• Ken Mitchell-Phillips

Creative Ways to Transfer Wealth

Often in my practice, clients ask me for creative ways to transfer wealth to their children. Often, depending on your circumstances, trusts are a good option. However, if you have millions to transfer, a much more creative way to transfer wealth is a Family Holding Company. If set up right a family holding company can be used to gift millions of dollars tax-free to heirs and others, while retaining control of assets and binding a group together economically.  In addition, a Family Holding Company can serve as a central investment vehicle to teach your children or grandchildren about money, business, finance, economics, and create a central entity that held everyone together through regular family meetings. However, I suggest you do not act on any of this without consulting a good attorney and accountant.


By way of example, let’s say you are 65 years old with four kids, all of whom are married and have grandchildren.  The total interested parties besides you and your spouse are 20 (four kids, four sons-or-daughters-in-law, and twelve grandchildren ). Your portfolio is worth $5,000,000 and you want to transfer your portfolio to the interested party through a Family Holding Company.


The first steps is to set up the Family Holding Company is a tax efficient way by choosing the appropriate state and opting for partnership taxation on an individual level so you bypass any applicable personal holding company tax. Then, you can contribute stocks, real estate holdings, local businesses, and any other applicable assets to the Family Holding Company.


At this point, you and your spouse hold 100% of a Family Holding Company with a net worth of $5,000,000 and no debt (before accounting for any applicable capital gains taxes). If you achieve a 8% annual return based on the holdings in your Family Holding Company, you could count on about $400,000 per year.


Next, you have your attorney write-up a great limited liability operating agreement where you are the managing member with the sole power to the determine distributions, including dividends or return of capital, to the various members.  The operating agreement should also divide your Family Holding Company into 100,000 membership units worth $50 each.  


The next step is to take advantage of the gift tax exclusion.  As of the current tax year, you can give $13,000 away to a person without any gift tax consequences or using up your lifetime exemption.  With your spouse, that rises to $26,000 per year.  

With twenty family members that you’d like to bring in as members, this would mean you and your spouse could gift $26,000 per year to everyone, or $520,000 in total.  However, there are special discounts on the amounts and it’s entirely possible that you could transfer, in the right circumstances, $50,000 worth of assets to someone and claim it as only $26,000.  But this requires a lot of very good tax advice and full transparency and disclosure to the IRS as to the claims you are making.  It is not something you would do on your own without the expert guidance of good tax accountants and attorneys.  So for the purpose of this article, I’ll ignore those discounts for now, which are often a vital part of lowering estate taxes and getting more money into the hands of your kids and grandkids prior to death.  Instead, let’s say that all 20 members get precisely $26,000 worth of assets, or 520 membership units of your Family Holding Company.


That means that you could transfer 520 shares of your Family Holding Company membership equity into the capital accounts of each family member.  As the managing member, you would maintain control over the Family Holding Company and its investments. The children would not be able to get their hands on the money unless you wanted them to. In total, in this scenario, you’d transfer 13,520 membership units, leaving you and your spouse 86,480 out of the 100,000 membership units. Each of the kids and grandkids own 520/100,000th of the company.  Your stake would be worth $4,324,000 and each kid and grandkid’s stake would be $26,000.


However, in the next year, imagine the Family Holding Company does, in fact, grow by 8% after taxes.  The $5,000,000 in net worth would expand to $5,400,000.  With 100,000 shares outstanding, each membership unit would now be worth $54, not $50 like the prior year.  Your 86,480 shares would be worth $4,669,920.  Each kid and grandkid unit would grow to $28,080.  In effect, you were able to able to gift them the extra $2,080 without counting it against your gift tax exemption because the asset is now held in their name.  It’s theirs.  


The same formula could be followed the next year by gifting everyone $26,000. Only this time, that would mean transferring 481 membership units to their account, not 520 shares like the previous year because the shares are more valuable at $54 each than they were last year at $50 each.  So, the members are getting the same total gift value but fewer membership units. For example, then, you would gift 9,620 shares in total, or 481 shares per person.  This would bring your total ownership to 76,860 shares and each of the family members to 1,001 shares.


Now, if you followed this formula for a decade, it would be possible to give away $8,467,795 in wealth to children and grandchildren without paying a single penny in gift taxes or estate taxes.  Furthermore, this only required the transfer of $26,000 x 20 recipients for 10 years, or $5,200,000 in total.  The extra $3,267,795 that was gifted came from the transfer of economic ownership of assets to your heirs who now could collect the dividends, interest income, and rents. In essence, at the end of the 10 year period, you were left with $2,319,205, your heirs had $8,467,795, and not a penny went to the government in the form of estate taxes or gift taxes,. The net worth of the Company would be $10,787,000.


You can also get more complex with the Family Holding Company concept. However, the bottom line is Family Holding Companies are a creative way to help you live another couple of decades and transfer millions upon millions of dollars to your family without hitting the estate tax or gift tax, while retaining a significant equity portion yourself if you manage the capital well enough.  That is because the faster the net worth grows, the higher the share value per membership unit, meaning you transfer the same amount of money each year, but fewer shares or equity percent.  In fact, at only 8% growth, it would take only 10 years with no dividends to get the value of each share to around $108.  


If you want to learn more about creative ways to transfer your wealth to your children, feel free to contact KMP Business Consulting Services for a free consultation.


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