May 4, 2025 • 25 mins
Analyzing a real client case reveals how proper business valuation prevented millions in estate tax liability for a family business succession plan.
• Late 70s couple with three children (one running the family business) needed trust updates
• Initial assumption: $6 million estate ($4M personal assets, $2M business) was non-taxable
• Deeper analysis revealed business actually worth $15-18 million based on revenue multiples
• Without planning, estate would face massive tax bill and business succession challenges
• Business-operating child didn't want to need siblings' permission or owe them money
• Solutions include gifting business interests at current valuation with appropriate discounts
• Restructuring ownership allows fair (not equal) distribution without losing control
• Wealthy clients often don't understand estate tax implications, even with $40M+ estates
• Family businesses, rental portfolios require specialized transition planning
• Business succession requires balancing equalization with practicality
Call the office at 479-601-4119 or visit theelderlawcoach.com to learn about upcoming webinars and the Elder Law Transformation Summit in February 2025.
Be sure to mark your calendar for our Monthly Webinars and for this fantastic weekend. Visit our website for the webinar schedule and to sign up. Stay tuned for more information about the Transformational Weekend.
Check out our new website www.TheElderLawCoach.com.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:19):
Thank you.
Specialized experience, Whetheryou're an established attorney
looking to refine your expertiseor an emerging lawyer seeking a
successful foray into elder law, this is your masterclass.
Now let's get started with theluminary in the field.
Here's Todd Whatley.
Speaker 2 (00:37):
That's right.
This is the Elder Law Coach andmy name is Todd Whatley, and,
as always, I am super happy thatyou have decided to join us
today and today I think this isgoing to be a really good show
because it's going to besomething that you don't see
every day, okay, so this isgoing to be one of those things.
(00:58):
I really do want you to listen,because if it comes up in a
meeting, you need to jump on it.
And my issue the reason Iwanted to do this was two things
.
Number one this is somethingthat kind of got by me and my
buddy, ian, caught it, and it issomething that can truly make a
(01:18):
difference in a client's life.
If you can catch this, it cansave them literally millions of
dollars in their estate plan anddeath taxes and things like
that.
So our goal here is to doeverything that we can for the
client to try to catch thethings that they've never seen,
and sometimes even things that Imissed, and, um, we want to
(01:40):
talk about that.
And when I say we, I am herewith my buddy, ian Weiner.
He's been on here before, he ismy certified financial planner
buddy and he does my investmentsand things, not taxes you don't
do taxes.
Speaker 3 (01:56):
I don't prepare taxes .
No, we have people for that,todd, there's always a who for
that how but that's a story foranother day.
Speaker 2 (02:04):
So this is Ian Weiner , my good friend and certified
financial planner, and he waswith me Certified exit planning
advisor as well.
Speaker 3 (02:11):
That's right.
Speaker 2 (02:13):
This is the other one .
Could have probably caught that.
Yeah, knowing that may havealso helped.
So, ian, we were in thismeeting together, so give us
just some general facts and thenwe'll discuss it.
Speaker 3 (02:27):
So this is, uh, we're going to protect, we're going
to change some of the details toprotect the the innocent here.
Um, but this is this is basedon a real life case that we're
in the process of, of working on.
Um, so husband and wife come in.
They are um late seventies,early eighties, have run a
business for you know, thebetter part of 40 years and have
(02:50):
done so successfully.
One of their children they'vegot, let's say, they've got
three children.
One of their children runs thebusiness.
The other two are really notinvolved, and so the the reason
for the conversation in thefirst place was to review the
current trust that they had,update powers of attorney, make
(03:10):
sure that they're going to avoidprobate successfully and have a
plan to eliminate the risk of aguardianship if possible.
So what we were focused on waskind of the basics here of
everyone needs to do this stuff.
They had done a trust years ago, decades ago I think, in
another state in this case Ithink so, and so they wanted to
(03:34):
make sure that stuff was right,and so we got in, we began to
talk to them and, todd, you cantouch on the complexity of the
trust it was an AB trust.
Is that right An?
Speaker 2 (03:45):
AB trust with some very complicated distributions
that they no longer reallywanted to do.
But, yeah, it was an AB trustand at that point I did not
think that they had a taxableestate and I think that's where
Ian jumped in and fixed this.
But yeah, I was like you know,this is way too complex for your
current situation and we candefinitely make this more simple
(04:08):
.
And that's when you jumped in.
You're like, uh, but sosomething that's great.
Speaker 3 (04:14):
You know, something that Todd is good at is he wants
to simplify as much as possible.
You know we're we're not fansof having any complexity.
That's unnecessary, but we'reopen to to doing complex things
if that's what the clientrequires.
And so you know, in theconversation we're talking about
the assets that they have andwhat their intentions for these
(04:34):
assets are, and let's just useround numbers.
Let's say that they value theirestate you know, their home and
their, we'll say, investableassets at about $4 million, and
their valuation for the companywas about $2 million.
And so initially, when we weretalking, we're going okay,
(04:55):
they're a married couple, evenif that's $6 million altogether
okay, currently we don't have ataxable estate and even if the
TCJA sunsets as expected at theend of this year, even if that
drops down to 7 million each,we're probably okay.
And I think normally this ishow people would approach this.
And so we wanted to get a senseof where does the money go?
(05:17):
What's the plan here?
How do the kids work?
Blah, blah, blah, and two ofthe children do not work in the
business and they want, you know, to have a fair distribution to
their kids.
And I think that's a key point,because the way that we say it
is fair is not always equalAbsolutely, and in this case,
their other child had reallycontributed over years you know,
(05:40):
even I think, probably thebetter part of a decade to
building and growing thisbusiness is basically the you
know the principle of thebusiness and drives a lot of the
day-to-day and so, okay, is itfair that everything is split
equally?
And how do we do thatequalization?
What's the process for that?
Because the sibling who runsthis business think about it
(06:04):
from their perspective.
They don't want to have to asktheir siblings who have not run
the business for permission tocontinue running the business.
But if the shares aredistributed equally between them
let's say, the son who isrunning the business has 33% of
the company or 34% of thecompany Well, the other two each
(06:26):
have 33.
This is a nightmare.
I want you guys to see thatthis is a nightmare if we get
this wrong, for everybodyinvolved.
And so we started to askquestions.
I said, okay, well, how do youvalue the business?
They said, well, the last timewe had a valued, you know about
20 years ago, was a couplemillion bucks.
Okay, Well.
And they said, well, we valueit based on the retained
(06:50):
earnings in the corporation.
Getting a little bit into theweeds here, that means that this
is profit that the company'spaid taxes on that are inside
the company.
But let's call it 3 millionbucks is inside the company,
okay.
And I said and so that's whatthey value it on, Because in
their mind, if they would walkaway from the business and shut
it down, that's what they couldtake out of it.
(07:13):
And they're in an industry thatthey're concerned under the
current climate, with thecurrent administration, is not
going to be a big high growthindustry for the next few years.
And I said, but what the lastcouple of years, what's top line
revenue been?
No, it's, you know, five, 6million.
I said, okay, well, even if youhave a slowdown this year, what
do you think you'll do?
Three to four, okay.
Even if you have a slowdownthis year, what do you think
(07:33):
you'll do?
Three to four, okay.
And so I said, well, good news,bad news Business is not worth
the $3 million in retainedearnings.
The bad news is it's probablyworth three to five times the
top line revenue.
Oh, and Todd's going oh, soI'll do the math for you.
Let's say it's worth, andthat's plus the retained
earnings, right, because ifyou're buying the business, you
(07:55):
know you're going to buy theretained earnings plus the value
of the company.
And so let's say that they'redoing $5 million a year and that
we get a five times multiple onthat All of a sudden, the
company's worth $15 million plusthe $3 million that's in the
company.
Now, this is I'm pulling up avaluation out of a hat here but
(08:19):
the point is, all of a sudden,if we get unlucky, we have a
taxable estate right away.
Absolutely yeah.
And not only do we have ataxable estate, the bigger issue
is how do we handle thedistribution of this?
Where's the?
They have a buy-sell, but howdoes the buy-sell work and how
is the buy-sell funded?
Because if the parents passaway, the shares get split
(08:41):
equally between them.
We have a control issue and thesibling who's running the
business does not want to haveto ask their siblings who have
not been in the businesspermission to do anything.
Have to ask their siblingswho've not been in the business
permission to do anything.
Sure, and also that siblingtypically is in a position where
you know they would love to beable to buy their siblings out,
and that's usually what thesiblings want is to be bought
(09:02):
out.
But if it's worth $15 millionand we have $3 million in the
business, this is a little bitmore challenging.
Creating $10 million is goingto be difficult.
How do we and how do we come upwith that out of thin air and
he was very adamant.
Speaker 2 (09:16):
My child does not want to owe the other two any
money or ask them for permission.
We're like, okay, and thatmakes sense, right.
Speaker 3 (09:28):
That does make sense.
Owner, you know, and you havesiblings, or you know your
siblings spouses, or even yourspouse you would not like for
them to have to, you know, paythis off when this, when this
happens, and so this is a reallyinteresting example of you know
, I think there are times whenwe have to take our clients at
(09:49):
their word, and there's othertimes when we have to trust but
verify, and so something thatwe're working on is part of the
programs that we have is, youknow, how do, how do we, as, as
Todd and Ian and our our, youknow, separate planning firm,
how do we provide the kind oftrust but verify services to
(10:10):
some of our colleagues to makesure that we don't miss anything
?
Because, let's say, somethinghappens down the road where, you
know, these folks decide not toimplement recommendations that
we have, they pass away, we getinto a fight about how the
distributions happen, andthere's a big issue, and they
also happen to have a taxableestate at that same time.
Is there some potential that wehave some liability in this?
(10:33):
And you know, it's not like welive in a non-litigious society,
right?
And so you know I'm not tryingto, but I'm talking to lawyers
here, and so you know, you cansee how this goes, and the last
thing that Todd and I want to dois get dragged into a family
deal, and so you know what we'regoing to come in and do is
we're going to come and figureout okay, is there a way and
(10:56):
there is how do we let thisfamily have their cake and eat
it too?
What the parents want, whatTodd's clients want, is they
want to create a fairdistribution, but that may not
be equal among their children,and they want to do it in a tax
efficient and simple way, and sosomething that we're talking
(11:18):
about is okay, do we begin togift these shares now, while the
limit is higher?
Do we lock in the currentvaluation?
And one issue is let's say thatthis business would normally,
under normal conditions, or hadthere been a different
administration in the WhiteHouse, let's say this business
(11:39):
would have traded at a fivetimes earnings multiple, valuing
at about between 15 and 18million.
But let's say that, given thecurrent environment, let's say
that it would only trade at athree times multiple.
You know, if you're buying abusiness, that you're concerned
about the next three to fiveyears how viable it is.
You know, and there's some,disfavored, there's some
(12:00):
legislative issues it would makesense that we would value it at
a discounted valuation.
Now, in the long run you know,the business has been in
operation for, I think almost 40years and they've got some,
they're pivoting and they'regoing to do fine.
But in the short term this maybe something we can take
advantage of.
So what we can do and we'reexploring different ways to do
(12:21):
this but what we can do is wecan freeze the valuation from an
estate tax perspective and wecan say, okay, Mr and Mrs Client
, let's value the business atwhat it is today, at this lower
valuation, and there may be somerestructuring of the business
that we do because it'scurrently a C corporation.
That may or may not be the waythat we want to transition
(12:44):
things.
But let's do some gifting, andit's probably to a variety of
different irrevocable trusts.
But let's gift a good chunk ofthis and we can get an
additional valuation discount.
So let's say the business isvalued at 12 million, all in 10
(13:06):
million, plus the 2 million or 3million in retained earnings.
Okay, Well, if we're going tobe gifting these shares to an
irrevocable trust, we also havesome control issues that we
talked about, the class ofshares that we might create or
gift could allow for.
Now people get in trouble whenthey do this.
(13:26):
Okay, Because they're going todo.
Typically this is what happenswith family limited partnerships
they're going to do a familylimited partnership and then get
a really big valuation discountand the IRS comes in later and
goes well, it wasn't really a50% discount, we might have
given you 15 or 20.
And so we will take aconservative valuation.
But let's say we can dropanother 20% off of the valuation
(13:49):
when we're getting it outsideof this family's estate
valuation, when we're getting itoutside of this family's estate
.
And so let's say they only haveto use up $10 million of their
between the two of them, $28million estate tax exemption.
We can get it outside of theirestate.
If we do it right, we can evenstill get a step up in basis
later on.
And now we've solved both thepotential estate tax issue,
(14:10):
which at some point is going tobe an issue realistically.
And two, we're going to solvethe equalization issue.
Now, someone who's justpreparing documents, that's not
going deeper with their clients,would have completely
overlooked this.
And let's be transparent If wehave to update the buy-sell, if
we've got to create additionaltrusts.
(14:30):
If we've got to fund thosetrusts, there's additional legal
work that needs to be done andit's in the best interest of the
client, but it needs to be doneand it's probably two to three
times what the baselinetransaction was going to be.
And so we did a couple of things.
We're in the process of solvinga huge issue for the client
that they didn't really realizethat they had.
I had no idea.
Yeah, this is a multimilliondollar oopsies.
(14:52):
Yeah, this is a multimilliondollar oopsies best case
scenario.
And we're we're doing it in away that the client gets what
they want.
What they want to happen isgoing to happen, because Todd is
going to draft the documents toto execute that and that's
additional revenue for Todd'sfirm.
This is not unimportant, butyou know we don't run a charity
right, but we want to do theright thing for the client and
(15:16):
by going a little bit deeper andmaking sure that we're crossing
the T's and dotting the I's andtrusting the client, but also
verifying this information,we're knocking out a whole lot
of issues here.
So this is one example of, youknow, the the financial and the
legal side working together touncover more opportunities for
(15:37):
the client and things that wecan help to solve.
Speaker 2 (15:40):
Yeah, it was just just kind of eyeopening.
It's like oh yeah, number one,this family had an issue that
they had no idea.
And number two, we were able tofix it or we're in the process
of fixing it.
Speaker 3 (15:54):
We can fix.
It Just depends on which youknow how many strategies we can,
we can use.
And so you know.
I think that one of thetakeaways I want to make sure I
hit here, todd is, you know,this doesn't apply just to
families that have businesses,Although if, if someone is a
business owner, this this shouldbe a you know bell going off in
your head Okay, we need to, weneed to see the buy sell, we
(16:15):
need to see the operatingagreement.
How does this work?
And two, another place thatthis kind of planning I think is
really, really important ispeople who they.
They wouldn't necessarily saythat they have a business, but
maybe they have a rentalportfolio.
Yeah, this is a classicsituation.
Mom and dad have 10 or 15rentals they've acquired over
the years and, yes, we want toput them in a trust, you know,
typically, but we also have.
(16:37):
I mean, this is a business.
You know past one it's abusiness.
Even one is arguably a business.
What's the plan to transitionthat?
If they have multiple kids, Issomeone going to, is someone
going to do, and how do we?
And if they have multiple kids,how do we distribute those
assets fairly?
I mean, we're working on a caseright now slightly different
situation.
I mean, I think we're talkingabout probably 200 units is the
(17:01):
the particular case kind of outout South here, the person who
really drives the bus, the otherone is along for the ride, and
they're working on an equaldistribution of these.
But the you know and I'mworking with the trustee
daughter, I'm working with thetrustee sibling and the
(17:24):
non-trustee sibling is like waita minute, wait a minute.
This isn't fair, this isn'tequal and it's a mess to get
that distributed.
And so you want to encourageyour clients to be thinking
about how that distribution isgoing to go when you pass,
particularly with things likereal estate.
Speaker 2 (17:41):
Yep, well, and also just take this opportunity to
tell you, listening out there,that just because we deal with
taxes and this all the time,it's just like second hand to us
.
The clients truly don't knowsometimes.
Was it you that was talkingabout the client with $40
(18:03):
million and did not know theyhad a taxable estate?
They assumed that all $40million would just go to their
kids.
Speaker 3 (18:10):
Well, this was an interesting one.
So this was a case that I wasworking on with a colleague of
mine.
They were in the wine industryand so this is why it was
interesting to me Very quickly,this store.
They were in a particular partof the country and probably
their business is probably worthbetween $100 million and $130
million is what we're currentlyvaluing it at First gen,
(18:31):
probably mid to late 70s.
So I want you folks to get thisidea right and so we get
brought in by another advisor tohelp with the.
This is an islet all day long.
We have a huge estate tax issue.
This advisor was just out oftheir depth, basically, and so
we're having this conversationwith the client and so we're
talking through okay, what's theplan for this, what's the plan
(18:57):
for this, what's the plan forthis?
And the question is what's theplan to handle estate taxes?
We're trying to get a sense ofwhere this client's at right,
because we're thinking, okay,anyone that has $140 million
business probably knows thatthis is an issue.
And the guy goes what are youtalking about?
Like, well, if your estate'sover a certain amount, it's like
a death tax, basically.
And he goes what they wouldnever do, that that's literally
what came out of the guy's mouth.
It's incredible, wow.
(19:18):
And we're like hang on, hang on.
And so we spend a few minutestalking through.
And so don't assume that justbecause someone is wealthy that
they are sophisticated.
Yeah, absolutely, and this isconsistent in my experience
(19:45):
across the board.
Yeah, absolutely, you know.
That's to bring in lifeinsurance death benefit into the
estate to pay the taxes,because we're above the amount
that gifting can really work at,and so we go, okay, well, you
know, tell us about the business.
You know he's like well, it'sall going to go to my kids, you
know Okay.
And so we go well, are theygoing to be able to come up with
the liquidity?
Speaker 2 (20:06):
$70 million.
Speaker 3 (20:10):
Yeah, you know, $70 million within nine months.
He goes, he names the kids, hegoes.
Those guys, no, they're morons.
And so this is you can't makethis up, it's just, it's too
good.
But if you've worked withbusiness owners, you know this
is how they are.
One of the challenges oftransitioning money across
generations is one generationthat builds it.
That's not a guarantee that thenext generation is going to be
(20:31):
competent.
It's Almost guaranteed, and sowe're working with a couple of
different and there's some gratsand some different things that
we can do, but if you havebusiness owner clients that have
really any level of wealth,these are the conversations that
we need to be having,regardless of what the
administration does In the longrun over the next 20 years
(20:55):
administration does in the longrun, over the next 20 years, the
legislative winds are blowingin the direction of making it
much harder to pass wealth on,and so you know we need to be
proactive and, frankly, you knowit's not going to be surprising
, you know, if someone's worth amillion dollars today and their
assets continue to double overthe next 10 or 15 years.
Clients that you don't thinkhave a taxable estate regular
(21:15):
kind of normal folks can getthere pretty quickly.
Speaker 2 (21:19):
Yep, so this is what we do every day.
Okay, ian has an office.
In my office, we typically seeclients together, with their
permission, of course, and we'vebeen doing this.
Are we pushing two years now?
It's about two years and we'vebeen doing this.
Are we pushing two years now?
Speaker 3 (21:33):
It's about two years that we've been working really
closely together and I think wedo this very well.
Speaker 2 (21:37):
If this interests you , okay, if this is something
that you are truly interested in, I would encourage you.
I am starting a series ofwebinars for the rest of 2025
that will lead up to what we arecalling the Elder Law
Transformation Summit.
It is in February of next yearand I think Ian and I have four
(22:01):
hours of that that we're goingto introduce people to this
concept, discuss how this worksand go into it, and it truly
can't Plus ethics.
And fiduciary duty yes,fiduciary duty, ethics, the
entire nine and you can see howhaving someone in thinking that
(22:22):
way will increase what the willshow what the client needs,
which many times we as attorneyscan provide those solutions,
and so it's in the client's bestinterest.
It's going to save themmillions of dollars and clients
will gladly pay for that.
But you've got to understandhow this works and how to do it,
(22:46):
and we will show you how to dothat.
So I encourage you, go, go tothe website, call the office and
ask for Patricia if you want toget the information on the
webinars coming out the rest ofthis year, and particularly
Transformation Weekend.
We are limiting it to 15 peopleand you're going to have to
(23:12):
apply and show that this is whatyou want to do, that you can do
it and I will teach you how todo it, okay.
So yeah, go to the website, theelderlawcoachcom.
Lots of information there.
Call the office 479-601-4119.
If you have questions, that ismy law office, but that will get
you to Tricia.
Ask about Tricia or just say,hey, I have some coaching
(23:34):
questions and they will get youto the right person.
Okay, as always.
Thank you very much forlistening and we will see you
next time, okay.
Speaker 1 (23:43):
Thank you for joining this episode of the Elder Law
Coach Podcast.
For those eager to take theirelder law practice to new
heights and are interested inTodd's acclaimed coaching
program, visitwwwTheElderLawCoachcom.
With Todd Watley by your side,the journey to becoming an elder
law authority has never beenmore achievable.
(24:03):
Until next time, keep learning,keep growing and stay
passionate about elder law.
Thank you.
Specialized experience, Whetheryou're an established attorney
looking to refine your expertiseor an emerging lawyer seeking a
successful foray into elder law, this is your masterclass.
Now let's get started with theluminary in the field.
Here's Todd Whatley.
Speaker 2 (00:37):
That's right.
This is the Elder Law Coach andmy name is Todd Whatley, and,
as always, I am super happy thatyou have decided to join us
today and today I think this isgoing to be a really good show
because it's going to besomething that you don't see
every day, okay, so this isgoing to be one of those things.
(00:58):
I really do want you to listen,because if it comes up in a
meeting, you need to jump on it.
And my issue the reason Iwanted to do this was two things
.
Number one this is somethingthat kind of got by me and my
buddy, ian, caught it, and it issomething that can truly make a
(01:18):
difference in a client's life.
If you can catch this, it cansave them literally millions of
dollars in their estate plan anddeath taxes and things like
that.
So our goal here is to doeverything that we can for the
client to try to catch thethings that they've never seen,
and sometimes even things that Imissed, and, um, we want to
(01:40):
talk about that.
And when I say we, I am herewith my buddy, ian Weiner.
He's been on here before, he ismy certified financial planner
buddy and he does my investmentsand things, not taxes you don't
do taxes.
Speaker 3 (01:56):
I don't prepare taxes .
No, we have people for that,todd, there's always a who for
that how but that's a story foranother day.
Speaker 2 (02:04):
So this is Ian Weiner , my good friend and certified
financial planner, and he waswith me Certified exit planning
advisor as well.
Speaker 3 (02:11):
That's right.
Speaker 2 (02:13):
This is the other one .
Could have probably caught that.
Yeah, knowing that may havealso helped.
So, ian, we were in thismeeting together, so give us
just some general facts and thenwe'll discuss it.
Speaker 3 (02:27):
So this is, uh, we're going to protect, we're going
to change some of the details toprotect the the innocent here.
Um, but this is this is basedon a real life case that we're
in the process of, of working on.
Um, so husband and wife come in.
They are um late seventies,early eighties, have run a
business for you know, thebetter part of 40 years and have
(02:50):
done so successfully.
One of their children they'vegot, let's say, they've got
three children.
One of their children runs thebusiness.
The other two are really notinvolved, and so the the reason
for the conversation in thefirst place was to review the
current trust that they had,update powers of attorney, make
(03:10):
sure that they're going to avoidprobate successfully and have a
plan to eliminate the risk of aguardianship if possible.
So what we were focused on waskind of the basics here of
everyone needs to do this stuff.
They had done a trust years ago, decades ago I think, in
another state in this case Ithink so, and so they wanted to
(03:34):
make sure that stuff was right,and so we got in, we began to
talk to them and, todd, you cantouch on the complexity of the
trust it was an AB trust.
Is that right An?
Speaker 2 (03:45):
AB trust with some very complicated distributions
that they no longer reallywanted to do.
But, yeah, it was an AB trustand at that point I did not
think that they had a taxableestate and I think that's where
Ian jumped in and fixed this.
But yeah, I was like you know,this is way too complex for your
current situation and we candefinitely make this more simple
(04:08):
.
And that's when you jumped in.
You're like, uh, but sosomething that's great.
Speaker 3 (04:14):
You know, something that Todd is good at is he wants
to simplify as much as possible.
You know we're we're not fansof having any complexity.
That's unnecessary, but we'reopen to to doing complex things
if that's what the clientrequires.
And so you know, in theconversation we're talking about
the assets that they have andwhat their intentions for these
(04:34):
assets are, and let's just useround numbers.
Let's say that they value theirestate you know, their home and
their, we'll say, investableassets at about $4 million, and
their valuation for the companywas about $2 million.
And so initially, when we weretalking, we're going okay,
(04:55):
they're a married couple, evenif that's $6 million altogether
okay, currently we don't have ataxable estate and even if the
TCJA sunsets as expected at theend of this year, even if that
drops down to 7 million each,we're probably okay.
And I think normally this ishow people would approach this.
And so we wanted to get a senseof where does the money go?
(05:17):
What's the plan here?
How do the kids work?
Blah, blah, blah, and two ofthe children do not work in the
business and they want, you know, to have a fair distribution to
their kids.
And I think that's a key point,because the way that we say it
is fair is not always equalAbsolutely, and in this case,
their other child had reallycontributed over years you know,
(05:40):
even I think, probably thebetter part of a decade to
building and growing thisbusiness is basically the you
know the principle of thebusiness and drives a lot of the
day-to-day and so, okay, is itfair that everything is split
equally?
And how do we do thatequalization?
What's the process for that?
Because the sibling who runsthis business think about it
(06:04):
from their perspective.
They don't want to have to asktheir siblings who have not run
the business for permission tocontinue running the business.
But if the shares aredistributed equally between them
let's say, the son who isrunning the business has 33% of
the company or 34% of thecompany Well, the other two each
(06:26):
have 33.
This is a nightmare.
I want you guys to see thatthis is a nightmare if we get
this wrong, for everybodyinvolved.
And so we started to askquestions.
I said, okay, well, how do youvalue the business?
They said, well, the last timewe had a valued, you know about
20 years ago, was a couplemillion bucks.
Okay, Well.
And they said, well, we valueit based on the retained
(06:50):
earnings in the corporation.
Getting a little bit into theweeds here, that means that this
is profit that the company'spaid taxes on that are inside
the company.
But let's call it 3 millionbucks is inside the company,
okay.
And I said and so that's whatthey value it on, Because in
their mind, if they would walkaway from the business and shut
it down, that's what they couldtake out of it.
(07:13):
And they're in an industry thatthey're concerned under the
current climate, with thecurrent administration, is not
going to be a big high growthindustry for the next few years.
And I said, but what the lastcouple of years, what's top line
revenue been?
No, it's, you know, five, 6million.
I said, okay, well, even if youhave a slowdown this year, what
do you think you'll do?
Three to four, okay.
Even if you have a slowdownthis year, what do you think
(07:33):
you'll do?
Three to four, okay.
And so I said, well, good news,bad news Business is not worth
the $3 million in retainedearnings.
The bad news is it's probablyworth three to five times the
top line revenue.
Oh, and Todd's going oh, soI'll do the math for you.
Let's say it's worth, andthat's plus the retained
earnings, right, because ifyou're buying the business, you
(07:55):
know you're going to buy theretained earnings plus the value
of the company.
And so let's say that they'redoing $5 million a year and that
we get a five times multiple onthat All of a sudden, the
company's worth $15 million plusthe $3 million that's in the
company.
Now, this is I'm pulling up avaluation out of a hat here but
(08:19):
the point is, all of a sudden,if we get unlucky, we have a
taxable estate right away.
Absolutely yeah.
And not only do we have ataxable estate, the bigger issue
is how do we handle thedistribution of this?
Where's the?
They have a buy-sell, but howdoes the buy-sell work and how
is the buy-sell funded?
Because if the parents passaway, the shares get split
(08:41):
equally between them.
We have a control issue and thesibling who's running the
business does not want to haveto ask their siblings who have
not been in the businesspermission to do anything.
Have to ask their siblingswho've not been in the business
permission to do anything.
Sure, and also that siblingtypically is in a position where
you know they would love to beable to buy their siblings out,
and that's usually what thesiblings want is to be bought
(09:02):
out.
But if it's worth $15 millionand we have $3 million in the
business, this is a little bitmore challenging.
Creating $10 million is goingto be difficult.
How do we and how do we come upwith that out of thin air and
he was very adamant.
Speaker 2 (09:16):
My child does not want to owe the other two any
money or ask them for permission.
We're like, okay, and thatmakes sense, right.
Speaker 3 (09:28):
That does make sense.
Owner, you know, and you havesiblings, or you know your
siblings spouses, or even yourspouse you would not like for
them to have to, you know, paythis off when this, when this
happens, and so this is a reallyinteresting example of you know
, I think there are times whenwe have to take our clients at
(09:49):
their word, and there's othertimes when we have to trust but
verify, and so something thatwe're working on is part of the
programs that we have is, youknow, how do, how do we, as, as
Todd and Ian and our our, youknow, separate planning firm,
how do we provide the kind oftrust but verify services to
(10:10):
some of our colleagues to makesure that we don't miss anything
?
Because, let's say, somethinghappens down the road where, you
know, these folks decide not toimplement recommendations that
we have, they pass away, we getinto a fight about how the
distributions happen, andthere's a big issue, and they
also happen to have a taxableestate at that same time.
Is there some potential that wehave some liability in this?
(10:33):
And you know, it's not like welive in a non-litigious society,
right?
And so you know I'm not tryingto, but I'm talking to lawyers
here, and so you know, you cansee how this goes, and the last
thing that Todd and I want to dois get dragged into a family
deal, and so you know what we'regoing to come in and do is
we're going to come and figureout okay, is there a way and
(10:56):
there is how do we let thisfamily have their cake and eat
it too?
What the parents want, whatTodd's clients want, is they
want to create a fairdistribution, but that may not
be equal among their children,and they want to do it in a tax
efficient and simple way, and sosomething that we're talking
(11:18):
about is okay, do we begin togift these shares now, while the
limit is higher?
Do we lock in the currentvaluation?
And one issue is let's say thatthis business would normally,
under normal conditions, or hadthere been a different
administration in the WhiteHouse, let's say this business
(11:39):
would have traded at a fivetimes earnings multiple, valuing
at about between 15 and 18million.
But let's say that, given thecurrent environment, let's say
that it would only trade at athree times multiple.
You know, if you're buying abusiness, that you're concerned
about the next three to fiveyears how viable it is.
You know, and there's some,disfavored, there's some
(12:00):
legislative issues it would makesense that we would value it at
a discounted valuation.
Now, in the long run you know,the business has been in
operation for, I think almost 40years and they've got some,
they're pivoting and they'regoing to do fine.
But in the short term this maybe something we can take
advantage of.
So what we can do and we'reexploring different ways to do
(12:21):
this but what we can do is wecan freeze the valuation from an
estate tax perspective and wecan say, okay, Mr and Mrs Client
, let's value the business atwhat it is today, at this lower
valuation, and there may be somerestructuring of the business
that we do because it'scurrently a C corporation.
That may or may not be the waythat we want to transition
(12:44):
things.
But let's do some gifting, andit's probably to a variety of
different irrevocable trusts.
But let's gift a good chunk ofthis and we can get an
additional valuation discount.
So let's say the business isvalued at 12 million, all in 10
(13:06):
million, plus the 2 million or 3million in retained earnings.
Okay, Well, if we're going tobe gifting these shares to an
irrevocable trust, we also havesome control issues that we
talked about, the class ofshares that we might create or
gift could allow for.
Now people get in trouble whenthey do this.
(13:26):
Okay, Because they're going todo.
Typically this is what happenswith family limited partnerships
they're going to do a familylimited partnership and then get
a really big valuation discountand the IRS comes in later and
goes well, it wasn't really a50% discount, we might have
given you 15 or 20.
And so we will take aconservative valuation.
But let's say we can dropanother 20% off of the valuation
(13:49):
when we're getting it outsideof this family's estate
valuation, when we're getting itoutside of this family's estate
.
And so let's say they only haveto use up $10 million of their
between the two of them, $28million estate tax exemption.
We can get it outside of theirestate.
If we do it right, we can evenstill get a step up in basis
later on.
And now we've solved both thepotential estate tax issue,
(14:10):
which at some point is going tobe an issue realistically.
And two, we're going to solvethe equalization issue.
Now, someone who's justpreparing documents, that's not
going deeper with their clients,would have completely
overlooked this.
And let's be transparent If wehave to update the buy-sell, if
we've got to create additionaltrusts.
(14:30):
If we've got to fund thosetrusts, there's additional legal
work that needs to be done andit's in the best interest of the
client, but it needs to be doneand it's probably two to three
times what the baselinetransaction was going to be.
And so we did a couple of things.
We're in the process of solvinga huge issue for the client
that they didn't really realizethat they had.
I had no idea.
Yeah, this is a multimilliondollar oopsies.
(14:52):
Yeah, this is a multimilliondollar oopsies best case
scenario.
And we're we're doing it in away that the client gets what
they want.
What they want to happen isgoing to happen, because Todd is
going to draft the documents toto execute that and that's
additional revenue for Todd'sfirm.
This is not unimportant, butyou know we don't run a charity
right, but we want to do theright thing for the client and
(15:16):
by going a little bit deeper andmaking sure that we're crossing
the T's and dotting the I's andtrusting the client, but also
verifying this information,we're knocking out a whole lot
of issues here.
So this is one example of, youknow, the the financial and the
legal side working together touncover more opportunities for
(15:37):
the client and things that wecan help to solve.
Speaker 2 (15:40):
Yeah, it was just just kind of eyeopening.
It's like oh yeah, number one,this family had an issue that
they had no idea.
And number two, we were able tofix it or we're in the process
of fixing it.
Speaker 3 (15:54):
We can fix.
It Just depends on which youknow how many strategies we can,
we can use.
And so you know.
I think that one of thetakeaways I want to make sure I
hit here, todd is, you know,this doesn't apply just to
families that have businesses,Although if, if someone is a
business owner, this this shouldbe a you know bell going off in
your head Okay, we need to, weneed to see the buy sell, we
(16:15):
need to see the operatingagreement.
How does this work?
And two, another place thatthis kind of planning I think is
really, really important ispeople who they.
They wouldn't necessarily saythat they have a business, but
maybe they have a rentalportfolio.
Yeah, this is a classicsituation.
Mom and dad have 10 or 15rentals they've acquired over
the years and, yes, we want toput them in a trust, you know,
typically, but we also have.
(16:37):
I mean, this is a business.
You know past one it's abusiness.
Even one is arguably a business.
What's the plan to transitionthat?
If they have multiple kids, Issomeone going to, is someone
going to do, and how do we?
And if they have multiple kids,how do we distribute those
assets fairly?
I mean, we're working on a caseright now slightly different
situation.
I mean, I think we're talkingabout probably 200 units is the
(17:01):
the particular case kind of outout South here, the person who
really drives the bus, the otherone is along for the ride, and
they're working on an equaldistribution of these.
But the you know and I'mworking with the trustee
daughter, I'm working with thetrustee sibling and the
(17:24):
non-trustee sibling is like waita minute, wait a minute.
This isn't fair, this isn'tequal and it's a mess to get
that distributed.
And so you want to encourageyour clients to be thinking
about how that distribution isgoing to go when you pass,
particularly with things likereal estate.
Speaker 2 (17:41):
Yep, well, and also just take this opportunity to
tell you, listening out there,that just because we deal with
taxes and this all the time,it's just like second hand to us
.
The clients truly don't knowsometimes.
Was it you that was talkingabout the client with $40
(18:03):
million and did not know theyhad a taxable estate?
They assumed that all $40million would just go to their
kids.
Speaker 3 (18:10):
Well, this was an interesting one.
So this was a case that I wasworking on with a colleague of
mine.
They were in the wine industryand so this is why it was
interesting to me Very quickly,this store.
They were in a particular partof the country and probably
their business is probably worthbetween $100 million and $130
million is what we're currentlyvaluing it at First gen,
(18:31):
probably mid to late 70s.
So I want you folks to get thisidea right and so we get
brought in by another advisor tohelp with the.
This is an islet all day long.
We have a huge estate tax issue.
This advisor was just out oftheir depth, basically, and so
we're having this conversationwith the client and so we're
talking through okay, what's theplan for this, what's the plan
(18:57):
for this, what's the plan forthis?
And the question is what's theplan to handle estate taxes?
We're trying to get a sense ofwhere this client's at right,
because we're thinking, okay,anyone that has $140 million
business probably knows thatthis is an issue.
And the guy goes what are youtalking about?
Like, well, if your estate'sover a certain amount, it's like
a death tax, basically.
And he goes what they wouldnever do, that that's literally
what came out of the guy's mouth.
It's incredible, wow.
(19:18):
And we're like hang on, hang on.
And so we spend a few minutestalking through.
And so don't assume that justbecause someone is wealthy that
they are sophisticated.
Yeah, absolutely, and this isconsistent in my experience
(19:45):
across the board.
Yeah, absolutely, you know.
That's to bring in lifeinsurance death benefit into the
estate to pay the taxes,because we're above the amount
that gifting can really work at,and so we go, okay, well, you
know, tell us about the business.
You know he's like well, it'sall going to go to my kids, you
know Okay.
And so we go well, are theygoing to be able to come up with
the liquidity?
Speaker 2 (20:06):
$70 million.
Speaker 3 (20:10):
Yeah, you know, $70 million within nine months.
He goes, he names the kids, hegoes.
Those guys, no, they're morons.
And so this is you can't makethis up, it's just, it's too
good.
But if you've worked withbusiness owners, you know this
is how they are.
One of the challenges oftransitioning money across
generations is one generationthat builds it.
That's not a guarantee that thenext generation is going to be
(20:31):
competent.
It's Almost guaranteed, and sowe're working with a couple of
different and there's some gratsand some different things that
we can do, but if you havebusiness owner clients that have
really any level of wealth,these are the conversations that
we need to be having,regardless of what the
administration does In the longrun over the next 20 years
(20:55):
administration does in the longrun, over the next 20 years, the
legislative winds are blowingin the direction of making it
much harder to pass wealth on,and so you know we need to be
proactive and, frankly, you knowit's not going to be surprising
, you know, if someone's worth amillion dollars today and their
assets continue to double overthe next 10 or 15 years.
Clients that you don't thinkhave a taxable estate regular
(21:15):
kind of normal folks can getthere pretty quickly.
Speaker 2 (21:19):
Yep, so this is what we do every day.
Okay, ian has an office.
In my office, we typically seeclients together, with their
permission, of course, and we'vebeen doing this.
Are we pushing two years now?
It's about two years and we'vebeen doing this.
Are we pushing two years now?
Speaker 3 (21:33):
It's about two years that we've been working really
closely together and I think wedo this very well.
Speaker 2 (21:37):
If this interests you , okay, if this is something
that you are truly interested in, I would encourage you.
I am starting a series ofwebinars for the rest of 2025
that will lead up to what we arecalling the Elder Law
Transformation Summit.
It is in February of next yearand I think Ian and I have four
(22:01):
hours of that that we're goingto introduce people to this
concept, discuss how this worksand go into it, and it truly
can't Plus ethics.
And fiduciary duty yes,fiduciary duty, ethics, the
entire nine and you can see howhaving someone in thinking that
(22:22):
way will increase what the willshow what the client needs,
which many times we as attorneyscan provide those solutions,
and so it's in the client's bestinterest.
It's going to save themmillions of dollars and clients
will gladly pay for that.
But you've got to understandhow this works and how to do it,
(22:46):
and we will show you how to dothat.
So I encourage you, go, go tothe website, call the office and
ask for Patricia if you want toget the information on the
webinars coming out the rest ofthis year, and particularly
Transformation Weekend.
We are limiting it to 15 peopleand you're going to have to
(23:12):
apply and show that this is whatyou want to do, that you can do
it and I will teach you how todo it, okay.
So yeah, go to the website, theelderlawcoachcom.
Lots of information there.
Call the office 479-601-4119.
If you have questions, that ismy law office, but that will get
you to Tricia.
Ask about Tricia or just say,hey, I have some coaching
(23:34):
questions and they will get youto the right person.
Okay, as always.
Thank you very much forlistening and we will see you
next time, okay.
Speaker 1 (23:43):
Thank you for joining this episode of the Elder Law
Coach Podcast.
For those eager to take theirelder law practice to new
heights and are interested inTodd's acclaimed coaching
program, visitwwwTheElderLawCoachcom.
With Todd Watley by your side,the journey to becoming an elder
law authority has never beenmore achievable.
(24:03):
Until next time, keep learning,keep growing and stay
passionate about elder law.
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