Bill Gentry is 76. His two sons Jim and Will (47 and 45 respectively) have worked in the family business with him since they each graduated from college. Both sons are licensed. Jim has a degree in finance and Will a degree in psychology. There are no other siblings.
Bill and his wife Jane (the son’s mother who is 74) are “active” in the funeral business meaning…they continue to have the final say in all decisions and come and go as they please WHEN they are in town. The parents spend 3 months a year at their condo in Florida as well as periodic “jaunts” in their RV when the mood hits them. Bill calls daily to “check on the calls from the previous evening and see what’s going on”…whether in or out of town.
During these long parental absences, Jim and Will have demonstrated that they have the capacity and ability to handle virtually any contingency. Yet, the “boys” are not permitted to make any decisions affecting the firm’s viability without Dad’s approval. That approval may be difficult to obtain depending on where Bill is or how he is feeling.
As part of a gifting program for tax reasons, Jim and Will own a combined 30% of the family business. The plan calls for transferring 100% of the firm to the sons when completed in 2020. Bill is the only other stockholder. Bill owns the real estate separate from the corporation and receives rent of $75,000 per year over and above his salary and bonuses. He and Jane have an IRA that makes minimum required distributions each year. Mostly the parents are dependent on the family business for maintaining their lifestyle. Their total compensation including rent is $175,000 per year.
Lately, a new factor has been introduced. Bill has been diagnosed with Parkinson’s resulting in erratic blowups and obsessive worrying.
The family funeral home is doing well against two competitors in their community of 75,000. However, one of the competitors is becoming more aggressive in marketing and recently has refurbished their facility to offer receptions. People are beginning to talk and Jim and Will are concerned that they are doing nothing to “keep up”. They each have spent time attending conventions lately trying to get up to speed on what they need to do but no matter what they suggest Bill vetoes it…ESPECIALLY, if it involves any kind of financial investment. It has been more than 20 years since facilities have been updated and they are beginning to show it.
The business has been valued at $1,500,000 (with leased real estate) the real estate is valued separately at $1,000,000. Neither the business nor real estate has any significant long term debt.
The family has brought us in to see what can be done.
After reviewing the financials and tax situations of each shareholder as well as meeting with them we recommended that Jim and Will enter into a purchase agreement with Bill for the remaining $1,050,000 for the business. This will have the effect of “freezing” the tax value of the business at today’s value.
Given the fact that the Jim and Will are destined to inherit Bill and Jane’s estate on their deaths, it was decided that the purchase price would be in the form of a private annuity for life on the last to die. Bill and Jane agreed to receiving $100,000 annually subject to annual increases of 2%. They will continue to receive $75,000 a year for rent. Combined, this preserves the $175,000 they had been receiving. In so doing we have resolved their fear of outliving their income and the boys benefit if (god forbid) they die early. Bill and Jane’s wills were revised so that the business real estate would be inherited directly by Jim and Will after their deaths.
Bill didn’t like giving up his “command and control” position. Fortunately, his interests in golf, fishing and Thursday night bridge games give him plenty to do. He promises to still come in and annoy the “boys” but now they can outvote him.