Asset Management & REITs | Business Succession

With the 30th anniversary of a successful asset management company approaching, its founder was ready to hand control of daily operations over to his hand-picked next generation of leadership:

  • His son—who was to be the company’s new president and the majority shareholder
  • The firm’s chief investment officer—who’d become a minority owner

Everything was in place for a smooth transition because the founder and his wife had worked with us to develop a thoughtful plan, both for their business and for their personal wealth. As parents, they also made sure to be fair to their physician daughter, their only other child, who would not be active in the business.

We also worked with the children and their spouses as well as the CIO and his wife to help each couple and their respective estate-planning lawyers develop wealth plans.

A multifaceted approach

The business succession took a number of years to implement properly and involved a number of classic steps, including:

1. Owners gift company interests to trusts—The founder and his wife had long been putting interests in their business into two irrevocable trusts: one for the primary benefit of his son, and the other for the primary benefit of his daughter.

2. Parents use lifetime gift tax exclusion amounts—As the gifts to these two trusts were being made, the founder and his wife had both applied their lifetime gift tax exclusion (as well as their generation-skipping transfer tax exemptions) to those transfers. By 2017, they had applied all of their combined $10.98 million worth of exclusions to those gifts. The trusts by this time held well more than $20 million worth of interests in the company. Each year since 2011, as the exclusion amounts were adjusted upward for inflation, the parents had given to the trusts the value of that inflation adjustment in additional business interests.

3. Founder keeps control—J.P. Morgan served as a trustee of both trusts, handling all the administrative and legal needs. But as long as the father wished to remain in control of the business, he kept control of the trusts’ investments. He also paid the taxes due on any income earned by the trusts.

4. Founder cedes control—By the time the father was ready to relinquish control of the company, he and his wife had moved a significant amount of their wealth off their joint balance sheet free of gift tax and for the benefit of their children. One thing the father did to cede control was to make his son legally responsible for handling investments for his son’s own trust. Because the daughter did not want to manage investments for her trust, the father also gave that responsibility to the son.

5. Founder balances children’s needs—The father made sure that the two trusts were drafted so that control of the company would stay with the son but the daughter would be protected financially. She also would have an exit: She could force the trustee of the son’s trust to buy out her trust’s shares in the company, at fair market value, on commercially reasonable terms and in a timely manner. On the same terms, the son could force the daughter’s trustee to sell her shares in the company to his trust.

6. Future owners acquire stakes—Meanwhile, both the son and the CIO had been taking interests in the business in lieu of cash for large portions of their bonuses.

7. New owners buy out original owners—When it came time for the son and CIO to take over and buy out the founder and his wife, they were able to borrow the funds still needed, based on the wealth they’d already accumulated and the firm’s future growth expectations. We worked closely with them to arrange financing. The price paid for the business was determined through an independent, professional valuation of the firm.

Looking forward

The 68-year-old father will continue with the firm as chairman. We will be working with him and his wife to ensure their new liquidity is invested in a diversified portfolio suitable to their appetite for risk and time horizons.

We also will be managing a portfolio for the son and his wife with investments uncorrelated to their business. As they gain a larger interest in the business, their wealth plan calls for them to put some of their company shares in trust for the benefit of their two daughters.

All our clients—father and mother; son, daughter and their spouses; plus the CIO and his wife—benefited from having plans for two of the toughest issues faced in closely held businesses: transition of ownership and investment concentration. Each couple also appreciated having plans to help them navigate their futures.

We look forward to speaking with you on how the Financial Institutions Group’s advice and insight can help fulfill your vision.

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This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances.

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. Results shown are not meant to be representative of actual results. Information and outcome is not a guarantee of future results.

Investors should be cautious when holding a highly concentrated stock position, which is typically defined as any individual holding that constitutes more than 30% of overall investment holdings. Tax consequences, including the avoidance of capital gains through selling, do not eliminate the risks of overexposure to a particular company or business sector.

Hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.

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