Ben Reach had a Monday morning appointment he dreaded. After breakfast at Millie’s with Sam he trudged to his office to “face the music,” as his father said whenever his mother insisted he join her at a symphony performance (quarterly). He had spent most of a sleepless night working out what his advice would be this morning to Gilbert Spain.
Gilbert, a widower, was a contemporary of Ben, unfortunately in bad health. He had started with nothing, built and run a highly successful industrial company making auto components, sold it, bought Sweetgum Plantation and moved to Thomasville, the site of Sweetgum. That was twenty years ago. Meanwhile Sweetgum had been nurtured as a game refuge — quail and waterfowl — and enjoyed by Gilbert and friends, including Ben and Sam who fished for bream in its ponds in spring.
Gilbert had two sons, in their sixties now and as Gilbert had put it more times than Ben wanted to recall, “just waiting for me to die.” The sons, Frank and Robert, coveted Sweetgum. But neither could afford it, Gilbert was convinced and Ben agreed. Both had been married to three women each (two now grass widows and one a current spouse) with the usual consequences, depletion of their capital despite being reasonably successful in business.
Gilbert’s affections at this time in his life lay with his grandchildren of which there were six. All were “good people,” as Gilbert often said, with families of their own. The grands (as Gilbert called them) were who Gilbert wanted to end up with the “fruits of his labors,” (as Gilbert called Sweetgum and his other assets).
The problem Ben had to solve was this. Gilbert’s second wife (his first had died early) had been wealthy in her own right. Gilbert had used his estate and generation skipping tax exemption by agreeing to “split gifts” with her to her grandchildren. So he had no such exemption to apply to transfers to his grandchildren. So if Gilbert left his assets direct to his grandchildren they would be subject to both estate tax and generation skipping tax. Ben had explained to Gilbert this meant they would “go up in smoke”.
But in his sleepless night Ben had come up with a plan that should minimize the transfer taxes and in time accomplish much of what Gilbert desired, he believed.
Gilbert was waiting in Ben’s library-conference room. Joanne had served him coffee but worry furrowed his brow. Ben shook his hand and smiled reassuringly, then sat across the table from him. Gilbert could tell Ben had come up with a solution.
“Gilbert, what I am going to propose is not perfect, but I believe it’s as good as we can do, given the history. Here it is.
“You give Sam Burns an option to buy Sweetgum on your death at the price you have agreed, provided he places the conservation easement you want on it. Since he just has an option you will not have to pay capital gains tax on the sale. You can charge him enough for the option he won’t be likely not to exercise it, but not so much the IRS will say it’s not an option but a sale. What he pays for the option goes toward the purchase price if and when he exercises.
“You leave your estate in two equal trusts, one for each son. He gets 3% per year of his trust’s value. You also give him the power at his death to will his trust to creditors of his estate, with the concurrence of a disinterest person you name. That will make it a general power of appointment in the eyes of the IRS, so the trusts will be in the taxable estates of your sons for estate tax purposes. That means the trusts will not be generation skipping trusts and will not attract a generation skipping transfer tax when your sons die. And your sons should have enough estate tax exemption between them to shield the trusts from estate tax when they die, though that may change, we cannot help that.”
“So what will the tax be when I die,” Gilbert asked.
“Forty percent, because you used your estate and gift tax exemption for your wife’s gifts to her grands,” Ben said.
Then to Ben’s surprise Gilbert smiled and said,
“Yes, but for that I got the marital trust that’s paying me 5% a year while I live and let’s me afford Sweetgum and those ponds you and Sam love to fish and that goes to her kids when I die, also with a 40% haircut for estate tax.”
“Or more if Bernie or Senator Warren wins,” Ben said.