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U.S. Trust® Family Office Profile: The Founder Of A Privately Held Business

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U.S. Trust® Family Office

When a longstanding private banking client turned to U.S. Trust for an estate plan, it marked a new phase in his relationship with the firm. Over the next several years, he and his family would increasingly come to utilize the comprehensive and integrated wealth planning, investment consulting, fiduciary1 and administrative services offered by U.S. Trust's® family office.

U.S. Trust had been working with the founder of a privately held manufacturing business since the early 1980s. He came to U.S. Trust at first to meet his personal and business banking needs.

"He knew exactly what he needed from his providers to operate his business efficiently," his private client advisor recalled. "We had suggested on several occasions that he meet with a U.S. Trust® wealth strategist to discuss his personal financial situation. While he agreed the suggestion made good sense, his business was his first priority and he didn't want to take time away from that focus."

As his business flourished and the complexities of his wealth demanded more of his time and oversight, he realized he needed help to administer his financial affairs. In recognizing these challenges, his private client advisor introduced him to our family office at U.S. Trust.

Creating a Comprehensive Financial Picture

"The first thing we did was to sit down with the client and listen," said the family office principal. "Our goal was to learn as much as possible about his current situation, concerns and objectives. As we gathered information, we gradually created a detailed picture of his financial holdings in the form of a comprehensive balance sheet. We also sketched out his current estate plan through the use of a flowchart."

This is often the first time that many clients see their entire financial situation represented so comprehensively and succinctly, and it was certainly true in this case. The client found the process eye-opening, in part because it pulled all of his important documents together into one neatly organized file.

In an effort to conduct such a complete information-gathering process, real and perceived investment constraints and related questions may be discussed. In the case of the family business owner, the family office principal noted, "In addition to the standard concerns that most people have — about investment, retirement, insurance, estate and income tax planning, etc. — we needed to address additional challenges and concerns unique to business owners."

Specifically, the team explored whether the current form of entity ownership of the business was the best choice from an income tax and asset protection standpoint. They also discussed the governance of the business in the event of the client's death or disability, whether he wanted to see ownership and possibly control of the business stay in his family, and methods of providing liquidity for gift and estate tax purposes.

The client was looking for ways to meet his retirement needs, though without having to sell any part of his business to an outsider.

Deciding on the Plan: Client Education and Recommendations

"Once we had a thorough understanding of the client's situation, we assembled a team of investment and planning professionals to discuss a range of strategies with the client," said his private client advisor. "This is always an education process for our clients, and I think it's one of the most valuable services we provide. We don't just present a conclusion; we involve clients to the degree that they wish in the problem-solving and decision making processes."

Working with the family business owner in this way, the members of the team were able to help ensure that he truly understood — and concurred with — the actions they were planning to implement on his behalf.

Among other planning techniques, the client and the team discussed the following:

  • The pros and cons of using a Limited Liability Company, S-Corporation or C-Corporation to own the business rather than owning it outright in the client's own name. The use of a corporate entity can enhance asset protection for the owner's personal nonbusiness assets. It also enables subdivision of a company into partial ownership interests that can then be gifted to family members.
  • Effective governance policies, including arranging a meeting with a consultant on the subject. Sound, comprehensive governance policies facilitate smooth operation of a business and help ensure a smooth transition to a successor management team upon the business owner's retirement or death.
  • Management of the company upon the founder's retirement, which could have included one or both of his then-college-age daughters.
  • Wealth transfer opportunities available via a Grantor Retained Annuity Trust (GRAT) and/or a sale to an Intentionally Defective Grantor Trust in conjunction with a privately held business.
  • The potential need for liquidity to pay estate taxes upon the death of the client and his spouse, as well as the ways in which IRC Section 6166 provides a measure of relief to private business owners. To the extent that the heirs to the founder's estate want the business to continue after the founder's death, estate tax will be due based on the value of the business. The estate will have to either sell the business or tap other sources, such as life insurance and/or other assets in the estate.
  • An Employee Stock Ownership Plan (ESOP) as a way of monetizing the client's concentrated position in the company in an income tax-efficient manner without selling an interest in the company to an outsider, and also as a way of allowing employees to participate in the company's growth.

Putting the Plan into Action

Once the client had made all necessary decisions, the team worked with him and his attorney, accountant and insurance representative to implement the agreed-upon recommendations.

This included restructuring ownership of the business into entity form, documenting a clear governance and succession plan, establishing and funding a series of GRATs, establishing and funding an Irrevocable Life Insurance Trust, and creating an ESOP.

The team also assisted the client in developing a diversified investment portfolio utilizing proceeds from the sale of company shares to the ESOP in a manner that allowed for the continued deferral of capital gains tax on the sale of shares to the ESOP consistent with IRC Section 1042.

In addition, the team worked with the client to update all estate-planning documents, medical directives, living wills, and powers of attorney. U.S. Trust was named a corporate fiduciary in these documents and, as a result, will work alongside the individual fiduciaries named. U.S. Trust also served as trustee on the GRATs that were established, providing custody services and ensuring a solid paper trail and timely annuity payments.

The transfer of ownership of a portion of the company to the GRATs for the ultimate benefit of heirs proved to be an effective strategy as the growth of the company skyrocketed over the next few years.

Adjusting for Change: the Family Business Owner Sells his Company

Eventually, a large, multinational publicly traded company approached the client with an offer to purchase his firm for a significant premium. After much deliberation, the client decided to move ahead with the sale.

U.S. Trust's investment professionals offered several critical income tax planning recommendations that significantly mitigated the net capital gain tax cost upon the sale. One of the strategies utilized involved systematic loss harvesting within domestic and international equity portfolios, which track the pretax performance of designated benchmark indexes.

U.S. Trust Serves as the Family Office

Today, the business founder is retired but still serves as a consultant for the public company that purchased his firm. He spends most of his time on philanthropic pursuits, including the management of his family's private charitable foundation.

The older of his two daughters, upon receipt of her master's degree in business, became an employee of the public company.

As a result of the substantial wealth created through the founder's company and its ultimate sale, the founder and his family's personal and estate finances have become even more complex. Currently, three generations of the family hold interests in various partnerships, LLCs and trusts.

U.S. Trust now serves as the family office.

The U.S. Trust family office provides comprehensive financial planning services to the family as a whole, as well as to each family unit. Guidance is provided in the areas of estate planning, retirement planning, education funding, investment planning, income tax planning, insurance planning, asset protection planning and philanthropic planning. The team draws upon the vast resources of Bank of America as needed, but a single point of contact for the client and a low client-to-staff ratio contribute to a personalized focus on their unique needs.

The U.S. Trust team continues to work closely with the family to design, implement and monitor its diversified investment portfolio, which includes several types of taxable, tax-deferred and tax-exempt entities. Backed by research and monitoring from a variety of resources, the family office team provides guidance on asset location among traditional and alternative asset classes, asset location planning, and prudent risk management.

In addition, the family office provides fiduciary services and experience coupled with a comprehensive administration platform for all family accounts and entities, including the family charitable foundation. Services include monthly statement preparation, performance reporting, custody for managed and non-managed assets, cost-basis reconciliation and tracking, ERISA administration, full-service banking, credit cards, online access to all accounts, grant making, serving as address of record, providing educational seminars to family members including budgeting and cash flow planning, effecting monthly transfers, and bill paying.

By opting to use the U.S. Trust family office versus creating a dedicated family office, the client was able to leverage a long tenured and deep pool of specialists in the financial, investment and fiduciary disciplines to handle the many complex issues related to the client's business.

U.S. Trust provided consulting in the areas of family governance, education and risk management. And having a corporate fiduciary has helped to ensure that the administration of his estate for future generations will be performed with the highest level of competence, trust and integrity.

A Truly Comprehensive Financial Solution

The family business owner may have come to U.S. Trust with a simple desire for banking services, but with the passage of time, and an evolving financial situation, he and the members of his immediate — and now extended — family have utilized more and more of U.S. Trust's services. Over the years, the bond between the family and U.S. Trust has grown steadily stronger.

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