It's not often that one gets to turn back the clock. But this rarest of privileges was afforded to a hypothetical business owner whose business succession and estate planning needs tested the expertise of a trio of experts at the Financial Service Forum, held here October 15-17.
During the final general session of the Society of Financial Service Professionals' annual conference, the 3 advisors–an accountant, a life insurance agent and an estate planning attorney–detailed what they would have recommended for the imaginary entrepreneur, Fred, before he died unexpectedly at age 65, leaving behind a successful company but an estate up for grabs.
The 2-hour case study featured a cast of characters ready-made for the tabloids: 2 children and a former spouse from a first marriage (Betty Jo) who stood to inherit interests in Fred's business, "Big Deal," an oil and gas production company valued at $30 million; a second wife (Susan) who laid claim to Fred's $5 million split-dollar life insurance policy; plus a third wife (Donna) whose prenuptial contract called for paying her $2 million and $1 million to each of her two children by Fred (see related charts).
There was, too, a "mystery woman" (Candi) who possessed a hand-written note from Fred bequeathing her a previously unknown downtown condominium (value: $500,000), a Porsche automobile and $2,500 per month for life; and another hand-written note entitling her to Fred's post-retirement benefits.
Among these was a pension plan account holding a balance of $2.5 million and a supplemental executive retirement plan of $600,000 per year with guaranteed payments for 15 years. Also in Fred's estate were ranching operations valued at $6 million, several residential and resort properties collectively worth $7 million, and a stock/bond portfolio totaling $10 million.
To prepare Fred for his inevitable retirement and death, his financial advisors (the session panelists) agreed to address estate planning issues only after developing a business succession plan, thereby permitting a more streamlined process.
"The business succession plan we established gives us the needed liquidity upon death," said Terence Stanaland, a principal at Teague, Rosenstreich & Stanaland, PC, Greensboro, N.C., and the panelist who played Fred's estate planning attorney. "If you focus on the business assets first, the rest of the estate plan starts to fall into place."
To that end, the team agreed to recommend revoking the subchapter S election of Big Deal, converting the business to a C Corp. (thereby permitting streamlined retirement and estate planning) and recapitalizing the business's debt structure to create $25 million in privately held preferred stock at $1 per share. Of the total, $5 million in non-voting shares ultimately went to Fred's first wife, Bettie Jo, thus securing for her a claim on the company when sold, plus dividends.
To free up cash needed to fund a business transition, the advisory team established an employee stock ownership plan. Sam Torolopoulos, president of ATI Capital Group, Irving, Tex., and the panelist who played the accountant, said the ESOP is advantageous in part because it's the only qualified plan under ERISA that can borrow money.
