This problem, if it exists, may be eliminated by amending the QTIP trust to comply with the special requirements mentioned above.

To the extent that Mary has voting control of the corporation she will generally be able to choose who manages it. Consequently, if you want to ensure that your sons manage the corporation following William's death it will be necessary to provide for them to do so by some type of contractual arrangement. This could be in the form of a management agreement or a provision in a buy-sell agreement.


Achievement of this objective requires the careful drafting of all of your estate planning documents with this goal in mind. Many technical provisions contained in your estate planning documents have an impact on whether this goal is met. For example, the trustee provisions, the trustee's powers provisions, and the language used in the provisions regarding the distribution of your property all come into play in determining whether your estates are distributed in an efficient and cost effective manner.

Planning Opportunities:

There is one particular aspect of your current estate plans which you may want to consider. Under your existing plans a substantial amount of property passes directly to the surviving spouse. Though the possibility may seem remote at the present time, there is always the chance that the surviving spouse will decide to leave this property to someone other than your sons (e.g., if the surviving spouse remarries), or that the surviving spouse will unintentionally or needlessly waste the property before passing it to your sons. This problem may be resolved by placing the property in a trust for the benefit of your spouse. Such a trust can be drafted to allow great flexibility in providing for the surviving spouse's needs while still preventing the property from being wasted or transferred to someone other than your sons.


There are a number of problems with your current estate plan with respect to this objective. First, your estate plans do not provide for the maximum use of the unified credit available to each of you. (The unified credit allows each of you to transfer up to $600,000 to your sons free of estate or gift tax.) Second, the insurance on William's life will be included in his estate for estate tax purposes under the existing arrangement when it could removed from his estate by using an irrevocable life insurance trust. Third, because the value of William's estate is so much higher than the value of Mary's estate you lose the advantage of the low estate tax brackets. Finally, your current estate plans do not appear to take advantage of the tax savings which could be realized through the use of lifetime gifts to your sons and charitable giving.

Planning Opportunities:

The first planning opportunity involves maximizing the use of the estate and gift tax unified credit in each of your estates. This credit allows each of you to transfer up to $600,000 (during life or at death) free of gift or estate tax. In order to take full advantage of this credit each of you must transfer at least $600,000 to someone other than your surviving spouse (e.g. your sons). Under William's current estate plan the property to be transferred to your sons has a value of only $545,000. The additional $55,000 ($600,000 - $545,000) which could be transferred directly to your sons goes instead to Mary. On Mary's death this $55,000 will be included in her estate, resulting in up to $30,250 in additional estate tax. We do not have sufficient information on Mary's estate plan to determine whether her estate makes full use of the credit; but unless her plan provides for at least $600,000 to pass to someone other than William (e.g. your sons) your estates may have to pay up to $330,000 in additional estate tax.

The second planning opportunity involves the use of an irrevocable life insurance trust. As the situation currently stands, insurance on William's life in the amount of $589,000 will be included in his estate. (Generally insurance on a person's life is included in that person's estate if it is payable to his estate, or if he retains any control over the policy.) The irrevocable life insurance trust would be an irrevocable trust created to hold the life insurance policies on William's life. If properly drafted, such a trust would remove the policies from William's estate for estate tax purposes. (So long as William does not die within three years from the date the policies are transferred to the trust.) The estate tax savings could be as much as $323,950. While the trust would have to be irrevocable (that is, it could not be canceled, and property transferred to it could not be taken back), it could be fairly flexible, and could, for example, be drafted to provide for Mary during her life with the remainder to go to your sons.

The transfer of the insurance policies to the trust would be treated as a current gift to Mary and your sons under the gift tax rules. However, the gift to Mary would not be taxable under the gift tax rules because it would be a transfer between spouses, and the value of the gift to your sons would be minimized because it would be based on the current fair market value of the policies (i.e., the amount you would have to pay to replace the policies) instead of on their face amounts. As a result, the use of an irrevocable insurance trust would allow William to remove the policies from his estate at a significantly reduced tax cost.

To further reduce the tax cost associated with transferring the insurance policies to the trust, the boys could be given a limited power to withdraw money from the trust. This would allow you to take advantage of the annual gift tax exclusion, by excluding transfers to the trust (including the future payment of premiums) of up to $40,000 per year from the gift tax. (The actual amount which could be transferred without adverse gift tax consequences would generally be limited to $5,000 per year for each beneficiary of the trust because of some rather technical rules contained in the gift tax laws.) Through proper use of this planning technique you may be able to completely avoid the gift tax on transfers of the insurance policies to the trust.

Another beneficial planning strategy may be to equalize the value of your two estates. As your estate plans are currently drafted, the estate of the first of you to die will pay no estate tax, while the estate of the survivor will pay estate tax on all of your combined property (except for the property which passes directly to your sons from the estate of the first to die). This arrangement could result in a greater overall tax cost because of the failure to take advantage of the lower estate tax brackets in the first estate.

For example, under your current estate plans, because of the unlimited marital deduction, the taxable estate of the first of you to die will be zero and the estate tax on the first estate will also be zero; however, the taxable estate of the survivor will be $10,515,000 and the estate tax on the second estate will be $5,257,000. If the two estates were equalized so that the taxable value of each estate was $5,257,500, then each estate would pay $2,339,625 in estate taxes. The combined estate tax would be 2 times this figure, or $4,679,250; a savings of $577,750 over the $5,257,000 estate tax under your current estate plans.

Charitable giving may be another method of reducing your estate tax. Any property given to charity, either during your life or on your death, is removed from your estate and results in a reduction in your estate tax liability. Charitable gifts also give you the added benefit of a charitable deduction on your income tax return. The planning opportunities presented by charitable giving are discussed in more detail in the Charitable Giving section of this report.

Finally, you may significantly reduce your estate taxes by giving away some of your property during your lives. Through a technique called "gift splitting" you are allowed to give up to $20,000 per year to anyone you choose without paying any gift tax. For example, by making gifts to each of your sons you could transfer up to $40,000 per year out of your estates free of any gift tax. A program of making such gifts during your lives could significantly reduce the size of your estates and consequently the amount of estate tax you will have to pay on your deaths. Since you want your sons to eventually control the S corporation you could use stock in the corporation to fund such a gift giving program. Any other property which you intend to pass to your sons is also a good candidate for such a program.


While the value of your estates is substantial, there may be a liquidity problem under your existing estate plans. This is a result of the fact that a large portion of the value of your estates consists of your ownership interest in the S corporation. This creates two problems. First, since you want ownership of the corporation to pass to your sons, you cannot sell the stock to third parties in order to generate funds to pay the expenses of your estates. Second, even if a sale of a portion of the stock is an acceptable alternative, stock in a family owned corporation is often extremely difficult, if not impossible, to sell. Therefore, in order to prevent a forced sale of the business to provide funds to pay the expenses of your estates you will need to find an alternate source of funds.

Planning Opportunities:

One method of providing your estates with liquid assets is through the use of life insurance. By purchasing the proper amount of insurance on your lives you can ensure that your estates will have sufficient funds to pay their expenses. The use of life insurance to provide cash to your estates has two major benefits. First, since the policy is not payable until your death you do not have to worry about using the money for some other purpose prior to the time it is needed by your estate. And, second, since the face amount of the policy is payable at any time after the policy is put into force, you ensure that your estates will be fully funded even if you die before you would have been able to accumulate the required funds through some type of investment program. In addition, you can prevent the proceeds of the insurance policies from being included in your estates for estate tax purposes through the use of an irrevocable life insurance trust as discussed in the preceding section of this report.

In light of your current estate plans you may want to consider the use of a "last to die" policy. Such a policy would not be payable until the death of the second of you to die. This type of policy may be appropriate in your case because under your existing estate plans there will be no estate tax payable until the death of the survivor. The major benefit of this kind of policy is that the premiums are substantially lower.

As discussed in the "Business Continuity" section of this report, life insurance may be used to provide funds to your estates in conjunction with a buy-sell agreement. This may be especially useful in your case because it would help you achieve your objectives with respect to both business continuity and estate liquidity.



Your final objective was to explore both lifetime and post-death charitable giving ideas. From a tax perspective, charitable giving has three major benefits: first, charitable gifts are not subject to either the gift or the estate tax; second, charitable gifts reduce the value of your estate and so reduce estate taxes; and third, charitable gifts result in a charitable deduction for income tax purposes. Thus, for example, if you were to give $10,000 to charity today you would pay no gift tax on the gift, your estate would be reduced by the $10,000 you gave away and you would be entitled to a $10,000 deduction on your current year's income tax return (subject to certain restrictions under the tax laws).

As an alternative to outright gifts to charities you may want to consider making gifts to a charitable remainder trust. The use of a charitable remainder trust allows you to transfer property to a charity while retaining the use of the income from such property for a specified period such as for your life. Charitable remainder trusts are subject to a number of technical requirements imposed by the tax laws, but may be quite beneficial under the right circumstances. In your case the use of a charitable remainder trust could help you achieve a number of objectives. It could reduce your estate taxes, provide you with a source of income for your lives and meet your charitable giving goals.


This report discusses a variety of techniques which may help you accomplish your estate, business and financial planning goals. By implementing those techniques that you feel the most comfortable with you should be able to achieve most, if not all of your objectives. We expect that you will have a number of questions after reviewing this report and we look forward to meeting with you discuss the report and to answer your questions.

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