Elderly Couple Meeting with an Attorney


Gregory S.DuPont Nov. 22, 2019

Jim and Lisa became wealthy the “old-fashioned” way. They worked hard. Together, they built an electronics equipment distributorship from scratch 30 years ago. Their two sons, Peter and Dave, both worked in key positions at the company. Then, in a sudden traffic accident, Jim and Lisa were killed. Of course, their two sons were devastated. What they didn’t know was that, with their parents now gone, their business troubles had just begun.

Before the dust had even settled, the executor of the couple’s estate came to a grim conclusion. The business had to be sold to pay estate taxes due. The topic of business succession had come up occasionally when the family got together, but Jim and Lisa never seemed to find the time to get down to serious estate planning. Unfortunately, there was no plan in place at the time of the accident.

Potential Safeguards

In the example of Jim and Lisa, one of several possible steps Jim could have taken would have been to relinquish part of his ownership and to transfer it to his two sons, using certain gifting or sale techniques. Handing over control—and becoming a minor stockholder in the business he had built and run so successfully—may not have been an easy thing to do, but it might have helped shrink his assets and reduce the tax bite. Additionally, he could have set up appropriate trusts to help ensure the net estate passed on without hindrance to his heirs, as well as to help pay for taxes that would come due.

In 2012, the applicable exclusion amount is $5.12 million. Estates exceeding this amount are liable for gift taxes if assets are transferred while the owner is alive (if the gifts exceed the annual gift tax exclusion) and for estate taxes after the owner’s death. Estate taxes are due within nine months; a six-month filing extension is available, and the Internal Revenue Service (IRS) allows qualifying farms or qualifying closely held businesses to defer taxes and then pay by installments (with interest) over as long as ten years. However, according to IRS records, very few businesses choose to defer estate tax payments. Family-held businesses need to take estate planning steps to avoid a drain on valuable assets and the possibility of a closely-held ownership coming to an abrupt end.


An attorney and accountant can help your estate planning team devise an effective strategy to remove assets from your taxable estate. This is an ongoing process that might involve structuring and administering trusts and other vehicles. While there are obvious costs involved in implementing an estate plan, there is no doubt that it is well worth the effort.

One effective tool estate planners often use to help fund estate tax payments is an irrevocable life insurance trust (ILIT). The ILIT purchases a life insurance policy on the life of you (the donor). The policy premiums are funded by annual gifts you make to the ILIT. You could use your annual gift tax exclusion, $13,000 per person in 2012, to fund the ILIT. In more advanced uses, the ILIT can be strategically employed to help ensure continuity in a closely-held business.

You’ve worked hard to build your business and may be able to avoid finding yourself in Jim and Lisa’s situation. Since the future operations and/or growth of a family-owned business could be severely affected by its estate tax obligations, it is important to set up and implement an estate plan before it’s too late.